Essential Properties Realty Trust, Inc. (NYSE:EPRT) Q4 2022 Earnings Conference Call February 16, 2023 10:00 AM ET Company Participants Daniel Donlan - Senior Vice President and Head of Capital Markets Peter Mavoides - President and Chief Executive Officer Mark Patten - Executive Vice President and Chief Financial Officer Conference Call Participants Ravi Vaidya - Mizuho Securities RJ Milligan - Raymond James & Associates Joshua Dennerlein - Bank of America Merrill Lynch Greg McGinniss - Scotiabank Nick Ker ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 001-38530 Essential Properties Realty Trust, Inc. (Exact name of Registrant as specified in its Charter) Maryland 82-4005693 (State or ot ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _____________________________________________________________________________________________________________ FORM 10-Q _____________________________________________________________________________________________________________ (Mark One) ☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2022 OR ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR ...

Essential Properties Realty Trust, Inc. (NYSE:EPRT) Q4 2021 Earnings Conference Call February 17, 2022 10:00 AM ET Company Participants Daniel Donlan - SVP & Head, Capital Markets Peter Mavoides - President, CEO & Director Gregg Seibert - EVP & COO Mark Patten - EVP, CFO & Treasurer Conference Call Participants Nathan Crossett - Berenberg Mary McConnell - Citigroup Michael Bilerman - Citigroup Ki Bin Kim - Truist Securities Caitlin Burrows - Goldman Sachs Group John Massocca - Ladenburg Thalmann & Co. Tayo ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 001-38530 | --- | --- | |-------------------------------------------------------------------------------------------|-------------------- ...

Financial Data and Key Metrics Changes - Total revenue for Q3 2021 was $59.6 million, up $16.7 million or almost 40% compared to the same period in 2020, driven by a full quarter of investments totaling $223 million in Q2 2021 and nearly $600 million in net investment activity year-to-date [21][22] - General and administrative (G&A) expenses decreased by 5.4% to just under $5.6 million in Q3 2021 from $5.9 million in Q3 2020, with G&A as a percentage of total revenue improving to 7.5% from 10.6% [21][22] - Net income for the quarter was $27.6 million, with funds from operations (FFO) totaling $43.6 million or $0.36 per fully diluted share, a 38% increase year-over-year [22] - Adjusted funds from operations (AFFO) totaled $40.2 million for the quarter, up $13.9 million over the same period in 2020, translating to $0.33 per share, an increase of over 22% [22][24] Business Line Data and Key Metrics Changes - The company invested $231 million in Q3 2021 across 31 transactions, with a weighted average cash yield of 7%, primarily in grocery, auto service, equipment rental, early childhood education, and casual dining sectors [9][15] - The weighted average lease term of investments was 16.4 years, with a weighted average annual rent escalation of 1.6% and a unit level coverage ratio of 2.8x [15] - The portfolio consisted of 1,397 properties, 99.9% leased to 297 tenants across 17 industries, with a weighted average lease term of 13.9 years [11] Market Data and Key Metrics Changes - The company reported strong portfolio performance with collections at 100% and only one vacant property, indicating full stabilization [9] - The company noted increased competition in the market, particularly for larger deals and credits, leading to cap rate compression [16][39] Company Strategy and Development Direction - The company aims to maintain a disciplined investment strategy focused on building a resilient net lease portfolio that generates attractive risk-adjusted returns [25] - Future investment activity levels are expected to moderate due to the recapture of pandemic-induced demand and potential changes in tax laws affecting seller motivations [10][24] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the operating environment and capital markets, which have allowed the company to capitalize on a robust pipeline of investment opportunities [25] - The company reaffirmed its 2021 AFFO per share guidance of $1.30 to $1.32 and established a 2022 guidance range of $1.46 to $1.50 per share, indicating a 13% year-over-year growth [13][24] Other Important Information - The company sold 11 properties for $10.1 million in net proceeds during the quarter, achieving a 6.5% average cash yield on these dispositions [19] - The company maintains a strong balance sheet with net debt to annualized adjusted EBITDAre at 4.5x and total liquidity of $428 million [23] Q&A Session Summary Question: Acquisition guidance and future acquisition pace - Management indicated that moderating acquisition activity would be closer to historical averages of $160 million to $200 million per quarter [27] Question: Improvement in unit level rent coverage - The improvement to 3.5x was attributed to strong performance in certain industries, with higher coverage in sectors like equipment rental and medical services [28] Question: G&A outlook for 2022 - Management does not expect significant additions to G&A personnel, indicating the current team is well-staffed for high transaction levels [30] Question: Same-store NOI profile changes - Changes were driven by significant repositionings in the portfolio, affecting the same-store sales numbers [32] Question: Impact of labor shortages on service-based tenants - While labor shortages are noted, they have not yet impacted collections, with coverage improving across the board [48] Question: Pricing and competition outlook - Increased competition is noted, particularly for larger deals, but the company remains focused on maintaining a competitive edge through strong relationships [36][39] Question: Tax law changes and M&A activity - Potential tax law changes are expected to drive increased M&A activity, particularly among small business owners looking to sell [54]

Portfolio Highlights - The company has a newly assembled portfolio of single-tenant net lease properties with a weighted average lease term (WALT) of 14.0 years[3] - The portfolio demonstrates solid unit-level rent coverage of 3.2x[3] - The portfolio is heavily weighted towards service and experiential cash ABR, representing 95% of the total[3] - The average investment per property is $2.2 million[3] Investment Strategy & Growth - The company targets growth via sale-leaseback transactions with middle-market companies, with 85% of investments being internally-originated sale-leasebacks[3] - The company's average quarterly investment activity is $175 million[3] - QTD investments of approximately $169 million were completed at a 7.2% cash yield, with another ~$67 million under PSA and ~$210 million under LOI[5] Balance Sheet & Financials - The company maintains a conservative long-term leverage profile, with a net debt-to-adjusted annualized EBITDAre of 4.6x and debt-to-undepreciated gross assets of 33%[3] - The company has strong liquidity of $530 million, including $400 million of capacity on the unsecured credit facility and $130 million of available cash as of 2Q'21[5] - The weighted average debt maturity is 6.7 years, and the weighted average interest rate is 3.11% as of 2Q'21[5]

Essential Properties Realty Trust, Inc. (NYSE:EPRT) Q2 2021 Earnings Conference Call July 29, 2021 11:00 AM ET Company Participants Dan Donlan - Senior Vice President and Head of Capital Markets Pete Mavoides - President & Chief Executive Officer Gregg Seibert - Chief Operating Officer Mark Patten - Chief Financial Officer Conference Call Participants Nate Crossett - Berenberg Parker Decraene - Citi Greg McGinniss - Scotiabank Sheila McGrath - Evercore Caitlin Burrows - Goldman Sachs John Massocca - Ladenbu ...

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=2&type=section&id=Item%201.%20Financial%20Statements) The unaudited consolidated financial statements detail the company's financial position and performance for the reported periods [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets%20as%20of%20June%2030%2C%202021%20%28unaudited%29%20and%20December%2031%2C%202020) The balance sheets reflect significant growth in total assets, liabilities, and equity from year-end 2020 Consolidated Balance Sheets (in thousands) | Metric | June 30, 2021 (Unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $2,948,674 | $2,488,802 | | Total Liabilities | $1,106,104 | $906,854 | | Total Equity | $1,842,570 | $1,581,948 | | Total Real Estate Investments, net | $2,496,379 | $2,223,298 | | Cash and Cash Equivalents | $126,465 | $26,602 | | Senior Unsecured Notes | $394,955 | $0 | | Secured Borrowings, net | $0 | $171,007 | [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations%20for%20the%20three%20and%20six%20months%20ended%20June%2030%2C%202021%20and%202020%20%28unaudited%29) The statements show substantial year-over-year increases in revenues and net income for Q2 and H1 2021 Consolidated Statements of Operations (in thousands) | Metric | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | Change (%) | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $57,066 | $38,503 | 48.2% | $105,618 | $79,991 | 32.0% | | Net Income | $23,400 | $10,444 | 124.1% | $38,775 | $24,488 | 58.3% | | Net Income Attributable to Stockholders | $23,284 | $10,381 | 124.3% | $38,579 | $24,341 | 58.5% | | Basic Net Income Per Share | $0.20 | $0.11 | 81.8% | $0.34 | $0.27 | 25.9% | | Diluted Net Income Per Share | $0.20 | $0.11 | 81.8% | $0.34 | $0.26 | 30.8% | | Rental Revenue | $53,150 | $36,465 | 45.8% | $98,582 | $76,007 | 29.7% | | Interest on Loans & Direct Financing Lease Receivables | $3,879 | $2,037 | 90.4% | $6,984 | $3,976 | 75.7% | | Depreciation and Amortization | $17,184 | $13,464 | 27.6% | $32,830 | $26,476 | 24.0% | | Loss on Repayment of Secured Borrowings | $(4,461) | $0 | N/A | $(4,461) | $(924) | -382.8% | [Consolidated Statements of Comprehensive Income/(Loss)](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%2F%28Loss%29%20for%20the%20three%20and%20six%20months%20ended%20June%2030%2C%202021%20and%202020%20%28unaudited%29) Comprehensive income increased significantly due to net income growth and positive shifts in cash flow hedges Consolidated Statements of Comprehensive Income/(Loss) (in thousands) | Metric | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $23,400 | $10,444 | $38,775 | $24,488 | | Unrealized income (loss) on cash flow hedges | $(4,793) | $(6,459) | $10,783 | $(44,891) | | Total other comprehensive income (loss) | $(7,107) | $(4,967) | $10,916 | $(43,067) | | Comprehensive income (loss) | $16,293 | $5,477 | $49,691 | $(18,579) | [Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Stockholders%27%20Equity%20for%20the%20three%20and%20six%20months%20ended%20June%2030%2C%202021%20and%202020%20%28unaudited%29) Stockholders' equity grew substantially, driven by common stock issuances and net income Stockholders' Equity Summary (in thousands) | Metric | December 31, 2020 | June 30, 2021 | | :--- | :--- | :--- | | Total Stockholders' Equity | $1,574,758 | $1,835,393 | | Common Stock Issuance (6 months) | N/A | $273,150 | | Net Income (6 months) | N/A | $38,579 | | Dividends Declared (6 months) | N/A | $(55,825) | - Common stock outstanding increased from **106,361,524 shares** at December 31, 2020, to **117,982,993 shares** at June 30, 2021[16](index=16&type=chunk) [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20for%20the%20six%20months%20ended%20June%2030%2C%202021%20and%202020%20%28unaudited%29) Cash flows reflect increased operating cash, higher investment activity, and significant financing from notes and stock issuance Consolidated Statements of Cash Flows (in thousands) | Metric | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $69,285 | $36,454 | 90.1% | | Net Cash Used in Investing Activities | $(385,237) | $(192,366) | 100.3% | | Net Cash Provided by Financing Activities | $412,639 | $244,097 | 69.1% | | Net Increase in Cash and Cash Equivalents and Restricted Cash | $96,687 | $88,185 | 9.6% | | Cash and Cash Equivalents, End of Period | $126,465 | $100,839 | 25.4% | - Significant financing activities included **$396.6 million** from Senior Unsecured Notes and **$264.4 million** from common stock issuance, partially offset by **$175.8 million** in secured borrowing repayments and **$185.0 million** in revolving credit facility repayments[314](index=314&type=chunk) [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements%20%28unaudited%29) The notes detail accounting policies, investments, debt, equity, and the impact of recent financial activities - The company is an internally managed REIT focused on single-tenant, net-leased properties for middle-market service-oriented or experience-based businesses[31](index=31&type=chunk) - The COVID-19 pandemic continues to pose uncertainty, with potential adverse impacts on tenant operations and rent collectability, despite businesses largely returning to pre-pandemic levels[34](index=34&type=chunk)[35](index=35&type=chunk) [Note 1. Organization](index=10&type=section&id=1.%20Organization) The company is an internally managed REIT focused on net-leased properties, monitoring ongoing COVID-19 risks - The Company is an internally managed REIT focused on acquiring, owning, and managing single-tenant properties net leased to middle-market companies in service-oriented or experience-based businesses[31](index=31&type=chunk) - The COVID-19 pandemic continues to create uncertainty, with potential for adverse impacts on tenant operations, financial condition, and liquidity, especially if new variants intensify or persist[34](index=34&type=chunk) - In 2020, the Company entered into rent deferral agreements with tenants, generally extending payments up to 24 months, which reduced cash flow from operations and cash available for distribution[35](index=35&type=chunk) [Note 2. Summary of Significant Accounting Policies](index=11&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines key accounting principles, including consolidation, revenue recognition, and REIT tax status - The Company operates in **one reportable segment**, aggregating investments in real estate owned and leased properties, and investments in loans and direct financing lease receivables[42](index=42&type=chunk) - Depreciation is computed using the **straight-line method** over estimated useful lives (up to 40 years for buildings, 15 years for site improvements)[50](index=50&type=chunk)[51](index=51&type=chunk)[52](index=52&type=chunk) - The Company uses derivative financial instruments (interest rate swaps, caps) to manage interest rate risk, designating them as **cash flow hedges** and recording them at fair value on the consolidated balance sheets[69](index=69&type=chunk) - Revenue recognition for rental income is on a **straight-line basis** over the non-cancellable lease term, with collectability assessed for straight-line rent[73](index=73&type=chunk)[77](index=77&type=chunk) - The Company elected and qualified as a **REIT** for federal income tax purposes starting December 31, 2018, and generally expects no U.S. federal income tax if distributions meet requirements[82](index=82&type=chunk) - The Operating Partnership is identified as a **Variable Interest Entity (VIE)** where the Company is the primary beneficiary, leading to consolidation[90](index=90&type=chunk) - The Company adopted **ASU 2020-06** (simplifying accounting for convertible debt and EPS calculation) on January 1, 2021, with no material impact[100](index=100&type=chunk)[101](index=101&type=chunk) [Note 3. Investments](index=19&type=section&id=3.%20Investments) The investment portfolio grew significantly through new property acquisitions and loan receivables in H1 2021 Investment Portfolio Summary (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Number of Investments | 1,325 | 1,181 | | Total Gross Investments | $2,906,107 | $2,528,673 | | Loans and Direct Financing Lease Receivables, net | $237,648 | $152,220 | | Real Estate Investments Held for Sale, net | $6,349 | $17,058 | Investment Activity (6 months ended June 30, in thousands) | Investment Activity | 2021 (Number of Locations) | 2021 (Dollar Amount) | 2020 (Number of Locations) | 2020 (Dollar Amount) | | :--- | :--- | :--- | :--- | :--- | | Acquisitions of and additions to real estate investments | 125 | $341,878 | 73 | $207,774 | | Investments in loans receivable | 45 | $85,365 | 3 | $9,656 | | Sales of investments in real estate | (25) | $(42,859) | (13) | $(21,882) | | Provisions for impairment of real estate | N/A | $(6,120) | N/A | $(1,859) | - The allowance for loan losses **decreased from $1.02 million to $0.89 million** at June 30, 2021, due to improving macroeconomic factors[118](index=118&type=chunk) - As of June 30, 2021, the company's real estate investment portfolio had significant concentrations in **Texas (12.8% of rental revenue)** and **Georgia (10.5%)**[125](index=125&type=chunk) Intangible Assets and Liabilities (in thousands) | Intangible Asset/Liability | Gross Carrying Amount (June 30, 2021) | Net Carrying Amount (June 30, 2021) | Gross Carrying Amount (Dec 31, 2020) | Net Carrying Amount (Dec 31, 2020) | | :--- | :--- | :--- | :--- | :--- | | In-place leases | $72,828 | $51,120 | $67,986 | $49,219 | | Intangible market lease assets | $12,448 | $8,138 | $12,285 | $8,226 | | Total intangible assets | $85,276 | $59,258 | $80,271 | $57,445 | | Intangible market lease liabilities | $13,352 | $10,465 | $12,772 | $10,168 | [Note 4. Leases](index=26&type=section&id=4.%20Leases) The company acts as a lessor for long-term, triple-net operating leases and as a lessee for ground and office leases - The company's leases are predominantly **triple-net**, making tenants responsible for all property operating expenses, including maintenance, insurance, utilities, and property taxes[131](index=131&type=chunk) Future Minimum Lease Payments (in thousands) | Lease Payments | Future Minimum Base Rental Receipts (as Lessor) | Future Minimum Base Rental Payments (as Lessee) | | :--- | :--- | :--- | | Total | $3,352,506 | $19,809 | | July 1 - Dec 31, 2021 | $106,013 | $737 | | 2022 | $214,754 | $1,484 | | 2023 | $217,510 | $1,141 | | 2024 | $218,561 | $991 | | 2025 | $217,572 | $894 | | Thereafter | $2,378,096 | $14,562 | Lease Revenue Components (in thousands) | Lease Revenue Component | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Fixed lease revenues | $50,987 | $41,828 | $97,076 | $82,231 | | Variable lease revenues | $460 | $402 | $1,083 | $768 | | Total lease revenues | $51,447 | $42,230 | $98,159 | $82,999 | [Note 5. Long Term Debt](index=28&type=section&id=5.%20Long%20Term%20Debt) Total debt increased due to a new $400 million Senior Unsecured Notes issuance, while secured notes were fully repaid Long-Term Debt Summary (Principal Outstanding, in thousands) | Debt Instrument | Maturity Date | June 30, 2021 | Dec 31, 2020 | Weighted Avg Interest Rate (June 30, 2021) | Weighted Avg Interest Rate (Dec 31, 2020) | | :--- | :--- | :--- | :--- | :--- | :--- | | April 2019 Term Loan | April 2024 | $200,000 | $200,000 | 1.4% | 1.4% | | November 2019 Term Loan | November 2026 | $430,000 | $430,000 | 1.7% | 1.7% | | Senior Unsecured Notes | July 2031 | $400,000 | $0 | 3.0% | 0% | | Revolving Credit Facility | April 2023 | $0 | $18,000 | 0% | 1.4% | | Series 2017-1 Notes | — | $0 | $173,193 | 0% | 4.2% | | Total Principal Outstanding | | $1,030,000 | $821,193 | 2.1% | 2.1% | - The company issued **$400 million in Senior Unsecured Notes** in June 2021, with net proceeds of $396.6 million, maturing in July 2031 at a 2.95% stated interest rate[165](index=165&type=chunk)[166](index=166&type=chunk) - The company fully repaid the remaining **$171.2 million principal** on the Series 2017-1 Notes in June 2021, incurring a **$4.46 million loss on repayment**[175](index=175&type=chunk) - As of June 30, 2021, the company had **$400.0 million of unused borrowing capacity** under the Revolving Credit Facility[155](index=155&type=chunk) [Note 6. Derivative and Hedging Activities](index=33&type=section&id=6.%20Derivative%20and%20Hedging%20Activities) The company utilizes interest rate swaps as cash flow hedges to manage interest rate risk on its floating-rate debt - The company uses interest rate swaps and lock agreements as **cash flow hedges** to protect against adverse fluctuations in interest rates on its floating-rate debt[179](index=179&type=chunk) Derivative Instruments (in thousands) | Derivative Instrument | Notional Value | Fair Value (June 30, 2021) | Fair Value (Dec 31, 2020) | | :--- | :--- | :--- | :--- | | Interest Rate Swaps | $630,000 | $(23,169) | $(38,912) | - A deferred loss of **$4.8 million** from the settlement of a treasury rate lock agreement was recognized as a component of other comprehensive income (loss)[183](index=183&type=chunk) - The company estimates **$10.3 million** will be reclassified from accumulated other comprehensive loss to interest expense over the next twelve months[180](index=180&type=chunk) [Note 7. Equity](index=34&type=section&id=7.%20Equity) The company raised significant capital through a follow-on offering and its ATM Program while declaring quarterly dividends - A follow-on offering in April 2021 generated **$185.1 million in net proceeds** from the sale of 8,222,500 shares of common stock[187](index=187&type=chunk) ATM Program Activity (in thousands, except share data) | Metric | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Shares of common stock sold | 562,037 | 3,358,842 | | Weighted average sale price per share | $26.67 | $23.79 | | Gross proceeds | $14,992 | $79,921 | | Net proceeds | $14,611 | $78,633 | - As of June 30, 2021, **$90.8 million** of common stock could still be issued under the 2020 ATM Program[188](index=188&type=chunk) Dividend Declarations | Dividend Declaration Date | Record Date | Paid Date | Dividend per Share | Total Dividend (in thousands) | | :--- | :--- | :--- | :--- | :--- | | May 27, 2021 | June 30, 2021 | July 15, 2021 | $0.25 | $29,559 | | March 5, 2021 | March 31, 2021 | April 15, 2021 | $0.24 | $26,265 | [Note 8. Non-controlling Interests](index=35&type=section&id=8.%20Non-controlling%20Interests) The company holds a 99.5% interest in its Operating Partnership, with the remaining 0.5% held by non-controlling OP Unit Holders - The Company holds a **99.5% limited partner interest** in the Operating Partnership, with non-controlling OP Unit Holders holding **0.5%**[198](index=198&type=chunk) - OP Units held by non-controlling interests are redeemable for cash or, at the Company's election, shares of common stock on a **one-for-one basis**[199](index=199&type=chunk) [Note 9. Equity Based Compensation](index=35&type=section&id=9.%20Equity%20Based%20Compensation) The company grants RSAs and RSUs under its Equity Incentive Plan, with vesting tied to service and performance metrics - The Equity Incentive Plan allows for grants of various equity awards, with a maximum of **3,550,000 shares**[200](index=200&type=chunk) Equity Award Activity (Number of Shares/Units) | Equity Award Type | Unvested (Jan 1, 2021) | Granted (6 months) | Vested (6 months) | Unvested (June 30, 2021) | | :--- | :--- | :--- | :--- | :--- | | Restricted Shares | 240,598 | 0 | (221,694) | 18,904 | | Restricted Units | 321,602 | 213,686 | (46,431) | 488,857 | - Performance-based RSUs (75% of awards) are tied to the company's **Total Shareholder Return (TSR)** compared to peer companies, with payouts ranging from **0% to 250%** of target[207](index=207&type=chunk) RSU Compensation Cost (in thousands) | Metric | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Compensation cost recognized | $1,137 | $1,973 | | Total unrecognized compensation cost (June 30, 2021) | N/A | $10,078 | | Weighted average recognition period (June 30, 2021) | N/A | 2.7 years | [Note 10. Net Income Per Share](index=38&type=section&id=10.%20Net%20Income%20Per%20Share) Net income per share is computed using the two-class method, accounting for participating and potentially dilutive securities Net Income Per Share Calculation | Metric | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income available for common stockholders: basic (in thousands) | $23,216 | $10,304 | $38,392 | $24,134 | | Basic net income per share | $0.20 | $0.11 | $0.34 | $0.27 | | Diluted net income per share | $0.20 | $0.11 | $0.34 | $0.26 | | Weighted average shares outstanding used in basic net income per share | 116,318,386 | 91,604,397 | 111,678,562 | 90,963,400 | | Weighted average shares outstanding used in diluted net income per share | 117,513,344 | 92,483,898 | 112,770,501 | 91,908,098 | [Note 11. Commitments and Contingencies](index=38&type=section&id=11.%20Commitments%20and%20Contingencies) The company has future funding commitments to tenants and maintains a 401(k) plan with matching contributions - The company has **$18.4 million** in future commitments to fund tenant development, construction, and renovation costs[217](index=217&type=chunk) - **No material legal or regulatory proceedings** are pending or contemplated against the company[219](index=219&type=chunk) - The company's 401(k) plan provides a **100% matching contribution** on the first 5% of eligible compensation[221](index=221&type=chunk) [Note 12. Fair Value Measurements](index=39&type=section&id=12.%20Fair%20Value%20Measurements) Financial instruments are measured at fair value using a three-level hierarchy, with most assets valued using unobservable inputs - Fair value measurements are categorized into **Level 1** (quoted prices), **Level 2** (observable inputs), and **Level 3** (unobservable inputs)[71](index=71&type=chunk)[72](index=72&type=chunk) - Senior Unsecured Notes are classified as **Level 1** ($400 million carrying and fair value as of June 30, 2021)[231](index=231&type=chunk)[396](index=396&type=chunk) - Derivative financial instruments are classified as **Level 2**, with a $23.2 million liability as of June 30, 2021[233](index=233&type=chunk) - Impaired real estate investments are valued using **Level 3 inputs**, considering sales agreements, bid/ask prices, and future cash flow estimates[236](index=236&type=chunk) [Note 13. Subsequent Events](index=41&type=section&id=13.%20Subsequent%20Events) The company continued its investment and disposition activities after the reporting period ended - After June 30, 2021, the company invested **$53.0 million** in 20 real estate properties[239](index=239&type=chunk) - After June 30, 2021, the company sold or transferred 9 real estate properties for an aggregate gross sales price of **$6.3 million**[239](index=239&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=42&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial results, business strategy, liquidity, and portfolio performance - The company is an internally managed REIT focused on acquiring, owning, and managing primarily single-tenant properties net leased to middle-market companies operating service-oriented or experience-based businesses[246](index=246&type=chunk) - As of June 30, 2021, the portfolio comprised **1,325 properties (99.8% occupied)** with annualized base rent of **$209.3 million**, diversified across 281 tenants, 402 concepts, and 17 industries in 44 states[248](index=248&type=chunk)[330](index=330&type=chunk) - The weighted average remaining lease term was **14.0 years**, with 98.4% of leases providing for annual rent escalations at a weighted average rate of 1.6% per year[249](index=249&type=chunk)[250](index=250&type=chunk) [Special Note Regarding Forward-Looking Statements](index=43&type=section&id=Special%20Note%20Regarding%20Forward-Looking%20Statements) This section cautions that the report contains forward-looking statements subject to risks and uncertainties - The report contains forward-looking statements identified by words like "estimate," "anticipate," and "expect," which are subject to known and unknown risks and uncertainties[242](index=242&type=chunk) - Key risk factors include the ongoing impact of the **COVID-19 pandemic**, general economic conditions, real estate business risks, and the ability to access capital[242](index=242&type=chunk) [Overview](index=44&type=section&id=Overview) The company's portfolio is highly occupied and diversified, with long lease terms and strong rent coverage - The company's portfolio consists of **1,325 properties** (including 159 mortgage loan-secured properties), with **$209.3 million in annualized base rent** and **99.8% occupancy** as of June 30, 2021[248](index=248&type=chunk) - The portfolio is highly diversified with **281 tenants** operating 402 concepts in 17 industries across 44 states, with no single tenant contributing more than **2.5% of annualized base rent**[248](index=248&type=chunk) - Leases have a weighted average remaining term of **14.0 years**, with **98.4% including rent escalations** (weighted average 1.6% per year), and 59.5% are master leases[249](index=249&type=chunk)[250](index=250&type=chunk) - The portfolio's weighted average rent coverage ratio is **3.2x**, and 98.3% of leases require unit-level financial reporting[250](index=250&type=chunk) - Approximately **87.7% of investments** during Q2 2021 were sale-leaseback transactions, with an average investment of $2.2 million per property[251](index=251&type=chunk)[253](index=253&type=chunk) [Our Competitive Strengths](index=45&type=section&id=Our%20Competitive%20Strengths) The company's strengths lie in its diversified portfolio, experienced management, and differentiated investment strategy - The portfolio is diversified across 281 tenants, 402 concepts, and 17 industries, with **94.8% of annualized base rent** from service-oriented and experience-based businesses[254](index=254&type=chunk)[255](index=255&type=chunk) - The senior management team has significant experience in the net-lease industry, with **84.7% of annualized base rent** (excluding the Initial Portfolio) attributable to internally originated sale-leaseback transactions[258](index=258&type=chunk) - The company focuses on **middle-market companies**, offering attractive real estate financing solutions for properties typically valued between $3 million and $50 million[259](index=259&type=chunk)[263](index=263&type=chunk) - The scalable platform and disciplined underwriting support significant investment growth, with expected decreases in general and administrative expenses as a percentage of portfolio and revenues due to **economies of scale**[262](index=262&type=chunk) - Leases contributing **98.3% of annualized base rent** require tenants to provide unit-level and corporate-level financial reporting, enhancing active asset management[264](index=264&type=chunk) [Our Business and Growth Strategies](index=46&type=section&id=Our%20Business%20and%20Growth%20Strategies) The company's strategy centers on disciplined underwriting, active asset management, and relationship-based sourcing - The company's strategy involves maintaining a diversified portfolio with **no more than 5% of annualized base rent** from any single tenant[267](index=267&type=chunk) - Active asset management includes regular property reviews, use of **Moody's Analytics RiskCalc** for credit deterioration detection, and monitoring market rents[270](index=270&type=chunk) - Growth is driven by originating **sale-leaseback transactions** and opportunistic acquisitions, leveraging long-standing relationships in the net lease industry[272](index=272&type=chunk) - The company targets long-term (15+ years), **triple-net leases** with attractive rent escalation provisions and tenant financial reporting obligations[267](index=267&type=chunk)[275](index=275&type=chunk) - Balance sheet management aims for capital efficiency, targeting **net debt less than six times annualized adjusted EBITDAre**[277](index=277&type=chunk)[294](index=294&type=chunk) [Historical Investment and Disposition Activity](index=48&type=section&id=Historical%20Investment%20and%20Disposition%20Activity) Investment and disposition volumes increased significantly in Q2 2021 compared to the prior year Investment Activity (3 Months Ended June 30) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Investment Volume (in thousands) | $223,186 | $42,369 | | Number of Transactions | 34 | 11 | | Property Count | 94 | 13 | | Cash Cap Rates | 7.1% | 7.4% | | Sale-Leaseback Percentage | 88% | 100% | | Lease Term (in years) | 13.5 | 16.7 | Disposition Activity (3 Months Ended June 30) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Disposition Volume (in thousands) | $19,578 | $3,420 | | Cash cap rate on leased assets | 7.1% | 6.8% | | Leased properties sold | 6 | 3 | | Vacant properties sold | 1 | 0 | [COVID-19 Pandemic Update](index=49&type=section&id=COVID-19%20Pandemic%20Update) The COVID-19 pandemic continues to pose uncertainty and risk to tenant operations and financial conditions - The ongoing COVID-19 pandemic, particularly the emergence of variants like **Delta**, continues to create significant uncertainty and could lead to renewed government restrictions[283](index=283&type=chunk) - While tenant businesses have largely recovered, there's a risk of tenants being unable or unwilling to meet rent obligations (**including deferred rent**) if conditions worsen[284](index=284&type=chunk) - The company is assessing whether COVID-19 has caused **material secular changes** in consumer behavior that could reduce patronage of service-based and experience-based businesses[284](index=284&type=chunk) [Liquidity and Capital Resources](index=50&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains a strong liquidity position through operating cash flows, credit facilities, and capital market activities - As of June 30, 2021, the company had **$2.7 billion in net investments** across 1,325 properties, with 99.8% occupancy[287](index=287&type=chunk)[288](index=288&type=chunk) - Short-term liquidity requirements include funding **$18.4 million** for tenant development, construction, and renovation costs by December 31, 2021[289](index=289&type=chunk)[317](index=317&type=chunk) - The company expects to meet short-term liquidity needs with cash, operating activities, Revolving Credit Facility borrowings, and **$90.8 million remaining under the ATM Program**[290](index=290&type=chunk) - Long-term liquidity will be sourced from operating cash flows, future financings, and property sales, with a target of **net debt less than six times annualized adjusted EBITDAre**[291](index=291&type=chunk)[294](index=294&type=chunk) - As of June 30, 2021, all long-term debt was fixed-rate or effectively fixed through hedging, with a weighted average debt maturity of **6.7 years**[295](index=295&type=chunk) [Description of Certain Debt](index=52&type=section&id=Description%20of%20Certain%20Debt) The company's debt portfolio consists of term loans and senior unsecured notes, with all covenants met Debt Summary (Principal Outstanding, in thousands) | Debt Instrument | Maturity Date | June 30, 2021 | Dec 31, 2020 | Weighted Avg Interest Rate (June 30, 2021) | | :--- | :--- | :--- | :--- | :--- | | April 2019 Term Loan | April 2024 | $200,000 | $200,000 | 3.3% | | November 2019 Term Loan | November 2026 | $430,000 | $430,000 | 3.0% | | Senior Unsecured Notes | July 2031 | $400,000 | $0 | 3.1% | | Revolving Credit Facility | April 2023 | $0 | $18,000 | 0% | | Series 2017-1 Notes | — | $0 | $173,193 | 0% | | Total Principal Outstanding | | $1,030,000 | $821,193 | 3.1% | - The company was **in compliance with all financial and nonfinancial covenants** under its Amended Credit Agreement and November 2019 Term Loan as of June 30, 2021[302](index=302&type=chunk)[307](index=307&type=chunk)[309](index=309&type=chunk) [Cash Flows](index=53&type=section&id=Cash%20Flows) Cash flows for H1 2021 show increased operating cash, significant investment, and substantial financing activities - Net cash provided by operating activities was **$69.3 million** for the six months ended June 30, 2021, an increase from $36.5 million in the prior year[311](index=311&type=chunk)[312](index=312&type=chunk) - Net cash used in investing activities was **$385.2 million**, including $339.3 million for real estate investments and capital expenditures, and $85.4 million for loans receivable[313](index=313&type=chunk) - Net cash provided by financing activities was **$412.6 million**, primarily from $264.4 million in common stock issuance and $396.6 million from Senior Unsecured Notes[314](index=314&type=chunk) [Off-Balance Sheet Arrangements](index=54&type=section&id=Off-Balance%20Sheet%20Arrangements) The company had no off-balance sheet arrangements as of the reporting date - The company reported **no off-balance sheet arrangements** as of June 30, 2021[315](index=315&type=chunk) [Contractual Obligations](index=54&type=section&id=Contractual%20Obligations) Total contractual obligations of $1.07 billion are primarily composed of unsecured debt and operating leases Contractual Obligations Summary (in thousands) | Commitment Type | Total | July 1 - Dec 31, 2021 | 2022 - 2023 | 2024 - 2025 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Unsecured Term Loans | $630,000 | $0 | $0 | $200,000 | $430,000 | | Senior Unsecured Notes | $400,000 | $0 | $0 | $0 | $400,000 | | Tenant Construction Financing and Reimbursement Obligations | $18,417 | $18,417 | $0 | $0 | $0 | | Operating Lease Obligations | $19,809 | $737 | $2,625 | $1,885 | $14,562 | | Total | $1,068,226 | $19,154 | $2,625 | $201,885 | $844,562 | [Critical Accounting Policies and Estimates](index=55&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Financial statement preparation requires significant management judgment and estimates, with no material changes in policies - Financial statement preparation involves significant management judgment and estimates, especially for **fair values, useful lives of properties, and asset impairment analysis**[321](index=321&type=chunk) - **No material changes** were made to critical accounting policies during the periods covered by this quarterly report[321](index=321&type=chunk) [Recent Issued Accounting Pronouncements](index=55&type=section&id=Recent%20Issued%20Accounting%20Pronouncements) The company adopted several new accounting standards with no material impact on its financial statements - The company adopted ASU 2016-13 (credit losses), ASU 2017-12 (hedging), ASU 2018-13 (fair value disclosures), and ASU 2020-06 (convertible instruments) with **no material impact** on its financial statements[322](index=322&type=chunk)[323](index=323&type=chunk)[324](index=324&type=chunk)[328](index=328&type=chunk) - The company elected to apply hedge accounting expedients from **ASU 2020-04** for LIBOR-indexed cash flows and accounted for COVID-19 lease concessions as if enforceable rights existed in the original lease[325](index=325&type=chunk)[327](index=327&type=chunk) - The company is currently evaluating the impact of **ASU 2021-05**, which amends lease classification for lessors with variable lease payments[329](index=329&type=chunk) [Our Real Estate Investment Portfolio](index=56&type=section&id=Our%20Real%20Estate%20Investment%20Portfolio) The portfolio is highly diversified by tenant, industry, and geography, with strong lease terms and financial reporting - The portfolio comprises **1,325 properties** (1,323 leased, 2 vacant) with **$209.3 million in annualized base rent**, diversified across 281 tenants and 402 concepts[330](index=330&type=chunk)[332](index=332&type=chunk)[334](index=334&type=chunk) - Top 10 tenants contributed **19.5% of annualized base rent**, with Captain D's being the largest at 2.5%[332](index=332&type=chunk) - **94.0% of leases are triple-net**, reducing the company's exposure to operating expenses and capital expenditures[333](index=333&type=chunk) Portfolio by Tenant Industry (as of June 30, 2021) | Tenant Industry | Annualized Base Rent (in thousands) | % of Annualized Base Rent | Number of Properties | | :--- | :--- | :--- | :--- | | Quick Service | $28,975 | 13.8% | 350 | | Car Washes | $28,802 | 13.7% | 119 | | Early Childhood Education | $28,426 | 13.6% | 122 | | Medical / Dental | $26,083 | 12.5% | 158 | | Automotive Service | $17,075 | 8.2% | 125 | | Convenience Stores | $15,800 | 7.5% | 144 | | Casual Dining | $11,368 | 5.4% | 82 | | Equipment Rental and Sales | $6,503 | 3.1% | 27 | | Family Dining | $5,768 | 2.8% | 39 | | Pet Care Services | $3,622 | 1.7% | 36 | | Other Services | $3,055 | 1.5% | 18 | | Health and Fitness | $9,885 | 4.7% | 25 | | Entertainment | $9,097 | 4.3% | 22 | | Movie Theatres | $4,171 | 2.0% | 6 | | Grocery | $4,966 | 2.4% | 23 | | Home Furnishings | $1,998 | 1.0% | 4 | | Building Materials | $3,748 | 1.8% | 23 | | Total | $209,342 | 100.0% | 1,323 | Portfolio by State (Top 5 as of June 30, 2021) | State | Annualized Base Rent (in thousands) | % of Annualized Base Rent | Number of Properties | | :--- | :--- | :--- | :--- | | Texas | $28,711 | 13.7% | 165 | | Georgia | $17,443 | 8.3% | 114 | | Ohio | $14,145 | 6.8% | 90 | | Florida | $13,039 | 6.2% | 60 | | Arkansas | $8,889 | 4.2% | 70 | - The weighted average remaining lease term was **14.0 years**, with only **4.1% of annualized base rent** attributable to leases expiring prior to January 1, 2026[340](index=340&type=chunk) Unit Level Coverage Ratio | Unit Level Coverage Ratio | % of Total (excluding non-reporting leases) | | :--- | :--- | | ≥ 2.00x | 59.6% | | 1.50x to 1.99x | 12.3% | | 1.00x to 1.49x | 11.3% | | < 1.00x | 14.9% | | Not Reported | 1.9% | - The company uses **Moody's Analytics RiskCalc** to assess tenant insolvency probability, with a significant portion of annualized base rent attributed to tenants with implied credit ratings of **BB+ or higher (30.7%)**[343](index=343&type=chunk)[344](index=344&type=chunk) [Comparison of the three months ended June 30, 2021 and 2020 (Results of Operations)](index=62&type=section&id=Comparison%20of%20the%20three%20months%20ended%20June%2030%2C%202021%20and%202020%20%28Results%20of%20Operations%29) Q2 2021 results show significant growth in revenue and net income, driven by portfolio expansion Results of Operations (3 Months Ended June 30, in thousands) | Metric | 2021 | 2020 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $57,066 | $38,503 | $18,563 | 48.2% | | Net Income | $23,400 | $10,444 | $12,956 | 124.1% | | Rental Revenue | $53,150 | $36,465 | $16,685 | 45.8% | | Interest on Loans & Direct Financing Lease Receivables | $3,879 | $2,037 | $1,842 | 90.4% | | General and Administrative Expenses | $6,470 | $6,253 | $217 | 3.5% | | Property Expenses | $1,174 | $572 | $602 | 105.2% | | Depreciation and Amortization | $17,184 | $13,464 | $3,720 | 27.6% | | Provision for Impairment of Real Estate | $398 | $1,486 | $(1,088) | -73.2% | | Loss on Repayment of Secured Borrowings | $(4,461) | $0 | $(4,461) | 100.0% | - The increase in revenues was primarily driven by the growth in the real estate investment portfolio, which expanded from **1,060 properties ($2.1 billion net investments)** to **1,325 properties ($2.7 billion net investments)** between June 30, 2020, and June 30, 2021[348](index=348&type=chunk) [Comparison of the six months ended June 30, 2021 and 2020 (Results of Operations)](index=64&type=section&id=Comparison%20of%20the%20six%20months%20ended%20June%2030%2C%202021%20and%202020%20%28Results%20of%20Operations%29) H1 2021 results demonstrate strong revenue and net income growth compared to the prior year period Results of Operations (6 Months Ended June 30, in thousands) | Metric | 2021 | 2020 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $105,618 | $79,991 | $25,627 | 32.0% | | Net Income | $38,775 | $24,488 | $14,287 | 58.3% | | Rental Revenue | $98,582 | $76,007 | $22,575 | 29.7% | | Interest on Loans & Direct Financing Lease Receivables | $6,984 | $3,976 | $3,008 | 75.7% | | General and Administrative Expenses | $12,901 | $13,789 | $(888) | -6.4% | | Property Expenses | $2,588 | $945 | $1,643 | 173.9% | | Depreciation and Amortization | $32,830 | $26,476 | $6,354 | 24.0% | | Provision for Impairment of Real Estate | $6,120 | $1,859 | $4,261 | 229.2% | | Loss on Repayment of Secured Borrowings | $(4,461) | $(924) | $(3,537) | -382.8% | - The increase in revenues was primarily driven by the growth in the real estate investment portfolio, which expanded from **1,060 properties ($2.1 billion net investments)** to **1,325 properties ($2.7 billion net investments)** between June 30, 2020, and June 30, 2021[361](index=361&type=chunk) [Non-GAAP Financial Measures](index=65&type=section&id=Non-GAAP%20Financial%20Measures) The company uses non-GAAP measures like FFO, AFFO, and EBITDAre to provide supplemental insights into performance - The company uses non-GAAP measures like **FFO, Core FFO, AFFO, EBITDA, EBITDAre, Adjusted EBITDAre, Annualized Adjusted EBITDAre, Net Debt, NOI, and Cash NOI** to provide supplemental information for comparing operating performance and assessing liquidity[374](index=374&type=chunk)[376](index=376&type=chunk)[377](index=377&type=chunk)[378](index=378&type=chunk)[380](index=380&type=chunk)[383](index=383&type=chunk)[386](index=386&type=chunk)[388](index=388&type=chunk) FFO and AFFO Reconciliation (in thousands) | Metric | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | FFO attributable to stockholders and non-controlling interests | $37,246 | $70,176 | | Core FFO attributable to stockholders and non-controlling interests | $41,707 | $74,637 | | AFFO attributable to stockholders and non-controlling interests | $39,892 | $72,373 | EBITDAre Reconciliation (in thousands) | Metric | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | EBITDA attributable to stockholders and non-controlling interests | $48,439 | $87,174 | | EBITDAre attributable to stockholders and non-controlling interests | $45,127 | $85,796 | | Annualized Adjusted EBITDAre attributable to stockholders and non-controlling interests (Q2 2021) | $197,052 | N/A | Net Debt (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Gross debt | $1,030,000 | $821,193 | | Net debt | $900,323 | $788,203 | NOI and Cash NOI (in thousands) | Metric | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | NOI attributable to stockholders and non-controlling interests | $55,892 | $103,030 | | Cash NOI attributable to stockholders and non-controlling interests | $51,987 | $96,586 | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=70&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to interest rate risk, which it manages through interest rate swap agreements - The company is exposed to interest rate risk from floating-rate debt and potential refinancing at higher rates, which it mitigates using **interest rate swap agreements**[394](index=394&type=chunk) Debt Summary (Principal Outstanding, in thousands) | Debt Instrument | June 30, 2021 | Weighted Avg Interest Rate (June 30, 2021) | | :--- | :--- | :--- | | April 2019 Term Loan | $200,000 | 3.3% | | November 2019 Term Loan | $430,000 | 3.0% | | Senior Unsecured Notes | $400,000 | 3.1% | | Revolving Credit Facility | $0 | 0% | | Series 2017-1 Notes | — | 0% | | Total Principal Outstanding | $1,030,000 | 3.1% | - As of June 30, 2021, the aggregate liability for early termination of interest rate swaps was **$23.7 million**[392](index=392&type=chunk) - A **100-basis point increase** in interest rates on unsecured term loan borrowings would increase annual interest costs by **$0.6 million**[393](index=393&type=chunk) - The fair value of the **$400 million Senior Unsecured Notes** was **$400.04 million** as of June 30, 2021, based on quoted prices in active markets (Level 1)[396](index=396&type=chunk) [Item 4. Controls and Procedures](index=71&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of the reporting date - The company's disclosure controls and procedures were evaluated and deemed **effective** as of June 30, 2021[399](index=399&type=chunk) - **No material changes** in internal control over financial reporting occurred during the most recent fiscal quarter[400](index=400&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=72&type=section&id=Item%201.%20Legal%20Proceedings) The company is not involved in any legal proceedings expected to have a material adverse effect on its business - Management believes that current legal proceedings will **not have a material adverse effect** on the company's business, financial condition, results of operations, or liquidity[403](index=403&type=chunk) - Third parties, typically tenants, are contractually obligated to **indemnify and defend** the company in many legal matters[403](index=403&type=chunk) [Item 1A. Risk Factors](index=72&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report - **No material changes** to the risk factors were reported since the Annual Report on Form 10-K for December 31, 2020[404](index=404&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=72&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or use of proceeds for the period - **No unregistered sales** of equity securities or use of proceeds were reported[405](index=405&type=chunk) [Item 3. Defaults Upon Senior Securities](index=72&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities for the period - **No defaults** upon senior securities were reported[406](index=406&type=chunk) [Item 4. Mine Safety Disclosures](index=72&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Mine Safety Disclosures are **not applicable** to the company[407](index=407&type=chunk) [Item 5. Other Information](index=72&type=section&id=Item%205.%20Other%20Information) The company reported no other information for the period - **No other information** was reported[408](index=408&type=chunk) [Item 6. Exhibits](index=73&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including indentures and officer certifications - Exhibits include indentures for Senior Unsecured Notes, certifications (31.1, 31.2, 32.1, 32.2), and Inline XBRL documents[410](index=410&type=chunk) [Signatures](index=74&type=section&id=Signatures) The report is duly signed by the company's Chief Executive Officer and Chief Financial Officer - The report was signed by **Peter M. Mavoides (CEO)** and **Mark E. Patten (CFO)** on July 28, 2021[415](index=415&type=chunk)

Financial Data and Key Metrics Changes - Total revenue for Q1 2021 reached $48.6 million, an increase of $7.1 million or 17% compared to the previous year, reflecting the impact of record investments made in Q4 2020 [27] - Net income was $15.3 million, up 9% from Q1 2020 [31] - FFO totaled $32.9 million, a 29% increase over the same period in 2020, with FFO per share at $0.30, a 7% increase [31] - AFFO was $32.5 million for the quarter, representing a 22% increase year-over-year, with AFFO per share also at $0.30, up 3% from Q1 2020 [32] Business Line Data and Key Metrics Changes - The company invested $198 million in 74 properties during the quarter, with a weighted average cash yield of 7% and a weighted average lease term of 16.1 years [15][9] - 85% of the first quarter investments were through direct sale leasebacks, with 79% containing master lease provisions [16] - The weighted average unit level coverage ratio improved to three times, up from 2.9 times in the previous quarter [13] Market Data and Key Metrics Changes - The portfolio consisted of 1,240 properties, 99.1% leased to 259 tenants across 17 industries, with a weighted average lease term of 14.3 years [12] - The largest industry segments included quick service restaurants (36% of cash ABR), auto service (14%), early childhood education (13%), and medical/dental (12.4%) [17] - Tenant concentration decreased, with no tenant representing more than 2.6% of ABR, and the top 10 tenants accounting for just 20.2% of ABR, down from 41.8% three years ago [20] Company Strategy and Development Direction - The company aims to continue adding properties and tenants predominantly through direct sale leasebacks with growing middle market operators [14] - The focus remains on pandemic-resistant industries while selectively pursuing opportunities in entertainment and casual dining sectors as they rebound [18] - The company maintains a low-leveraged balance sheet and significant liquidity, which is viewed as a strategic advantage for growth and stability [37] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the stability and durability of the portfolio as tenants recover from the pandemic [6] - The company anticipates a strong pipeline of accretive investment opportunities and reiterated its 2021 AFFO per share guidance of $1.22 to $1.26 [11] - Management noted that the capital markets remain attractive, allowing for continued external growth [10] Other Important Information - The company ended the quarter with total gross assets of $2.8 billion and unrestricted cash of nearly $43 million [33] - The company executed an upsized overnight equity offering post-quarter, generating $193 million in gross proceeds, which improved liquidity to $492 million [35] Q&A Session Summary Question: Investment activity and transaction timing - Management indicated a typical transaction cycle of 60 to 90 days, with variations based on underlying M&A transactions [39] Question: Lease restructuring details - Management clarified that the impact seen in retail was largely due to restructuring leases related to specific tenants [43] Question: Pipeline and competition - Management noted increased competition in the first half of the year but expects to continue transacting in the low seven range for cap rates [49] Question: Auto service tenant issue - Management reassured that the automotive service sector is performing well and the occupancy dip was not a significant concern [55] Question: Early childhood education performance - Management reported that early childhood education operators are now open and operating profitably, with occupancy rebounding significantly [71]