Essential Properties(EPRT) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited consolidated financial statements detail the company's financial position and performance for the reported periods Consolidated Balance Sheets 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 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) 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 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] Consolidated Statements of Cash Flows 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] Notes to Consolidated Financial Statements 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] - 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][35] Note 1. Organization 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] - 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] - 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] Note 2. Summary of Significant Accounting Policies 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] - Depreciation is computed using the straight-line method over estimated useful lives (up to 40 years for buildings, 15 years for site improvements)[50][51][52] - 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] - 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][77] - 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] - The Operating Partnership is identified as a Variable Interest Entity (VIE) where the Company is the primary beneficiary, leading to consolidation[90] - The Company adopted ASU 2020-06 (simplifying accounting for convertible debt and EPS calculation) on January 1, 2021, with no material impact[100][101] Note 3. Investments 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] - 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] 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 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] 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 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][166] - 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] - As of June 30, 2021, the company had $400.0 million of unused borrowing capacity under the Revolving Credit Facility[155] Note 6. Derivative and Hedging Activities 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] 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] - The company estimates $10.3 million will be reclassified from accumulated other comprehensive loss to interest expense over the next twelve months[180] Note 7. Equity 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] 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] 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 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] - 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] Note 9. Equity Based Compensation 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] 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] 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 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 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] - No material legal or regulatory proceedings are pending or contemplated against the company[219] - The company's 401(k) plan provides a 100% matching contribution on the first 5% of eligible compensation[221] Note 12. Fair Value Measurements 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][72] - Senior Unsecured Notes are classified as Level 1 ($400 million carrying and fair value as of June 30, 2021)[231][396] - Derivative financial instruments are classified as Level 2, with a $23.2 million liability as of June 30, 2021[233] - Impaired real estate investments are valued using Level 3 inputs, considering sales agreements, bid/ask prices, and future cash flow estimates[236] Note 13. Subsequent Events 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] - After June 30, 2021, the company sold or transferred 9 real estate properties for an aggregate gross sales price of $6.3 million[239] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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] - 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][330] - 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][250] Special Note Regarding Forward-Looking Statements 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] - 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] 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] - 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] - 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][250] - The portfolio's weighted average rent coverage ratio is 3.2x, and 98.3% of leases require unit-level financial reporting[250] - Approximately 87.7% of investments during Q2 2021 were sale-leaseback transactions, with an average investment of $2.2 million per property[251][253] Our Competitive Strengths 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][255] - 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] - The company focuses on middle-market companies, offering attractive real estate financing solutions for properties typically valued between $3 million and $50 million[259][263] - 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] - Leases contributing 98.3% of annualized base rent require tenants to provide unit-level and corporate-level financial reporting, enhancing active asset management[264] Our Business and Growth Strategies 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] - Active asset management includes regular property reviews, use of Moody's Analytics RiskCalc for credit deterioration detection, and monitoring market rents[270] - Growth is driven by originating sale-leaseback transactions and opportunistic acquisitions, leveraging long-standing relationships in the net lease industry[272] - The company targets long-term (15+ years), triple-net leases with attractive rent escalation provisions and tenant financial reporting obligations[267][275] - Balance sheet management aims for capital efficiency, targeting net debt less than six times annualized adjusted EBITDAre[277][294] Historical Investment and Disposition Activity 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 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] - 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] - 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] Liquidity and Capital Resources 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][288] - Short-term liquidity requirements include funding $18.4 million for tenant development, construction, and renovation costs by December 31, 2021[289][317] - 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] - 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][294] - 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] Description of Certain Debt 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][307][309] Cash Flows 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][312] - 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] - 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] Off-Balance Sheet Arrangements 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] Contractual Obligations 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 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] - No material changes were made to critical accounting policies during the periods covered by this quarterly report[321] Recent Issued Accounting Pronouncements 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][323][324][328] - 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][327] - The company is currently evaluating the impact of ASU 2021-05, which amends lease classification for lessors with variable lease payments[329] Our Real Estate Investment Portfolio 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][332][334] - Top 10 tenants contributed 19.5% of annualized base rent, with Captain D's being the largest at 2.5%[332] - 94.0% of leases are triple-net, reducing the company's exposure to operating expenses and capital expenditures[333] 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] 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][344] Comparison of the three months ended June 30, 2021 and 2020 (Results of Operations) 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] Comparison of the six months ended June 30, 2021 and 2020 (Results of Operations) 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] Non-GAAP Financial Measures 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][376][377][378][380][383][386][388] 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 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] 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] - A 100-basis point increase in interest rates on unsecured term loan borrowings would increase annual interest costs by $0.6 million[393] - 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] Item 4. Controls and Procedures 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] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[400] PART II. OTHER INFORMATION Item 1. Legal Proceedings 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] - Third parties, typically tenants, are contractually obligated to indemnify and defend the company in many legal matters[403] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities for the period - No defaults upon senior securities were reported[406] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[407] Item 5. Other Information The company reported no other information for the period - No other information was reported[408] Item 6. Exhibits 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] 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]