# Broadstone Net Lease, Inc. (BNL) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Broadstone Net Lease, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1424182/000119312522049969/d248996d10k.htm
Accession: 0001193125-22-049969
Filing date: 2022-02-23
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/BNL/
All MD&A years: /company/BNL/mda/
Next year: /company/BNL/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements appearing in Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form
10-K.

Overview

We acquire, own, and manage primarily single-tenant commercial real estate properties that are net leased on a long-term basis to a diversified group of tenants. Since our inception in 2007, we have selectively invested in net leased assets in the industrial, healthcare, restaurant, retail, and office property types. During the year

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ended December 31, 2021, we invested $654.7 million, excluding capitalized acquisition costs, in 116 properties at a weighted average initial cash capitalization rate of 6.3%. The acquisitions included properties in industrial (47%, based on ABR), retail (26%), healthcare (23%), and restaurant (4%) asset classes located across 28 states with a weighted average initial lease term and minimum annual rent increases of 15.9 years and 1.5%, respectively. As of December 31, 2021, our portfolio has grown to 726 properties, with 725 properties located in 42 U.S. states and one property located in British Columbia, Canada.

We focus on investing in real estate that is operated by creditworthy single tenants in industries characterized by positive business drivers and trends. We target properties that are an integral part of the tenants’ businesses and are therefore opportunities to secure long-term net leases. Through long-term net leases, our tenants are able to retain operational control of their strategically important locations, while allocating their debt and equity capital to fund core business operations rather than real estate ownership.

[[GREPCENT_TABLE]]
[["","\u2022","","Diversified Portfolio. As of December 31, 2021, our portfolio comprised approximately 32.2 million rentable square feet of operational space, and was highly diversified based on property type, geography, tenant, and industry, and is cross-diversified within each (e.g., property-type diversification within a geographic concentration):"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","","Property Type: We are focused primarily on industrial, healthcare, restaurant, retail, and office property types based on our extensive experience in and conviction around these sectors. Within these sectors, we have meaningful concentrations in manufacturing, distribution and warehouse, clinical, quick service restaurant, food processing, casual dining, flex/research and development, and general merchandise."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","","Geographic Diversification: Our properties are located in 42 U.S. states and British Columbia, Canada, with no single geographic concentration exceeding 10.6% of our ABR."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","","Tenant and Industry Diversification: Our properties are occupied by approximately 204 different commercial tenants who operate 189 different brands that are diversified across 56 differing industries, with no single tenant accounting for more than 2.1% of our ABR."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","","Strong In-Place Leases with Significant Remaining Lease Term. As of December 31, 2021, our portfolio was approximately 99.8% leased with an ABR weighted average remaining lease term of approximately 10.5 years, excluding renewal options."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","","Standard Contractual Base Rent Escalation. Approximately 97.3% of our leases have contractual rent escalations, with an ABR weighted average minimum increase of 2.0%."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","","Extensive Tenant Financial Reporting. Approximately 94.0% of our tenants, based on ABR provide financial reporting, of which 84.6% are required to provide us with specified financial information on a periodic basis and an additional 9.4% of our tenants report financial statements publicly, either through SEC filings or otherwise."]]
[[/GREPCENT_TABLE]]

Factors That Impact Our Result of Operations

Our results of operations and financial condition are affected by numerous factors, many of which are beyond our control. Key factors that typically impact our results of operations and financial condition, include rental rates, property dispositions, lease renewals and occupancy, acquisition activity, net lease terms, interest expense, general and administrative expenses, tenant bankruptcies, and impairments.

Rental Rates

Our ability to grow rental revenue from our existing portfolio will depend on our ability to realize the rental escalations built into our leases. As of December 31, 2021, leases contributing approximately 97.3% of our ABR provided for increases in future annual base rent, generally ranging from 1.5% to 2.5% annually, with an ABR

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weighted average minimum increase of 2.0%. Generally, our rent escalators increase rent on specified dates by a fixed percentage. Approximately 13.6% of our rent escalators are based on an increase in the CPI over a specified period and 2.7% of our leases are flat leases, meaning they do not provide for rent increases during their terms. During periods of low inflation, small increases in the CPI will result in limited increases in rental revenue from our leases that contain rent escalators based on CPI increases. However, when the CPI decreases or does not change over the relevant period, our rental revenue from such leases is not reduced and will remain the same.

Property Dispositions

From time to time, we strategically dispose of properties, primarily when we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives. The resulting gains or losses on dispositions may materially impact our operating results, and the recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market at the time a property is listed for sale.

Lease Renewals and Occupancy

As of December 31, 2021, the ABR weighted average remaining term of our portfolio was approximately 10.5 years, excluding renewal options, and approximately 14.5% of our leases (based on ABR) will expire prior to January 1, 2027. The stability of the rental revenue generated by our properties depends principally on our tenants’ ability to pay rent and our ability to collect rents, renew expiring leases or
re-lease
space upon the expiration or other termination of leases, lease currently vacant properties, and maintain or increase rental rates at our leased properties. To the extent our properties become vacant and are not subject to a lease, we would forego rental income while remaining responsible for the payment of property taxes and maintaining the property until it is
re-leased,
which could negatively impact our operating results. Our portfolio was 99.8% occupied as of December 31, 2021.

Acquisition Activity

Our historical growth in revenues and earnings has been achieved through rent escalations associated with existing
in-place
leases, coupled with rental income generated from accretive property acquisitions. Our ability to grow revenue will depend, to a significant degree, on our ability to identify and complete acquisitions that meet our investment criteria. Changes in capitalization rates, interest rates, or other factors may impact our acquisition opportunities in the future. Market conditions may also impact the total returns we can achieve on our investments. Our acquisition volume also depends on our ability to access third-party debt and equity financing.

Net Lease Terms

Substantially all of our leases are net leases pursuant to which our tenant generally is obligated to pay most recurring expenses associated with the leased property including real estate taxes, insurance, maintenance, and repairs. The remaining leases generally require that we pay some property expenses such as real estate taxes, insurance, or certain
non-structural
repairs and maintenance. Additionally, we seek to use master lease structures where it fits market practice in the particular property type, pursuant to which we seek to lease multiple properties to a single tenant on an all or none basis. Master leases strengthen our ability to preserve rental revenue and prevent costs associated with vacancies for underperforming properties. We believe the master lease structure is most prevalent and applicable to leases in our restaurant and retail property types, while less relevant to our other property types, such as healthcare and industrial. As of December 31, 2021, master leases contributed approximately 32.7% of our overall ABR (our largest master lease by ABR related to 43 properties and contributed 2.1% of our ABR, and our smallest master lease by ABR related to two properties and contributed 0.1% of our ABR), 73.7% of our restaurant property ABR (156 of our 235 restaurant properties), and 37.9% of our retail property ABR (84 of our 191 retail properties).

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Interest Expense

We anticipate that we will continue to incur debt to fund future acquisition activity, which will increase the amount of interest expense we incur. In addition, although we attempt to limit our total floating-rate debt exposure, changes in the interest rate environment could either increase or decrease our weighted average interest rate in the future. Any changes to our debt structure or debt financing associated with property acquisitions, could materially influence our operating results depending on the terms of any such debt. In January 2021, we received an initial credit rating of ‘BBB’ with a stable outlook from S&P, which lowered the applicable margin on our existing $965 million of bank loans by 25 basis points in February 2021, as well as a 20 basis point decrease in the applicable margin on future Revolving Credit Facility borrowings. In September 2021, Moody’s upgraded our credit rating to ‘Baa2’ with a stable outlook, which aligned with S&P’s credit rating and therefore had no impact to our actual interest expense. However, a downgrade in our credit rating could also increase the amount of interest we pay under our debt agreements.

General and Administrative Expenses

Our general and administrative expenses primarily consist of compensation and related costs, third party legal, accounting, and consulting expenses, travel and entertainment, and general office expenses.

Impact of Inflation

Our leases with tenants of our properties are long-term in nature, with a current weighted average remaining lease term of 10.5 years as of December 31, 2021. To mitigate the impact of inflation on our fixed revenue streams, we have implemented limited escalation clauses in our leases. As of December 31, 2021, substantially all of our leases had contractual lease escalations, with an annual weighted average of 2.0%. A majority of our leases have fixed annual rent increases or periodic escalations over the term of the lease (

e.g.

, a 10% increase every five years), and the remaining portion has annual lease escalations based on increases in the CPI. These lease escalations mitigate the risk of fixed revenue streams in the case of an inflationary economic environment, and provide increased return in otherwise stable market conditions. As a majority of our portfolio has fixed lease escalations, there is a risk that inflation could be greater than the contractual rent increases.

Our focus on single-tenant, net leases also shelters us from fluctuations in the cost of services and maintenance as a result of inflation. For a portion of our portfolio, we have leases that are not fully
triple-net,
and, therefore, we bear certain responsibilities for the maintenance and structural component replacements (

e.g.,

roof, structure, or parking lot) that may be required in the future, although the tenants are still required to pay all operating expenses associated with the property (

e.g.

, real estate taxes, insurance, and maintenance). Inflation and increased costs may have an adverse impact to our tenants and their creditworthiness if the increase in costs are greater than their increase in revenue. Where we cannot implement a
triple-net
lease, we attempt to limit our exposure to inflation through the use of warranties and other remedies that reduce the likelihood of a significant capital outlay.

Tenant Bankruptcies

Adverse economic conditions, particularly those that affect the markets in which our properties are located, or downturns in our tenants’ industries could impair our tenants’ ability to meet their lease obligations to us and our ability to renew expiring leases or
re-lease
space. In particular, the bankruptcy of one or more of our tenants could adversely affect our ability to collect rents from such tenants and maintain our portfolio’s occupancy. We have historically experienced only a limited number of tenant bankruptcies, which have not been material to our financial results.

Impairments

We review long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If, and when, such events or changes

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in circumstances are present, an impairment exists to the extent the carrying value of the long-lived asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the long-lived asset or asset group and its eventual disposition. Such cash flows include expected future operating income, as adjusted for trends and prospects, as well as the effects of demand, competition, and other factors. Significant judgment is made as to if and when impairment should be taken. If our strategy, or one or more of the assumptions described above, changes in the future, we may have to recognize an impairment. Indications of a tenant’s inability to continue as a going concern, changes in our view or strategy relative to a tenant’s business or industry, or changes in our long-term hold strategies, could each be indicative of an impairment triggering event. For the year ended December 31, 2021, we recognized $28.2 million of impairment, of which approximately $25.7 million related to the termination of a long-term master lease in exchange for a termination fee of $35 million. Simultaneously, we sold the underlying vacant properties to an unrelated third party for net proceeds of approximately $15.3 million. Due to the nature of the separate transactions, on a gross basis we recorded $33.8 million of revenue, $4.1 million of depreciation and amortization, and $25.7 million of impairment, for a net $4 million impact to net income.

Results of Operations

Our historical results of operations for the year ended December 31, 2021, discussed below, include a full year of direct compensation expenses and incremental general and administrative expenses associated with being internally managed. Our historical results of operations for the year ended December 31, 2020, discussed below, include the payment of asset and property management fees that we no longer pay following the Internalization, and do not include the full extent of expected direct compensation expenses or incremental general and administrative expenses associated with being internally managed.

Discussion of our Results of Operations for the year ended December 31, 2020 compared to the year ended December 31, 2019 was previously filed in our Annual Report on Form
10-K
for the year ended December 31, 2020. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “

Results of Operations—Year Ended December

 31, 2020 Compared to Year Ended year ended December

 31, 2019

.”

Overview

As of December 31, 2021, our real estate investment portfolio included 726 commercial real estate properties, with 725 properties located in 42 U.S. states and one property located in British Columbia, Canada, and leased to tenants in various industries. All but two of our properties were subject to a lease as of December 31, 2021.

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Year Ended December 31, 2021 Compared to Year Ended year ended December 31, 2020

Lease revenues, net

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Increase/(Decrease)"],["(in thousands)","","2021","","","2020","","","$","","","%"],["Revenues:"],["Contractual rental amounts billed for operating leases","","$","308,624","","","$","281,998","","","$","26,626","","","","9.4","%"],["Adjustment to recognize contractual operating lease billings on a straight-line basis","","","19,847","","","","25,200","","","","(5,353",")","","","(21.2",")%"],["Write-off of accrued rental income","","","(442",")","","","(4,235",")","","","3,793","","","","(89.6",")%"],["Variable rental amount earned","","","768","","","","743","","","","25","","","","3.4","%"],["Earned income from direct financing leases","","","2,909","","","","3,355","","","","(446",")","","","(13.3",")%"],["Interest income from sales-type leases","","","58","","","","5","","","","53","","","","100.0","%"],["Operating expenses billed to tenants","","","17,462","","","","15,845","","","","1,617","","","","10.2","%"],["Other income from real estate transactions","","","33,549","","","","799","","","","32,750","","","","100.0","%"],["Adjustment to revenue recognized for uncollectible rental amounts billed, net","","","101","","","","(2,073",")","","","2,174","","","","(100.0",")%"],["Total Lease revenues, net","","$","382,876","","","$","321,637","","","$","61,239","","","","19.0","%"]]
[[/GREPCENT_TABLE]]

The increase in Lease revenues, net was primarily due to growth in our real estate portfolio through accretive property acquisitions during 2021, partially offset by the reductions of revenues associated with property dispositions. During year, we invested $654.7 million, excluding capitalized acquisition costs, in 116 properties at a weighted average initial cash capitalization rate of 6.3%. Lease revenues also increased due to lease termination fee income of $35.0 million (which we classified as other income from real estate transactions in the table above) during the year ended December 31, 2021, compared to $0.4 million in lease termination fee income during the year ended December 31, 2020. In September 2021, we executed the early termination of a long-term, master lease with an investment-grade office tenant in exchange for a termination fee of $35.0 million. Simultaneously, we sold the underlying vacant properties to an unrelated third party. Through the simultaneous transactions, we recorded $33.8 million of revenue, $4.1 million of amortization, and $25.7 million of impairment, for a net $4.0 million increase to net income. This resulted in a $33.8 million increase to generated funds from operations (“FFO”), but no impact to generated adjusted funds from operations (“AFFO”) or net debt to annualized adjusted EBITDAre. Refer to our
non-GAAP
reconciliations in the

Non-GAAP
Measures

section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Operating Expenses

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Increase/(Decrease)"],["(in thousands)","","2021","","","2020","","","$","","","%"],["Operating expenses:"],["Depreciation and amortization","","$","132,096","","","$","132,685","","","$","(589",")","","","(0.4",")%"],["Property and operating expense","","","18,459","","","","17,478","","","","981","","","","5.6","%"],["General and administrative","","","36,366","","","","27,988","","","","8,378","","","","29.9","%"],["Provision for impairment of investment in rental properties","","","28,208","","","","19,077","","","","9,131","","","","47.9","%"],["Asset management fees","","","\u2014","","","","2,461","","","","(2,461",")","","","(100.0",")%"],["Property management fees","","","\u2014","","","","1,275","","","","(1,275",")","","","(100.0",")%"],["Total operating expenses","","$","215,129","","","$","200,964","","","$","14,165","","","","7.0","%"]]
[[/GREPCENT_TABLE]]

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Depreciation and amortization

The decrease in depreciation and amortization was due to $11.1 million of accelerated amortization during the year ended December 31, 2020 as a result of the
COVID-19
pandemic and certain lease terminations compared to only $4.1 million of accelerated amortization during the year ended December 31, 2021, offset by additional depreciation and amortization recognized from growth in our real estate portfolio.

General and administrative

Following the Internalization in February 2020, our asset and property management fees were replaced with compensation and related expenses, along with associated general and administrative expenses. The increase in general and administrative expenses was a direct result of the Internalization.

Provision for impairment of investment in rental properties

During the year ended December 31, 2021, we recognized $28.2 million of impairment on our investments in rental properties, primarily attributable to our simultaneous early lease termination transaction and sale of underlying properties as discussed in Lease revenues, net above, compared to $19.1 million of impairment during the year ended December 31, 2020. The following table presents the impairment charges for their respective periods:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in thousands, except number of properties)","","2021","","","2020"],["Number of properties","","","7","","","","7"],["Carrying value prior to impairment charge","","$","48,604","","","$","55,674"],["Fair value","","","20,396","","","","36,597"],["Impairment charge","","$","28,208","","","$","19,077"]]
[[/GREPCENT_TABLE]]

The timing and amount of impairment fluctuates from period to period depending on the specific facts and circumstances.

Asset management fees and Property management fees

The decrease in asset management fees and property management fees was due to the completion of the Internalization in February 2020, which terminated the associated agreements with our third-party manager.

Other income (expenses)

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Increase/(Decrease)"],["(in thousands)","","2021","","","2020","","","$","","","%"],["Other income (expenses)"],["Interest income","","$","17","","","$","24","","","$","(7",")","","","(29.2",")%"],["Interest expense","","","(64,146",")","","","(76,138",")","","","(11,992",")","","","(15.8",")%"],["Cost of debt extinguishment","","","(368",")","","","(417",")","","","(49",")","","","(11.8",")%"],["Gain on sale of real estate","","","13,523","","","","14,985","","","","(1,462",")","","","(9.8",")%"],["Income taxes","","","(1,644",")","","","(939",")","","","705","","","","75.1","%"],["Internalization expenses","","","\u2014","","","","(3,705",")","","","(3,705",")","","","(100.0",")%"],["Change in fair value of earnout liability","","","(5,539",")","","","1,800","","","","(7,339",")","","","(100.0",")%"],["Other expenses","","","(62",")","","","(7",")","","","55","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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Interest expense

The decrease in interest expense primarily reflects a decrease in our average outstanding borrowings, combined with a decrease in our weighted average cost of borrowings. In September 2020, we used the proceeds of our IPO to repay $456.7 million of outstanding borrowings, including accrued interest, significantly reducing our leverage profile. In January 2021, we received an initial credit rating of ‘BBB’ with a stable outlook from S&P Global Ratings (“S&P”), which had the effect of lowering the applicable margin on our then existing $965 million of bank loans by 25 basis points beginning in February 2021. In September 2021, Moody’s Investors Service (“Moody’s”) upgraded our credit rating to ‘Baa2’ with a stable outlook, which aligned with S&P’s credit rating and therefore had no impact to our actual interest expense. We also repriced and partially repaid our 2026 Unsecured Term Loan in March 2021, reducing the applicable margin and principal balance by an additional 60 basis points and $50 million, respectively. Our Net Debt to Annualized Adjusted EBITDAre ratio, used as a relative leverage measure, decreased from 7.04x as of January 1, 2020, to 5.13x as of December 31, 2021.

Gain on sale of real estate

Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market. During the year ended December 31, 2021, we recognized gains of $13.5 million on the sale of 31 properties, compared to gains of $15.0 million on the sale of 24 properties during the year ended December 31, 2020.

Internalization expenses

During the year ended December 31, 2020, we incurred $3.7 million of third-party fees and consulting expenses associated with the Internalization. We did not incur these expenses during the year ended December 31, 2021.

Change in fair value of earnout liability

The fair value of the earnout liability was remeasured each reporting period, with changes recorded as Change in fair value of earnout liability in the Consolidated Statements of Income and Comprehensive Income. The change in the fair value of the earnout liability during the year ended December 31, 2021, reflects our achievement of all four milestones applicable to the earnout during the year ended December 31, 2021.

Net Income and Net earnings per diluted share

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Increase/(Decrease)"],["(in thousands, except per share data)","","2021","","","2020","","","$","","","%"],["Net income","","$","109,528","","","$","56,276","","","$","53,252","","","","94.6","%"],["Net earnings per diluted share","","","0.67","","","","0.44","","","","0.23","","","","52.3","%"]]
[[/GREPCENT_TABLE]]

The increase in net income is primarily due to revenue growth of $61.2 million, a $12.0 million decrease in interest expense, a $3.7 million decrease in asset and property management fees, and a $3.7 million decrease in Internalization expenses. These factors were partially offset by a $9.1 million increase in impairment of investment in rental properties, a $8.4 million increase in general and administrative expenses, a $7.3 million increase in the fair value of our earnout liability, and a $1.5 million decrease on gain on sale of real estate.

GAAP net income includes items such as gain or loss on sale of real estate and provisions for impairment, among others, which can vary from quarter to quarter and impact period-over-period comparisons.

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Liquidity and Capital Resources

General

We acquire real estate using a combination of debt and equity capital and with cash from operations that is not otherwise distributed to our stockholders. Our focus is on maximizing the risk-adjusted return to our stockholders through an appropriate balance of debt and equity in our capital structure. We are committed to maintaining an investment grade balance sheet through active management of our leverage profile and overall liquidity position. We believe our leverage strategy has allowed us to take advantage of the lower cost of debt while simultaneously strengthening our balance sheet, as evidenced by our current investment grade credit ratings of ‘BBB’ from S&P and ‘Baa2’ from Moody’s. We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, a
non-GAAP
financial measure, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with lenders and with rating agencies regarding our credit rating. We seek to maintain on a sustained basis a Net Debt to Annualized Adjusted EBITDAre ratio that is generally less than 6.0x. As of December 31, 2021, we had total debt outstanding and Net Debt of $1.7 billion, and a Net Debt to Annualized Adjusted EBITDAre ratio of 5.13x.

Net Debt and Annualized Adjusted EBITDAre are
non-GAAP
financial measures, and Annualized Adjusted EBITDAre is calculated based upon EBITDA, EBITDAre, and Adjusted EBITDAre, each of which is also a
non-GAAP
financial measure. Refer to

Non-GAAP
Measures

below for further details concerning our calculation of
non-GAAP
measures and reconciliations to the comparable GAAP measure.

Liquidity/REIT Requirements

Liquidity is a measure of our ability to meet potential cash requirements, including our ongoing commitments to repay debt, fund our operations, acquire properties, make distributions to our stockholders, and other general business needs. As a REIT, we are required to distribute to our stockholders at least 90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital gain, on an annual basis. As a result, it is unlikely that we will be able to retain substantial cash balances to meet our long-term liquidity needs, including repayment of debt and the acquisition of additional properties, from our annual taxable income. Instead, we expect to meet our long-term liquidity needs primarily by relying upon external sources of capital.

Short-term Liquidity Requirements

Our short-term liquidity requirements consist primarily of funds necessary to pay for our operating expenses, including our general and administrative expenses as well as interest payments on our outstanding debt, and to pay distributions. We do not currently anticipate making significant capital expenditures or incurring other significant property costs because of the strong occupancy levels across our portfolio and the net lease nature of our leases. We expect to meet our short-term liquidity requirements primarily from cash and cash equivalents balances and net cash provided by operating activities, supplemented by borrowings under our Revolving Credit Facility.

As detailed in the contractual obligations table below, we have approximately $124.2 million of expected obligations due throughout 2022, primarily consisting of the $60.0 million 2022 Unsecured Term Loan, $2.9 million of mortgage maturities, and $60.5 million of interest expense due, including the impact of our interest rate swaps. We expect to repay our $60.0 million 2022 Unsecured Term Loan with borrowings under our Revolving Credit Facility. We expect our cash provided by operating activities, as discussed below, will be sufficient to pay for our current obligations including interest expense on our borrowings. We expect to either repay the maturing mortgages with available cash on hand generated from our results of operations or borrowings under our Revolving Credit Facility, or refinance with property-level borrowings.

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Long-term Liquidity Requirements

Our long-term liquidity requirements consist primarily of funds necessary to repay debt and invest in additional revenue generating properties. Debt capital has historically been provided through unsecured term loans from commercial banks, revolving credit facilities, and private placement senior unsecured notes. In September 2021, we completed our inaugural public bond offering of $375 million aggregate principal amount of 2.600% senior unsecured notes due 2031 (the “2031 Senior Unsecured Public Notes”), and expect to use additional public bond offerings in the future as a form of growth capital.

The source and mix of our debt capital in the future will be impacted by market conditions as well as our continued focus on lengthening our debt maturity profile to better align with our portfolio’s long-term leases, staggering debt maturities to reduce the risk that a significant amount of debt will mature in any single year in the future, and managing our exposure to interest rate risk. With outstanding borrowings of $102.0 million at December 31, 2021, we have $798.0 million of available capacity under our Revolving Credit Facility.

We expect to meet our long-term liquidity requirements primarily from borrowings under our Revolving Credit Facility, future debt and equity financings, and proceeds from limited sales of our properties. Our ability to access these capital sources may be impacted by unfavorable market conditions, particularly in the debt and equity capital markets, that are outside of our control. In addition, our success will depend on our operating performance, our borrowing restrictions, our degree of leverage, and other factors. Our acquisition growth strategy significantly depends on our ability to obtain acquisition financing on favorable terms. We seek to reduce the risk that long-term debt capital may be unavailable to us by strengthening our balance sheet by investing in real estate with creditworthy tenants and lease guarantors, and by maintaining an appropriate mix of debt and equity capitalization. We also, from time to time, obtain or assume
non-recourse
mortgage financing from banks and insurance companies secured by mortgages on the corresponding specific property. Mortgages, however, are not currently a strategic focus of the active management of our capital structure.

Equity Capital Resources

On September 21, 2020, we completed our IPO and issued 37 million shares of stock for net proceeds of $588.3 million, including shares issued subsequently pursuant to the underwriters’ partial exercise of their over-allotment option.

On June 28, 2021, we completed our first public
follow-on
equity offering and issued 11,500,000 shares of common stock, including shares issued pursuant to the underwriters’ full exercise of their over-allotment option, at $23.00 per share. The net proceeds, after deducting underwriting discounts and commissions of $10.6 million and $0.4 million of other expenses, were $253.5 million.

On August 23, 2021, we established an

at-the-market

common equity offering program (“ATM Program”), through which we may, from time to time, publicly offer and sell shares of our common stock having an aggregate gross sales price of up to $400 million. The ATM Program provides for forward sale agreements, enabling us to set the price of shares upon pricing the offering while delaying the issuance of shares and the receipt of the net proceeds.

During the year ended December 31, 2021, we issued 1,071,500 shares of common stock under our ATM Program, at a weighted average sale price of $26.26 per share. The net proceeds, after deducting $0.3 million for commissions and $0.5 million for other issuance expenses, were $27.3 million. At December 31, 2021, we could issue additional common stock with an aggregate sales price of up to $371.9 million under the ATM Program.

Our public offerings have been used to repay debt, fund acquisitions, and for other general corporate purposes.

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As we continue to invest in accretive real estate properties, we expect to balance our debt and equity capitalization, while maintaining a Net Debt to Annualized Adjusted EBITDAre ratio below 6.0x on a sustained basis, through the anticipated use of
follow-on
equity offerings and the ATM Program.

Unsecured Indebtedness and Capital Markets Activities as of and for the Year Ended December 31, 2021

The following table sets forth our outstanding Revolving Credit Facility, Unsecured Term Loans and Senior Unsecured Notes at December 31, 2021.

[[GREPCENT_TABLE]]
[["(in thousands, except interest rates)","","Outstanding Balance","","","Interest Rate","","","Maturity Date"],["Unsecured revolving credit facility","","$","102,000","","","","one-month LIBOR + 1.00%","","","","Sep. 2023"],["Unsecured term loans:"],["2022 Unsecured Term Loan","","","60,000","","","","one-month LIBOR + 1.00%","","","","Feb. 2022"],["2024 Unsecured Term Loan","","","190,000","","","","one-month LIBOR + 1.00%","","","","Jun. 2024"],["2026 Unsecured Term Loan","","","400,000","","","","one-month LIBOR + 1.00%","","","","Feb. 2026"],["Total unsecured term loans","","","650,000"],["Senior unsecured notes:"],["2027 Senior Unsecured Notes - Series A","","","150,000","","","","4.84%","","","","Apr. 2027"],["2028 Senior Unsecured Notes - Series B","","","225,000","","","","5.09%","","","","Jul. 2028"],["2030 Senior Unsecured Notes - Series C","","","100,000","","","","5.19%","","","","Jul. 2030"],["2031 Senior Unsecured Public Notes","","","375,000","","","","2.60%","","","","Sep. 2031"],["Total senior unsecured notes","","","850,000"],["Total unsecured debt","","$","1,602,000"]]
[[/GREPCENT_TABLE]]

Revolving Credit Facility

The Revolving Credit Facility has a maximum availability of $900.0 million and includes $20.0 million available for issuance of letters of credit. The Revolving Credit Facility has an initial maturity date of September 2023 and provides for two
six-month
extensions, at our election, subject to certain conditions set forth in the agreement and payment of a 0.0625% fee on the revolving commitments. The Revolving Credit Facility contains an applicable facility fee ranging between 0.125% and 0.30% per annum, based on our credit rating. At December 31, 2021, the facility fee was 0.20% per annum based on our credit ratings of ‘BBB’ and ‘Baa2’ from S&P and Moody’s, respectively.

Borrowings on the Revolving Credit Facility bear interest at variable rates based on LIBOR plus a margin based on our credit rating ranging between 0.825% and 1.55% per annum. At December 31, 2021, the applicable margin was 1.00%.

Subsequent to
year-end,
on January 28, 2022 we amended and restated the Revolving Credit Facility, upsizing the capacity to $1 billion, extending its maturity date to March 2026, and reducing the applicable margin to 0.85%.

2022 Unsecured Term Loan

The 2022 Unsecured Term Loan has an initial maturity date of February 2022. Borrowings under the 2022 Unsecured Term Loan are subject to interest only payments at variable rates equal to LIBOR plus a margin based on our credit rating, ranging between 0.85% and 1.65% per annum. At December 31, 2021, the applicable margin was 1.00%.

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2024 Unsecured Term Loan

The 2024 Unsecured Term Loan has an initial maturity date of June 2024. Borrowings under the 2024 Unsecured Term Loan are subject to interest at variable rates based on LIBOR plus a margin based on our credit rating ranging between 0.85% and 1.65% per annum. At December 31, 2021, the applicable margin was 1.00%.

2026 Unsecured Term Loan

On March 12, 2021, we amended the 2026 Unsecured Term Loan and made a $50.0 million paydown on the loan. Prior to the amendment, the borrowings under the 2026 Unsecured Term Loan were subject to interest at variable rates based on LIBOR plus a margin based on our credit rating ranging between 1.45% and 2.4% per annum. The amendment reduced the margin to a range between 0.85% and 1.65% based on our credit rating. At December 31, 2021, the applicable margin was 1.00%.

2027 Senior Unsecured Notes - Series A

The 2027 Senior Unsecured Notes - Series A are payable interest only semiannually during their term, bear interest at a fixed rate of 4.84% per annum, and mature in April 2027.

2028 Senior Unsecured Notes - Series B and 2030 Senior Unsecured Notes - Series C

The 2028 Senior Unsecured Notes - Series B and 2030 Senior Unsecured Notes - Series C are payable interest only semiannually during their term, and bear interest at fixed rates of 5.09% per annum and 5.19% per annum, respectively. Series B Notes mature in July 2028, and the Series C Notes mature in July 2030.

2031 Senior Unsecured Public Notes

On September 15, 2021, we completed our inaugural public bond offering of our 2031 Senior Unsecured Public Notes. We used the proceeds to repay the Revolving Credit Facility and a $265.0 million term loan in full that matured in 2020, to fund acquisitions, and for other general corporate purposes. Borrowings under the 2031 Senior Unsecured Public Notes are subject to interest only, semi-annual payments at a fixed rate of 2.60% per annum and mature in September 2031. The 2031 Senior Unsecured Public Notes were issued by our OP and are fully and unconditionally guaranteed by the Company. The assets, liabilities and results of operations of the OP are not materially different than the corresponding amounts in Company’s consolidated financial statements included herein.

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Debt Covenants

We are subject to various covenants and financial reporting requirements pursuant to our debt facilities, which are summarized below. As of December 31, 2021, we believe we were in compliance with all of our covenants on all outstanding borrowings. In the event of default, either through default on payments or breach of covenants, we may be restricted from paying dividends to our stockholders in excess of dividends required to maintain our REIT qualification. For each of the previous three years, we paid dividends out of our cash flows from operations in excess of the distribution amounts required to maintain our REIT qualification.

[[GREPCENT_TABLE]]
[["Covenants","","Requirement"],["Leverage Ratio","","\u2264 0.60 to 1.00"],["Secured Indebtedness Ratio","","\u2264 0.40 to 1.00"],["Unencumbered Coverage Ratio","","\u2265 1.75 to 1.00"],["Fixed Charge Coverage Ratio","","\u2265 1.50 to 1.00"],["Total Unsecured Indebtedness to Total Unencumbered Eligible Property Value","","\u2264 0.60 to 1.00"],["Dividends and Other Restricted Payments","","Only applicable in case of default"],["Aggregate Debt Ratio","","\u2264 0.60 to 1.00"],["Consolidated Income Available for Debt to Annual Debt Service Charge","","\u2265 1.50 to 1.00"],["Total Unencumbered Assets to Total Unsecured Debt","","\u2265 1.50 to 1.00"],["Secured Debt Ratio","","\u2264 0.40 to 1.00"]]
[[/GREPCENT_TABLE]]

Contractual Obligations

The following table provides information with respect to our contractual commitments and obligations as of December 31, 2021 (in thousands). Refer to the discussion in the Liquidity and Capital Resources section above for further discussion over our short and long-term obligations.

[[GREPCENT_TABLE]]
[["Year of Maturity","","Term Loans","","","Revolving Credit Facility(1)","","","Senior Notes","","","Mortgages","","","Interest Expense(2)","","","Tenant Improvement Allowances(3)","","","Operating Leases","","","Total"],["2022","","$","60,000","","","$","\u2014","","","$","\u2014","","","$","2,906","","","$","60,542","","","$","57","","","$","723","","","$","124,228"],["2023","","","\u2014","","","","102,000","","","","\u2014","","","","7,582","","","","59,432","","","","\u2014","","","","539","","","","169,553"],["2024","","","190,000","","","","\u2014","","","","\u2014","","","","9,760","","","","55,578","","","","\u2014","","","","153","","","","255,491"],["2025","","","\u2014","","","","\u2014","","","","\u2014","","","","20,195","","","","52,126","","","","\u2014","","","","155","","","","72,476"],["2026","","","400,000","","","","\u2014","","","","\u2014","","","","16,843","","","","43,682","","","","\u2014","","","","157","","","","460,682"],["Thereafter","","","\u2014","","","","\u2014","","","","850,000","","","","39,874","","","","94,113","","","","\u2014","","","","3,620","","","","987,607"],["Total","","$","650,000","","","$","102,000","","","$","850,000","","","$","97,160","","","$","365,473","","","$","57","","","$","5,347","","","$","2,070,037"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","On January 28, 2022, we amended and restated the Revolving Credit Facility, extending its maturity date to March 2026. The amended agreement contains two six-month extension options subject to certain conditions, including the payment of an extension fee equal to 0.0625% of the revolving commitments."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Interest expense is projected based on the outstanding borrowings and interest rates in effect as of December 31, 2021. This amount includes the impact of interest rate swap agreements."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","We expect to pay tenant improvement allowances out of cash flows from operations or from additional borrowings."]]
[[/GREPCENT_TABLE]]

At December 31, 2021 and 2020, investment in rental property of $161.6 million and $173.5 million, respectively, was pledged as collateral against our mortgages.

Additionally, we are a party to three separate tax protection agreements with the contributing members of three distinct UPREIT transactions and we entered into the Founding Owners’ Tax Protection Agreement in connection with the Internalization. The tax protection agreements require us to indemnify the beneficiaries in

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the event of a sale, exchange, transfer, or other disposal of the contributed property, and in the case of the Founding Owners’ Tax Protection Agreement, the entire Company, in a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the agreements, subject to certain exceptions. Based on values as of December 31, 2021, taxable sales of the applicable properties would trigger liability under the four agreements of approximately $22.3 million. Based on information available, we do not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future. Accordingly, we have excluded these commitments from the contractual commitments table above.

In the normal course of business, we enter into various types of commitments to purchase real estate properties. These commitments are generally subject to our customary due diligence process and, accordingly, a number of specific conditions must be met before we are obligated to purchase the properties.

Derivative Instruments and Hedging Activities

We are exposed to interest rate risk arising from changes in interest rates on the floating-rate borrowings under our unsecured credit facilities and a certain mortgage. Borrowings pursuant to our unsecured credit facilities bear interest at floating rates based on LIBOR plus an applicable margin. Accordingly, fluctuations in market interest rates may increase or decrease our interest expense, which will in turn, increase or decrease our net income and cash flow.

We attempt to manage our interest rate risk by entering into interest rate swaps. As of December 31, 2021, we had 24 interest rate swaps outstanding in an aggregate notional amount of $640.0 million. Under these agreements, we receive monthly payments from the counterparties equal to the related variable interest rates multiplied by the outstanding notional amounts. In turn, we pay the counterparties each month an amount equal to a fixed interest rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that we pay a fixed interest rate on our variable-rate borrowings. The interest rate swaps have been designated by us as cash flow hedges for accounting purposes and are reported at fair value. We assess, both at inception and on an ongoing basis, the effectiveness of our qualifying cash flow hedges. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes.

Cash Flows

Cash and cash equivalents and restricted cash totaled $27.8 million, $110.7 million, and $20.3 million at December 31, 2021, 2020, and 2019, respectively. The table below shows information concerning cash flows for the years ended December 31, 2021, 2020, and 2019:

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["(in thousands)","","2021","","","2020","","","2019"],["Net cash provided by operating activities","","$","244,937","","","$","179,028","","","$","147,358"],["Net cash used in investing activities","","","(582,304",")","","","(60,236",")","","","(831,707",")"],["Net cash provided by (used in) financing activities","","","254,408","","","","(28,375",")","","","685,671"],["(Decrease) increase in cash and cash equivalents and restricted cash","","$","(82,959",")","","$","90,417","","","$","1,322"]]
[[/GREPCENT_TABLE]]

The increase in net cash provided by operating activities during the years ended December 31, 2021 and 2020, as compared to the comparable prior periods, was mainly due to growth in our real estate portfolio and cost savings associated with the Internalization, in addition to $35 million lease termination fee we received during the year ended December 31, 2021. The increase in net cash provided by operating activities during the years ended December 31, 2020 as compared to the year ended December 31, 2019, was mainly due to growth in our real estate portfolio and cost savings associated with the Internalization.

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The increase in net cash used in investing activities during the year ended December 31, 2021 as compared to the year ended December 31, 2020, was mainly due to increased acquisition volume in 2021 offset by decrease in cash paid in connection with the Internalization. The change in net cash used in investing activities during the year ended December 31, 2020 as compared to the year ended December 31, 2019, was mainly due to decreased acquisition volume, offset by cash paid in connection with the Internalization and decreased proceeds from the disposal of properties in 2020.

The increase in net cash provided by (used in) financing activities during the year ended December 31, 2021 as compared to the year ended December 31, 2020, mainly reflects an increase in net proceeds from equity and debt offerings in 2021 to fund growth in our real estate portfolio. The change in net cash (used in) provided by financing activities during the year ended December 31, 2020 as compared to the year ended December 31, 2019, mainly reflects a net repayment of debt in 2020 with proceeds from our IPO, compared to net borrowings in 2019 that were partially offset by increased proceeds from the sale of common stock.

Non-GAAP
Measures

FFO and AFFO

We compute FFO in accordance with the standards established by the Board of Governors of Nareit, the worldwide representative voice for REITs and publicly traded real estate companies with an interest in the U.S. real estate and capital markets. Nareit defines FFO as GAAP net income or loss adjusted to exclude net gains (losses) from sales of certain depreciated real estate assets, depreciation and amortization expense from real estate assets, gains and losses from change in control, and impairment charges related to certain previously depreciated real estate assets. To derive AFFO, we modify the Nareit computation of FFO to include other adjustments to GAAP net income related to certain
non-cash
and
non-recurring
revenues and expenses, including straight-line rents,
write-off
of accrued rental income, the change in fair value of our earnout liability, cost of debt extinguishments, amortization of lease intangibles, amortization of debt issuance costs, amortization of net mortgage premiums, (gain) loss on interest rate swaps and other
non-cash
interest expense, realized gains or losses on foreign currency transactions, internalization expenses, stock-based compensation, severance, extraordinary items, and other specified
non-cash
items. We believe that excluding such items assists management and investors in distinguishing whether changes in our operations are due to growth or decline of operations at our properties or from other factors.

Our leases include cash rents that increase over the term of the lease to compensate us for anticipated increases in market rental rates over time. Our leases do not include significant front-loading or back-loading of payments, or significant rent-free periods. Therefore, we find it useful to evaluate rent on a contractual basis as it allows for comparison of existing rental rates to market rental rates. In situations where we granted short-term rent deferrals as a result of the
COVID-19
pandemic, and such deferrals were probable of collection and expected to be repaid within a short term, we continued to recognize the same amount of GAAP lease revenues each period. Consistent with GAAP lease revenues, the short-term deferrals associated with
COVID-19,
and the corresponding payments, did not impact our AFFO.

We further exclude the change in fair value of our earnout liability, lease terminations fees, costs or gains recorded on the extinguishment of debt,
non-cash
interest expense and gains, the amortization of debt issuance costs, net mortgage premiums, and lease intangibles, realized gains and losses on foreign currency transactions, internalization expenses, stock-based compensation and severance, as these items are not indicative of ongoing operational results. We use AFFO as a measure of our performance when we formulate corporate goals.

FFO is used by management, investors, and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers, primarily because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market

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conditions. We believe that AFFO is a useful supplemental measure for investors to consider because it will help them to better assess our operating performance without the distortions created by
non-cash
revenues or expenses. FFO and AFFO may not be comparable to similarly titled measures employed by other REITs, and comparisons of our FFO and AFFO with the same or similar measures disclosed by other REITs may not be meaningful.

Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments to FFO that we use to calculate AFFO. In the future, the SEC, Nareit or another regulatory body may decide to standardize the allowable adjustments across the REIT industry and in response to such standardization we may have to adjust our calculation and characterization of AFFO accordingly.

The following table reconciles net income (which is the most comparable GAAP measure) to FFO and AFFO:

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["(in thousands, except per share data)","","2021","","","2020","","","2019"],["Net income","","$","109,528","","","$","56,276","","","$","85,114"],["Real property depreciation and amortization","","","131,999","","","","132,613","","","","108,818"],["Gain on sale of real estate","","","(13,523",")","","","(14,985",")","","","(29,914",")"],["Provision for impairment on investment in rental properties","","","28,208","","","","19,077","","","","3,452"],["FFO","","$","256,212","","","$","192,981","","","$","167,470"],["Straight-line rent adjustment","","","(20,304",")","","","(24,066",")","","","(21,986",")"],["Write-off of accrued rental income","","","1,938","","","","4,235","","","","43"],["Lease termination fee","","","(35,000",")","","","\u2014","","","","\u2014"],["Adjustment to provision for credit losses","","","(38",")","","","(148",")","","","\u2014"],["Cost of debt extinguishment","","","368","","","","417","","","","1,176"],["Amortization of debt issuance costs","","","3,854","","","","3,445","","","","2,685"],["Amortization of net mortgage premiums","","","(132",")","","","(142",")","","","(143",")"],["Loss (gain) on interest rate swaps and other non-cash interest expense","","","698","","","","(166",")","","","(205",")"],["Amortization of lease intangibles","","","(3,208",")","","","(1,118",")","","","(3,410",")"],["Stock-based compensation","","","4,669","","","","1,989","","","","\u2014"],["Severance","","","1,304","","","","94","","","","\u2014"],["Change in fair value of earnout liability","","","5,539","","","","(1,800",")","","","\u2014"],["Internalization expenses","","","\u2014","","","","3,705","","","","3,658"],["Capital improvements/reserves","","","\u2014","","","","1,662","","","","(97",")"],["Other expenses","","","62","","","","7","","","","6"],["AFFO","","$","215,962","","","$","181,095","","","$","149,197"]]
[[/GREPCENT_TABLE]]

EBITDA, EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre

We compute EBITDA as earnings before interest, income taxes and depreciation and amortization. EBITDA is a measure commonly used in our industry. We believe that this ratio provides investors and analysts with a measure of our performance that includes our operating results unaffected by the differences in capital structures, capital investment cycles and useful life of related assets compared to other companies in our industry. We compute EBITDAre in accordance with the definition adopted by Nareit, as EBITDA excluding gains (loss) from the sales of depreciable property and provisions for impairment on investment in real estate. We believe EBITDA and EBITDAre are useful to investors and analysts because they provide important supplemental information about our operating performance exclusive of certain
non-cash
and other costs. EBITDA and

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EBITDAre are not measures of financial performance under GAAP, and our EBITDA and EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our EBITDA and EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.

We are focused on a disciplined and targeted acquisition strategy, together with active asset management that includes selective sales of properties. We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, each discussed further below, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with our lenders and rating agencies regarding our credit rating. As we fund new acquisitions using our unsecured Revolving Credit Facility, our leverage profile and Net Debt will be immediately impacted by current quarter acquisitions. However, the full benefit of EBITDAre from newly acquired properties will not be received in the same quarter in which the properties are acquired. Additionally, EBITDAre for the quarter includes amounts generated by properties that have been sold during the quarter. Accordingly, the variability in EBITDAre caused by the timing of our acquisitions and dispositions can temporarily distort our leverage ratios. We adjust EBITDAre (“Adjusted EBITDAre”) for the most recently completed quarter (i) to recalculate as if all acquisitions and dispositions had occurred at the beginning of the quarter, (ii) to exclude certain GAAP income and expense amounts that are either
non-cash,
such as cost of debt extinguishments or the change in fair value of our earnout liability, or that we believe are one time, or unusual in nature because they relate to unique circumstances or transactions that had not previously occurred and which we do not anticipate occurring in the future, and (iii) to eliminate the impact of lease termination fees and other items that are not a result of normal operations. We then annualize quarterly Adjusted EBITDAre by multiplying it by four (“Annualized Adjusted EBITDAre”). You should not unduly rely on this measure as it is based on assumptions and estimates that may prove to be inaccurate. Our actual reported EBITDAre for future periods may be significantly different from our Annualized Adjusted EBITDAre. Adjusted EBITDAre and Annualized Adjusted EBITDAre are not measurements of performance under GAAP, and our Adjusted EBITDAre and Annualized Adjusted EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our Adjusted EBITDAre and Annualized Adjusted EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.

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The following table reconciles net income (which is the most comparable GAAP measure) to EBITDA, EBITDAre, and Adjusted EBITDAre. Information is also presented with respect to Annualized EBITDAre and Annualized Adjusted EBITDAre:

[[GREPCENT_TABLE]]
[["","","For the Three Months Ended December 31,"],["(in thousands)","","2021","","","2020","","","2019"],["Net income","","$","32,226","","","$","17,619","","","$","27,712"],["Depreciation and amortization","","","33,476","","","","30,182","","","","30,829"],["Interest expense","","","16,997","","","","17,123","","","","21,509"],["Income taxes","","","457","","","","(141",")","","","1,262"],["EBITDA","","$","83,156","","","$","64,783","","","$","81,312"],["Provision for impairment of investment in rental properties","","","207","","","","1,678","","","","\u2014"],["Gain on sale of real estate","","","(3,732",")","","","(5,260",")","","","(13,142",")"],["EBITDAre","","$","79,631","","","$","61,201","","","$","68,170"],["Adjustment for current quarter acquisition activity (1)","","","2,002","","","","1,703","","","","346"],["Adjustment for current quarter disposition activity (2)","","","(180",")","","","(318",")","","","(1,015",")"],["Adjustment to exclude non-recurring expenses (income) (3)","","","\u2014","","","","182","","","","2,463"],["Adjustment to exclude change in fair value of earnout liability","","","\u2014","","","","6,706","","","","\u2014"],["Adjustment to exclude write-off of accrued rental income","","","\u2014","","","","242","","","","\u2014"],["Adjusted EBITDAre","","$","81,453","","","$","69,716","","","$","69,964"],["Annualized EBITDAre","","$","318,526","","","$","244,805","","","$","272,680"],["Annualized Adjusted EBITDAre","","$","325,812","","","$","278,867","","","$","279,856"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Reflects an adjustment to give effect to all acquisitions during the quarter as if they had been acquired as of the beginning of the quarter."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Reflects an adjustment to give effect to all dispositions during the quarter as if they had been sold as of the beginning of the quarter."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","Amounts represent expense directly associated with the Internalization."]]
[[/GREPCENT_TABLE]]

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Net Debt, Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre

We define Net Debt as gross debt (total reported debt plus debt issuance costs) less cash and cash equivalents and restricted cash. We believe that the presentation of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre is useful to investors and analysts because these ratios provide information about gross debt less cash and cash equivalents, which could be used to repay debt, compared to our performance as measured using EBITDAre, and is used in communications with lenders and rating agencies regarding our credit rating. The following table reconciles total debt (which is the most comparable GAAP measure) to Net Debt, and presents the ratio of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre, respectively:

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["(in thousands)","","2021","","","2020"],["Debt"],["Unsecured revolving credit facility","","$","102,000","","","$","\u2014"],["Unsecured term loans, net","","","646,671","","","","961,330"],["Senior unsecured notes, net","","","843,801","","","","472,466"],["Mortgages, net","","","96,846","","","","107,382"],["Debt issuance costs","","","9,842","","","","6,489"],["Gross Debt","","","1,699,160","","","","1,547,667"],["Cash and cash equivalents","","","(21,669",")","","","(100,486",")"],["Restricted cash","","","(6,100",")","","","(10,242",")"],["Net Debt","","$","1,671,391","","","$","1,436,939"],["Net Debt to Annualized EBITDAre","","","5.25x","","","","5.87x"],["Net Debt to Annualized Adjusted EBITDAre","","","5.13x","","","","5.15x"]]
[[/GREPCENT_TABLE]]

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses as well as other disclosures in the financial statements. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and assumptions; however, actual results may differ from these estimates and assumptions, which in turn could have a material impact on our financial statements. A summary of our significant accounting policies and procedures are included in Note 2, “Summary of Significant Accounting Policies”, contained in Item 8. “Financial Statements and Supplementary Data” included in this Annual Report on Form
10-K.
Management believes the following critical accounting policies, among others, affect its more significant estimates and assumptions used in the preparation of our consolidated financial statements.

Investment in Rental Property

Rental property accounted for under operating leases is recorded at cost. Rental property accounted for under direct financing leases and sales-type are recorded at its net investment, which generally represents the cost of the property at the inception of the lease.

We account for acquisitions of real estate as asset acquisitions in accordance with Accounting Standards Codification (“ASC”) 805,

Business Combinations,

as substantially all of the fair value of the assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets.

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We allocate the purchase price of investments in rental property accounted for as asset acquisitions based on the relative fair value of the assets acquired and liabilities assumed. These generally include tangible assets, consisting of land and land improvements, buildings and other improvements, and equipment, and identifiable intangible assets and liabilities, including the value of
in-place
leases and acquired above-market and below-market leases.

We use multiple sources to estimate fair value, including information obtained about each property as a result of our
pre-acquisition
due diligence and our marketing and leasing activities. Factors that impact our fair value determination include real estate market conditions, industry conditions that the tenant operates in, and characteristics of the real estate and/or real estate appraisals. Changes in any of these factors could impact the future purchase prices of our investments and the corresponding capitalization rates recognized.

The estimated fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant. The

as-if-vacant

value is then allocated to land and land improvements, buildings, and equipment based on comparable sales and other relevant information with respect to the property, as estimated by management. Specifically, the “if vacant” value of buildings and equipment is calculated using an income approach. Assumptions used in the income approach to value the buildings include: capitalization and discount rates,
lease-up
time, market rents, make ready costs, land value, and land improvement value.

The estimated fair value of acquired
in-place
leases are the costs we would have had to incur to lease the properties to the occupancy level of the properties at the date of acquisition. Such costs include the fair value of leasing commissions and other operating costs that would have been incurred to lease the properties, had they been vacant, to their acquired occupancy level. Acquired
in-place
leases as of the date of acquisition are amortized over the remaining
non-cancellable
lease terms of the respective leases to amortization expense.

Acquired above-market and below-market lease values are recorded based on the present value (using an interest rate that reflects the risks associated with the lease acquired) of the differences between the contractual amounts to be paid pursuant to the
in-place
leases and management’s estimate of fair market value lease rates at the time of acquisition for the corresponding
in-place
leases. The capitalized above-market and below-market lease values are amortized as adjustments to rental income over the remaining term of the respective leases.

Management estimates the fair value of assumed mortgages based upon indications of then-current market pricing for similar types of debt with similar maturities. Assumed mortgages are initially recorded at their estimated fair value as of the assumption date, and the difference between such estimated fair value and the notes’ outstanding principal balance is amortized to interest expense over the remaining term of the debt.

Long-lived Asset Impairment

We review long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If, and when, such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the long-lived asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the long-lived asset or asset group and its eventual disposition. Such cash flows include expected future operating income, as adjusted for trends and prospects, as well as the effects of demand, competition, and other factors. An impairment loss is measured as the amount by which the carrying amount of the long-lived asset or asset group exceeds the fair value. Significant judgment is made to determine if and when impairment should be taken. Management’s assessment of impairment as of December 31, 2021 was based on the most current information available to management. Certain of our properties may have fair values less than their carrying amounts. However, based on management’s plans with respect to each of those properties, we believe that their carrying amounts are recoverable and therefore, no impairment charges were recognized other than those described below. If the operating conditions mentioned above deteriorate or if our expected holding period for assets changes, subsequent tests for impairments could result in additional impairment charges in the future.

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Inputs used in establishing fair value for real estate assets generally fall within Level 3 of the fair value hierarchy, which are characterized as requiring significant judgment as little or no current market activity may be available for validation. The main indicator used to establish the classification of the inputs is current market conditions, as derived through the use of published commercial real estate market information. We determine the valuation of impaired assets using generally accepted valuation techniques including discounted cash flow analysis, income capitalization, analysis of recent comparable sales transactions, actual sales negotiations, and bona fide purchase offers received from third parties. We may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of our real estate.

The following table summarizes our impairment charges resulting primarily from changes in our long-term hold strategy with respect to the individual properties:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in thousands, except number of properties)","","2021","","","2020","","","2019"],["Number of properties","","","7","","","","7","","","","4"],["Carrying value prior to impairment charge","","$","48,604","","","$","55,674","","","$","15,901"],["Fair value","","","20,396","","","","36,597","","","","12,449"],["Impairment charge","","$","28,208","","","$","19,077","","","$","3,452"]]
[[/GREPCENT_TABLE]]

Goodwill

Goodwill represents the excess of the amount paid over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination and it assigned to one or more reporting units. We evaluate goodwill for impairment when an event occurs or circumstances change that indicate the carrying value may not be recoverable, or at least annually. Our annual testing date is November 30.

The goodwill impairment evaluation is completed using either a qualitative or quantitative approach. Under a qualitative approach, the impairment review for goodwill consists of an assessment of whether it is
more-likely-than-not
that the reporting unit’s fair value is less than its carrying value, including goodwill. If a qualitative approach indicates it is more
likely-than-not
that the estimated carrying value of a reporting unit (including goodwill) exceeds its fair value, or if we choose to bypass the qualitative approach, we perform the quantitative approach described below.

When we perform a quantitative test of goodwill for impairment, we compare the carrying value of a reporting unit with its fair value. If the fair value of the reporting unit exceeds its carrying amount, we do not consider goodwill to be impaired and no further analysis would be required. If the fair value is determined to be less than its carrying value, the amount of goodwill impairment equals the amount by which the reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

Management determined that we have one reporting unit, consistent with our segment reporting analysis, which includes the acquisition, leasing, and ownership of net leased properties (i.e., the consolidated entity). When necessary to perform the quantitative test for goodwill impairment, our estimate of fair value is determined using a market approach, leveraging assumptions such as the fair value of our equity, and consideration of a control premium, if necessary, which includes an analysis of similar market transactions. While we believe the assumptions used to estimate the fair value of our reporting unit are reasonable, changes in these assumptions may have a material impact on our financial results. Based on the results of our annual goodwill impairment test on November 30, 2021, our inaugural goodwill impairment test date, we concluded that goodwill was not impaired.

Revenue Recognition

We account for leases in accordance with ASC 842, Leases. We commence revenue recognition on our leases based on a number of factors, including the initial determination that the contract is or contains a lease.

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Generally, all of our property related contracts are or contain leases, and therefore revenue is recognized when the lessee takes possession of or controls the physical use of the leased assets. In most instances this occurs on the lease commencement date. At the time of lease assumption or at the inception of a new lease, including new leases that arise from amendments, we assess the terms and conditions of the lease to determine the proper lease classification.

A lease is classified as an operating lease if none of the following criteria are met: (i) ownership transfers to the lessee at the end of the lease term, (ii) the lessee has a purchase option that is reasonably expected to be exercised, (iii) the lease term is for a major part of the economic life of the leased property, (iv) the present value of the future lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all of the fair value of the leased property, and (v) the leased property is of such a specialized nature that it is expected to have no future alternative use to the Company at the end of the lease term. If one or more of these criteria are met, the lease will generally be classified as a sales-type lease, unless the lease contains a residual value guarantee from a third party other than the lessee, in which case it would be classified as a direct financing lease under certain circumstances.

We account for the right to use land as a separate lease component, unless the accounting effect of doing so would be insignificant. Determination of significance requires management judgment. In determining whether the accounting effect of separately reporting the land component from other components for its real estate leases is significant, we assess: (i) whether separating the land component impacts the classification of any lease component, (ii) the value of the land component in the context of the overall contract, and (iii) whether the right to use the land is coterminous with the rights to use the other assets.

Lease Termination Fee Income

The Company recognizes lease termination fee income as other income from real estate transactions, a component of Lease revenues, net, when all conditions of the termination agreement have been met, and collection of the lease termination fee is probable. If the tenant immediately vacates the property upon satisfying the conditions of the termination agreement, the Company recognizes the lease termination fee income net of accrued rental income associated with the lease immediately, as other income from real estate transactions, a component of Lease revenues, net, in the Consolidated Statement of Income and Comprehensive Income.

Derivative Instruments and Hedging

Management uses interest rate swap agreements to manage risks related to interest rate movements. Management documents its risk management strategy and hedge effectiveness at the inception of, and during the term of, each hedge. Our interest rate risk management strategy is intended to stabilize cash flow requirements by maintaining interest rate swap agreements to convert certain variable-rate debt to a fixed rate.

The interest rate swap agreements, designated and qualifying as cash flow hedges, are reported at fair value. Interest rate swaps are measured at fair value using inputs that are directly observable in active markets and are classified within Level 2 of the valuation hierarchy, using an income approach. Specifically, the fair value of the interest rate swaps is determined using a discounted cash flow analysis on the expected future cash flows of each instrument. This analysis utilizes observable market data including yield curves and implied volatilities to determine the market’s expectation of the future cash flows of the variable component. The fixed and variable components of the interest rate swaps are then discounted using calculated discount factors developed based on the overnight indexed swap (“OIS”) curve and are aggregated to arrive at a single valuation for the period. The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although the Company has determined that the majority of the inputs used to value its interest rate swaps fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its interest rate swaps utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its

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counterparties. At December 31, 2021 and 2020, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the Company has determined that its interest rate swap valuations in their entirety are appropriately classified within Level 2 of the fair value hierarchy.

When an existing cash flow hedge is terminated, we determine the accounting treatment for the accumulated gain or loss recognized in Accumulated other comprehensive loss, based on the probability of the hedged forecasted transaction occurring within the period the cash flow hedge was anticipated to affect earnings. If management determines that the hedged forecasted transaction is probable of occurring during the original period, the accumulated gain or loss is reclassified into earnings over the remaining life of the cash flow hedge using a straight-line method. If management determines that the hedged forecasted transaction is not probable of occurring during the original period, the entire amount of accumulated gain or loss is reclassified into earnings at such time.

Impact of Recent Accounting Pronouncements

For information on the impact of recent accounting pronouncements on our business, see the captions

Recently Adopted Accounting Standards

and

Other Recently Issued Accounting Standards

in Note 2, “Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form
10-K.

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