Item 1. Business
Item 1.
Business
The Company
We are an internally-managed real estate investment trust (“REIT”) that acquires, owns, and manages primarily single-tenant commercial real estate properties that are net leased on a long-term basis to a diversified group of tenants. Since our inception in 2007, we have selectively invested in net leased assets in the industrial, healthcare, restaurant, retail, and office property types. During the year 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.
•
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):
•
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, general merchandise, and flex/research and development.
•
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.
•
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
•
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.
•
Standard Contractual Base Rent Escalation
. Approximately 97.3% of our leases have contractual rent escalations, with an ABR weighted average minimum increase of 2.0%.
•
Extensive Tenant Financial Reporting
. Approximately 94.0% 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.
We conduct substantially all of our activities through, and all of our properties are held directly or indirectly by, the OP, which is commonly referred to as an umbrella partnership real estate investment trust or UPREIT. We are the sole managing member of the OP. As of December 31, 2021, we owned approximately 94.0% of its issued and outstanding membership units of the OP (“OP Units”), with the remaining 6.0% of its OP Units held
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by persons who were issued OP Units pursuant to the Internalization or in exchange for their interests in properties acquired by the OP.
2021 Highlights
Operating Highlights
•
Closed 35 real estate acquisitions totaling approximately $654.7 million, excluding capitalized acquisition costs, adding 116 new properties with a weighted average initial cash capitalization rate of 6.3%. The properties acquired had an ABR weighted average remaining lease term of 15.9 years at the time of acquisition and ABR weighted average rent increases of 1.5%.
•
Sold 31 properties, at a weighted average cash capitalization rate of 6.7%, for net proceeds of $83.8 million, recognizing a gain of $13.5 million above net book value.
•
Increased occupancy 60 basis points to 99.8%.
•
Collected 100% of base rents due during the year.
•
Generated net income of $109.5 million or $0.67 per diluted share for the year ended December 31, 2021.
•
Generated funds from operations (“FFO”) of $256.2 million or $1.56 per diluted share for the year ended December 31, 2021.
•
Generated adjusted funds from operations (“AFFO”) of $216.0 million or $1.31 per diluted share for the year ended December 31, 2021.
•
Received initial credit rating of ‘BBB’ with stable outlook from S&P Global Ratings (“S&P”) in January 2021 and upgraded credit rating of ‘Baa2’ with stable outlook from Moody’s Investors Service (“Moody’s”) in September 2021.
•
Completed our first public follow-on
equity offering, issuing 11,500,000 common shares for net proceeds of $253.5 million.
•
Established $400 million at-the-market
common equity offering program (“ATM Program”) and sold 1,071,500 shares of common stock under this program for net proceeds of $27.3 million.
•
Closed $375 million inaugural 10-year
public bond offering at a fixed rate of 2.600%.
•
Ended the fourth quarter with total outstanding debt and Net Debt of $1.7 billion and a Net Debt to Annualized Adjusted EBITDAre ratio of 5.13x.
FFO, AFFO, Net Debt, and Annualized Adjusted EBITDAre are performance measures that are not calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We present these non-GAAP
measures as we believe certain investors and other users of our financial information use them as part of their evaluation of our historical operating performance. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K
under the heading Non-GAAP
Measures
, which includes discussion of the definition, purpose, and use of these non-GAAP
measures as well as a reconciliation of each to the most comparable GAAP measure.
Our Business and Growth Strategies
Our primary business objectives are to maximize cash flows, the value of our portfolio, and total returns to our stockholders through pursuit of the following business and growth strategies:
•
Internal Growth through Long-Term Net Leases with Strong Contractual Rent Escalations
. We seek to enter into long-term net leases that include strong rent escalations over the lease term. As of
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December 31, 2021, substantially all of our portfolio (based on ABR) was subject to net leases, our leases had an ABR weighted average remaining lease term of approximately 10.5 years, excluding renewal options, and approximately 97.3% of our leases had contractual rent escalations, with an ABR weighted average minimum increase of 2.0%.
•
Disciplined and Targeted Acquisition Growth while Maintaining Our Diversified Portfolio
. We plan to continue our disciplined and targeted acquisition strategy to identify properties that are both individually compelling and contribute to our portfolio’s overall diversification based on property type, geography, tenant, and industry. We believe our reputation, in-depth
market knowledge, and extensive network of established relationships in the net lease industry will continue to provide us access to potential attractive investment opportunities.
•
Selectively Identify Attractive Adjacent Opportunities to Our Core Property Types
. We have and will continue to seek attractive adjacent opportunities to our core property types in the net lease space, which have historically provided us the opportunity to earn higher relative returns.
•
Actively Manage Our Balance Sheet to Maximize Capital Efficiency
. We seek to maintain a prudent balance between debt and equity financing and to maintain funding sources that lock in long-term investment spreads, limit interest rate sensitivity, and align with our lease terms. As of December 31, 2021, we had total debt outstanding and Net Debt of $1.7 billion, and a ratio of Net Debt to Annualized Adjusted EBITDAre of 5.13x. In the future, we will seek to maintain, on a sustained basis, a level of Net Debt that is generally less than 6.0x our Annualized Adjusted EBITDAre.
•
Proactively Manage Our Portfolio
. We proactively approach asset management and property management to enhance the performance of our portfolio through risk mitigation strategies and opportunistic sales. We regularly review and monitor each of our properties to identify changes in the business performance and credit quality of our tenants, individual property level performance metrics, and the local real estate market conditions. Our proactive approach to asset management helps to identify and address issues, such as tenant credit deterioration, changes in real estate fundamentals, general market disruption (such as from the COVID-19
pandemic), or otherwise, including determining to sell any of our properties where we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives.
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Our Real Estate Investment Portfolio
The following charts summarize our portfolio diversification by property type, tenant, brand, industry, and geographic location as of December 31, 2021. The percentages below are calculated based on our ABR of $334.1 million as of December 31, 2021.
Diversification by Property Type
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Property Type
# Properties
ABR ($000s)
ABR as a % of
Total Portfolio
Square Feet
(000s)
SF as a % of
Total Portfolio
Industrial
Manufacturing
64
$
50,377
15.1
%
9,147
28.4
%
Distribution & Warehouse
45
48,665
14.6
%
9,221
28.6
%
Food Processing
16
21,495
6.4
%
2,405
7.5
%
Flex and R&D
7
17,132
5.1
%
1,457
4.5
%
Cold Storage
4
12,686
3.8
%
933
2.9
%
Services
20
8,168
2.4
%
454
1.4
%
Industrial Total
156
158,523
47.4
%
23,617
73.3
%
Healthcare
Clinical
51
25,596
7.6
%
1,049
3.3
%
Healthcare Services
28
12,444
3.7
%
463
1.4
%
Animal Health Services
27
10,297
3.1
%
405
1.3
%
Surgical
12
10,226
3.1
%
329
1.0
%
Life Science
9
7,655
2.3
%
549
1.7
%
Untenanted
1
—
—
18
0.1
%
Healthcare Total
128
66,218
19.8
%
2,813
8.8
%
Restaurant
Quick Service Restaurants
148
24,726
7.4
%
505
1.6
%
Casual Dining
87
21,269
6.4
%
559
1.7
%
Restaurant Total
235
45,995
13.8
%
1,064
3.3
%
Retail
General Merchandise
112
18,441
5.5
%
1,416
4.4
%
Automotive
65
11,932
3.6
%
762
2.4
%
Home Furnishings
13
7,030
2.1
%
797
2.5
%
Untenanted
1
—
—
34
0.1
%
Retail Total
191
37,403
11.2
%
3,009
9.4
%
Office
Corporate Headquarters
7
10,406
3.1
%
679
2.1
%
Strategic Operations
5
9,655
2.9
%
615
1.9
%
Call Center
4
5,887
1.8
%
391
1.2
%
Office Total
16
25,948
7.8
%
1,685
5.2
%
Total
726
$
334,087
100.0
%
32,188
100.0
%
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Diversification by Tenant
Tenant
Property Type
# Properties
ABR
($‘000s)
ABR as a %
of Total
Portfolio
Square Feet
(‘000s)
SF as a %
of Total
Portfolio
Jack’s Family Restaurants LP*
Quick Service Restaurants
43
$
7,166
2.1
%
147
0.4
%
Red Lobster Hospitality & Red Lobster Restaurants LLC*
Casual Dining
22
6,994
2.1
%
181
0.6
%
Joseph T. Ryerson & Son, Inc
Distribution & Warehouse
11
6,395
1.9
%
1,537
4.8
%
Axcelis Technologies, Inc.
Flex and R&D
1
5,859
1.8
%
417
1.3
%
Hensley & Company*
Distribution & Warehouse
3
5,756
1.7
%
577
1.8
%
BluePearl Holdings, LLC**
Animal Health Services
13
5,398
1.6
%
160
0.5
%
Outback Steakhouse of Florida LLC* 1
Casual Dining
22
5,278
1.6
%
140
0.4
%
Tractor Supply Company
General Merchandise
21
5,246
1.6
%
417
1.3
%
Dollar General Corporation
General Merchandise
53
5,218
1.6
%
492
1.5
%
Krispy Kreme Doughnut Corporation
Quick Service Restaurants/ Food Processing
27
5,034
1.5
%
156
0.5
%
Total Top 10 Tenants
216
58,344
17.5
%
4,224
13.1
%
Siemens Medical Solutions USA, Inc. & Siemens Corporation
Manufacturing/Flex and R&D
2
4,936
1.5
%
545
1.7
%
Big Tex Trailer Manufacturing, Inc.*
Automotive/Distribution & Warehouse/Manufacturing/ Corporate Headquarters
17
4,859
1.4
%
1,302
4.0
%
Santa Cruz Valley Hospital
Healthcare Facilities
1
4,500
1.3
%
148
0.5
%
Nestle’ Dreyer’s Ice Cream Company
Cold Storage
1
4,476
1.3
%
310
1.0
%
Arkansas Surgical Hospital
Surgical
1
4,367
1.3
%
129
0.4
%
American Signature, Inc.
Home Furnishings
6
4,224
1.3
%
474
1.5
%
Cascade Aerospace Inc.
Manufacturing
1
4,087
1.2
%
231
0.7
%
Aventiv Technologies, LLC
Corporate Headquarters
1
3,896
1.2
%
154
0.5
%
Fresh Express Incorporated
Food Processing
1
3,869
1.2
%
335
1.0
%
Kith Kitchens*
Manufacturing
3
3,561
1.1
%
843
2.6
%
Total Top 20 Tenants
250
$
101,119
30.3
%
8,695
27.0
%
1
Tenant’s properties include 20 Outback Steakhouse restaurants and two Carrabba’s Italian Grill restaurants.
*
Subject to a master lease.
**
Includes properties leased by multiple tenants, some, not all, of which are subject to master leases.
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Diversification by Brand
Brand
Property Type
# Properties
ABR
($‘000s)
ABR as a %
of Total
Portfolio
Square Feet
(‘000s)
SF as a %
of Total
Portfolio
Jack’s Family Restaurants *
Quick Service Restaurants
43
$
7,166
2.1
%
147
0.4
%
Red Lobster*
Casual Dining
22
6,994
2.1
%
181
0.6
%
Ryerson
Distribution & Warehouse
11
6,395
1.9
%
1,537
4.8
%
Axcelis
Flex and R&D
1
5,859
1.8
%
417
1.3
%
Hensley *
Distribution & Warehouse
3
5,756
1.7
%
577
1.8
%
BluePearl Veterinary Partners **
Animal Health Services
13
5,398
1.6
%
160
0.5
%
Bob Evans Farms *1
Casual Dining/Food Processing
21
5,285
1.6
%
281
0.9
%
Tractor Supply Co.
General Merchandise
21
5,246
1.6
%
417
1.3
%
Dollar General
General Merchandise
53
5,218
1.6
%
492
1.5
%
Krispy Kreme
Quick Service Restaurants/ Food Processing
27
5,034
1.5
%
156
0.5
%
Total Top 10 Brands
215
58,351
17.5
%
4,365
13.6
%
Siemens
Manufacturing/Flex and R&D
2
4,936
1.5
%
545
1.7
%
Big Tex Trailers *
Automotive/Distribution & Warehouse/Manufacturing/ Corporate Headquarters
17
4,859
1.4
%
1,302
4.0
%
Outback Steakhouse *
Casual Dining
20
4,566
1.4
%
126
0.4
%
Wendy’s **
Quick Service Restaurants
31
4,549
1.4
%
89
0.2
%
Santa Cruz Valley Hospital
Healthcare Facilities
1
4,500
1.3
%
148
0.5
%
Nestle’
Cold Storage
1
4,476
1.3
%
310
1.0
%
Arkansas Surgical Hospital
Surgical
1
4,367
1.3
%
129
0.4
%
Value City Furniture
Home Furnishings
6
4,224
1.3
%
474
1.5
%
Taco Bell **
Quick Service Restaurants
31
4,136
1.3
%
80
0.2
%
Cascade Aerospace
Manufacturing
1
4,087
1.2
%
231
0.7
%
Total Top 20 Brands
326
$
103,051
30.9
%
7,799
24.2
%
1
Brand includes one BEF Foods, Inc. property and 20 Bob Evans Restaurants, LLC properties.
*
Subject to a master lease.
**
Includes properties leased by multiple tenants, some, not all, of which are subject to master leases.
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Diversification by Industry
Industry
# Properties
ABR ($000s)
ABR as a %
of Total
Portfolio
Square Feet
(‘000s)
SF as a %
of Total
Portfolio
Healthcare Facilities
102
$
53,099
15.9
%
2,028
6.3
%
Restaurants
238
46,766
14.0
%
1,106
3.4
%
Packaged Foods & Meats
11
16,578
5.0
%
1,820
5.7
%
Distributors
25
14,311
4.3
%
2,528
7.9
%
Food Distributors
7
12,978
3.9
%
1,556
4.8
%
Auto Parts & Equipment
39
12,443
3.7
%
2,387
7.4
%
Specialized Consumer Services
47
12,078
3.6
%
720
2.2
%
Metal & Glass Containers
8
9,796
2.9
%
2,206
6.9
%
Specialty Stores
25
9,685
2.9
%
1,140
3.5
%
Healthcare Services
18
9,105
2.7
%
515
1.6
%
Home Furnishings
5
8,955
2.7
%
1,785
5.5
%
Home Furnishing Retail
16
8,845
2.6
%
1,149
3.6
%
Aerospace & Defense
7
8,693
2.6
%
952
3.0
%
General Merchandise Stores
83
8,269
2.5
%
747
2.3
%
Electronic Components
2
6,674
2.0
%
466
1.4
%
Other (41 industries)
91
95,812
28.7
%
11,031
34.3
%
Untenanted properties
2
—
—
52
0.2
%
Total
726
$
334,087
100.0
%
32,188
100.0
%
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Diversification by Geography
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State
#
Properties
ABR
($000s)
ABR as a
% of Total
Portfolio
Square
Feet
(000s)
SF as a %
of Total
Portfolio
State
#
Properties
ABR
($000s)
ABR as a
% of Total
Portfolio
Square
Feet
(000s)
SF as a %
of Total
Portfolio
TX
67
$
35,461
10.6
%
3,491
10.8
%
NJ
3
4,904
1.5
%
366
1.1
%
IL
24
20,130
6.0
%
1,981
6.2
%
MO
10
4,822
1.5
%
959
3.0
%
WI
35
19,687
5.9
%
2,069
6.4
%
WA
15
4,223
1.3
%
150
0.5
%
FL
46
16,398
4.9
%
854
2.7
%
LA
4
3,394
1.0
%
194
0.6
%
MI
47
16,230
4.9
%
1,537
4.8
%
NE
6
3,027
0.9
%
509
1.6
%
CA
10
15,559
4.7
%
1,493
4.6
%
MD
4
2,917
0.9
%
293
0.9
%
OH
36
14,925
4.5
%
1,400
4.3
%
NM
8
2,782
0.8
%
96
0.3
%
AZ
9
13,098
3.9
%
909
2.8
%
MS
8
2,772
0.8
%
334
1.0
%
NC
35
12,936
3.9
%
1,308
4.1
%
IA
4
2,718
0.8
%
622
1.9
%
IN
29
12,763
3.8
%
1,759
5.5
%
WV
16
2,471
0.7
%
109
0.3
%
MN
20
12,738
3.8
%
2,021
6.3
%
SC
13
2,469
0.7
%
308
1.0
%
AL
51
11,445
3.4
%
855
2.7
%
CO
4
2,423
0.7
%
125
0.4
%
TN
45
10,825
3.2
%
536
1.7
%
UT
3
2,379
0.7
%
280
0.9
%
NY
26
10,660
3.2
%
680
2.1
%
CT
2
1,699
0.5
%
55
0.2
%
GA
29
10,355
3.1
%
1,538
4.8
%
MT
7
1,544
0.5
%
43
0.1
%
MA
5
10,291
3.1
%
1,026
3.2
%
NV
2
1,336
0.4
%
81
0.2
%
AR
11
7,506
2.3
%
282
0.9
%
DE
4
1,154
0.4
%
133
0.4
%
OK
20
7,126
2.1
%
944
2.9
%
ND
2
943
0.3
%
28
0.1
%
PA
14
6,737
2.0
%
1,010
3.1
%
VT
2
414
0.1
%
24
0.1
%
KY
21
6,036
1.8
%
691
2.1
%
WY
1
307
0.1
%
21
0.1
%
VA
17
5,388
1.6
%
204
0.6
%
Total US
725
$
330,000
98.8
%
31,957
99.3
%
KS
10
5,008
1.5
%
639
2.0
%
Total
Canada
1
4,087
1.2
%
231
0.7
%
Grand
Total
726
$
334,087
100.0
%
32,188
100.0
%
Our Leases
We typically lease our properties pursuant to long-term net leases with initial terms of 10 years or more that often have renewal options. Substantially all of our leases are net, meaning our tenants are generally obligated to pay all expenses associated with the leased property (such as real estate taxes, insurance, maintenance, repairs, and capital costs). 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. We believe the master lease structure is most prevalent and applicable to leases in our restaurant and retail property types and less relevant to our other property types, such as healthcare and industrial. Additionally, when we acquire properties associated with a tenant that has an existing master lease structure with us, we seek to add the new properties to the existing master lease structure to strengthen the existing lease with such tenant. As of December 31, 2021, master leases contributed approximately 32.7% of our overall 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 properties).
As of December 31, 2021, approximately 99.8% of our portfolio, representing all but two of our properties, was subject to a lease. Because substantially all of our properties are leased under long-term leases, we are not currently required to perform significant ongoing leasing activities on our properties. The lease for one of our properties, representing 0.5% of our ABR, will expire during 2022, and leases for an additional seven properties, representing approximately 1.6% of our ABR, will expire during 2023. As of December 31, 2021, the ABR weighted average remaining term of our leases was approximately 10.5 years. Less than 5% of the properties in our portfolio are subject to leases without at least one renewal option. Approximately 49.4% of our rental
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Table of Contents
revenue was derived from leases that will expire after 2030, and no more than 7.0% of our rental revenue was derived from leases that expire in any single year prior to 2030. The following chart sets forth our lease expirations based upon the terms of the leases in place as of December 31, 2021.
Expiration Year
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041+
Number of properties
1
7
11
20
35
28
33
71
99
30
54
50
32
16
86
24
33
12
33
49
Number of leases
2
8
11
23
32
28
30
39
55
25
39
24
21
12
21
9
29
7
6
11
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The following table presents certain information based on lease expirations by year. Amounts are in thousands, except for number of properties.
Year
# Properties
ABR
($000s)
ABR as a % of
Total Portfolio
Square Feet
(000s)
SF as a % of
Total
Portfolio
2022
1
$
1,566
0.5
%
46
0.1
%
2023
7
5,375
1.6
%
538
1.7
%
2024
11
13,996
4.2
%
1,689
5.2
%
2025
20
8,403
2.5
%
698
2.2
%
2026
35
19,055
5.7
%
1,414
4.4
%
2027
28
23,296
7.0
%
2,019
6.3
%
2028
33
22,765
6.8
%
2,282
7.1
%
2029
71
21,807
6.5
%
2,711
8.4
%
2030
99
52,934
15.8
%
5,089
15.8
%
2031
30
7,897
2.4
%
700
2.2
%
2032
54
28,534
8.5
%
3,248
10.1
%
2033
50
18,754
5.6
%
1,950
6.0
%
2034
32
5,850
1.8
%
376
1.2
%
2035
16
11,694
3.5
%
1,552
4.8
%
2036
86
25,693
7.7
%
2,854
8.9
%
2037
24
17,256
5.2
%
1,367
4.2
%
2038
33
6,839
2.0
%
306
0.9
%
2039
12
9,145
2.7
%
933
2.9
%
2040
33
5,906
1.8
%
317
1.0
%
2041
24
12,789
3.8
%
1,506
4.7
%
Thereafter
25
14,533
4.4
%
541
1.7
%
Untenanted properties
2
—
—
52
0.2
%
Total
726
$
334,087
100.0
%
32,188
100.0
%
Substantially all of our leases provide for periodic contractual rent escalations. As of December 31, 2021, leases contributing 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 weighted average annual minimum increase equal to 2.0% of base rent. Generally, our rent escalators increase rent on specified dates by a fixed percentage. Our escalations provide us with a source of organic growth and a measure of inflation protection. Additional information on lease escalation frequency and weighted average annual escalation rates as of December 31, 2021 is displayed below.
Lease Escalation Frequency
% of ABR
Weighted Average
Annual Minimum
Increase (1)
Annually
78.6
%
2.2
%
Every 2 years
0.1
%
1.8
%
Every 3 years
3.1
%
2.9
%
Every 4 years
1.2
%
2.4
%
Every 5 years
8.6
%
1.8
%
Other escalation frequencies
5.7
%
1.9
%
Flat
2.7
%
—
Total/Weighted Average (2)
100.0
%
2.0
%
(1)
Represents the ABR weighted average annual minimum increase of the entire portfolio as if all escalations occurred annually. For leases where rent escalates by the greater of a stated fixed percentage or the change in CPI, we have assumed an escalation equal to the stated fixed percentage in the lease. As of December 31, 2021, leases contributing 8.4% of our ABR provide for rent increases equal to the lesser of a stated fixed percentage or the change in CPI. As any future increase in CPI is unknowable at this time, we have not included an increase in the rent pursuant to these leases in the weighted average annual minimum increase presented.
(2)
Weighted by ABR.
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The escalation provisions of our leases (by percentage of ABR) as of December 31, 2021, are displayed in the following chart:
If requested by a tenant, we may, subject to the tenant’s history, creditworthiness, and other relevant considerations, agree to reimburse or provide a loan to the tenant for property expansion or improvement costs that it incurs in connection with improvements at a property, 100% of which it leases from us. In exchange for such reimbursement or loan, we generally receive contractually specified rent that increases proportionally with our funding. For example, we may agree to reimburse a tenant, up to a specified amount, for property expansion or improvement costs that it incurs in improving a commercial facility on its property. Generally, as we reimburse the tenant for property expansion or improvement costs, the rent will increase proportionally with our funding, which typically allows us to achieve a consistent cash yield on our funding throughout improvement.
Investment Guidelines
We seek to acquire primarily freestanding, single-tenant commercial real estate properties located in the United States that are under lease and fully occupied at the time of acquisition. We also seek to maintain our portfolio’s diversification by property type, geography, tenant, and industry in an effort to reduce fluctuations in income caused by under-performing individual real estate assets or adverse economic conditions affecting an entire industry or geographic region. When evaluating whether a property acquisition would contribute to our overall portfolio’s diversification, we expect to take into account the percentage a single property, tenant, or brand would represent in our overall portfolio, as well as geographic concentrations, both by the metropolitan statistical area and by state. While we consider these criteria when evaluating acquisition opportunities, we may also pursue opportunistic investments that do not meet one or more of these factors if we assess that a transaction presents compelling risk-adjusted returns. We intend to primarily acquire portfolios and assets over time that will generally not result in any one tenant representing more than 5% of ABR.
We are focused primarily on investing in the industrial, healthcare, restaurant, retail, and office property types. Within each property type, we target specific acquisition opportunities in a highly selective manner.
•
Industrial
. We focus on single-tenant manufacturing, warehouse and distribution facilities, food processing, refrigerated storage, flex-space, and research and development facilities where the tenant
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has a strong credit profile and experienced management team. We look for industrial assets where the real estate is mission critical to the tenant’s operations, where the property sits on an essential or strategic location for the tenant, and where it would be difficult or more expensive for the tenant to relocate. We look for industrial properties that are located in close proximity to major transportation thoroughfares such as airports, ports, railways, major freeways or interstate highways.
•
Healthcare
. We focus on single-tenant medical office buildings, large regional physician practices, and off-campus
clinics affiliated with major health systems, as well as laboratories, ambulatory surgical centers, service-type locations such as dental and dialysis centers, and animal health service clinics. We primarily focus on healthcare properties that have substantial tenant investments like special regulatory permits and buildouts that would make relocation difficult or costly. We look for healthcare properties that are mission critical to tenant operations, generally located adjacent to or near hospital campuses or other medical facilities, and where the tenant has a strong credit profile and is not easily displaced by regulatory changes. In certain instances, we will seek additional credit enhancements to augment the credit of the tenant. In states where a certificate of need statute exists, we ensure that our sites carry this designation to maintain long-term viability.
•
Restaurant
. We focus our restaurant investments primarily in single-tenant quick service restaurant and casual dining properties, with an emphasis on restaurants that are located in strong retail markets. We underwrite restaurant properties primarily based on the fundamental value of the underlying real estate, site level performance, corporate owned location or experienced multi-unit franchise operators, and whether the property is subject to a master lease with multiple operating locations.
•
Retail.
We focus on e-commerce
resistant industries where the presence of a physical location is important to the end consumer and mission critical to the tenant. Our retail investments are primarily in single-tenant, net leased retail establishments in the general merchandise, automotive, and home furnishings industries, with an emphasis on market presence and necessity-based shopping. We underwrite retail properties primarily based on the fundamental value of the underlying real estate, site level performance, corporate owned location or experienced multi-unit franchise operators, and whether the property is subject to a master lease with multiple operating locations.
•
Office
. We focus on single-tenant corporate headquarters, mission-critical business operations, and call centers with creditworthy tenants where the property is strategically located or important to the tenant’s business. Key considerations for us when making office investments include a strong tenant credit profile, tenant’s previous investment in the property, occupancy costs relative to the market, divisibility of the space, and cost associated with repositioning the space upon lease expiration.
Competition
The commercial real estate market is highly competitive. We compete for tenants to occupy our properties in all of our markets with other owners and operators of commercial real estate. We compete based on a number of factors that include location, rental rates, security, suitability of the property’s design to prospective tenants’ needs, and the manner in which the property is operated and marketed. The number of competing properties in a particular market could have a material effect on our occupancy levels, rental rates, and the operating expenses of certain of our properties.
In addition, we compete with other entities engaged in real estate investment activities to locate suitable properties to acquire and purchasers to buy our properties. These competitors include other REITs, private and institutional real estate investors, sovereign wealth funds, banks, mortgage bankers, insurance companies, investment banking firms, lenders, specialty finance companies, and other entities. Some of these competitors, including larger REITs, have substantially greater financial resources, including lower cost of capital, than we have. The relative size of their portfolios may allow them to absorb properties with lower returns or allow them to accept more risk on a given property than we can prudently manage, including risks with respect to the creditworthiness of tenants. In addition, these same entities may seek financing through similar channels to us,
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and may have a higher target leverage profile. Competition from these REITs and other third-party real estate investors may limit the number of suitable investment opportunities available to us. It also may result in higher prices, lower yields, and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms.
Human Capital
As of December 31, 2021, we employed 76 full-time employees, comprised of professional employees engaged in origination, underwriting, closing, accounting and financial reporting, portfolio and asset management, capital markets, and other corporate activities essential to our business.
Our commitment to our employees is central to our ability to continue to deliver strong performance and financial results for our stockholders and other stakeholders. We are as passionate about our people as we are about real estate. We seek to create and cultivate an inclusive and engaging work environment for our employees, which allows us to attract, retain, and develop top talent to manage our business. We strive to provide our employees with a work environment that is free from discrimination and harassment, that respects and honors their differences and unique life experiences, and that enables employees the opportunity to develop and excel in their role and reach their full potential. We seek to provide a collaborative, creative workplace where people with unique talents can flourish, where their opinions are valued, and where their contributions are rewarded.
As part of our commitment to our employees, we are focused on the following:
•
Diversity, Equity, and Inclusion (“DE&I”)—We are committed to providing equal opportunity in all aspects of employment and cultivating a diverse, equitable, and inclusive workplace. We believe that diverse backgrounds and experiences help drive our performance and are important assets for our company. To that end, we value and advance the diversity, equity, and inclusion of the people with whom we work. Our cross-functional DE&I committee spearheads our ongoing efforts to deepen our commitment to this important initiative and drive our education, including diversity trainings on topics such as unconscious bias, employee engagement, policy reviews, recruitment, and monetary donations to external DE&I focused programs and organizations. DE&I is a critical business imperative that requires ongoing focus and commitment.; therefore, our efforts to promote greater diversity, equity and inclusion within and beyond our workplace have been instituted as a regular reporting item for our employees and our board of directors.
•
Career Development—We strive to create an engaging work experience that allows for career development and related opportunities. We offer numerous opportunities for our employees to engage in personal and professional development, including educational support and opportunities for tuition assistance and reimbursement, participation in industry conferences and networking events, individual leadership and management training, access to an online learning library providing an extensive collection of learning and development opportunities, lunch and learn meetings with our CEO and senior management team, group trainings (e.g., underwriting, real estate fundamentals, cyber security, computer skills, safety, ethics, harassment prevention, and DE&I related content), peer mentorship opportunities, and reimbursement for continuing education.
•
Employee Wellness—Our employees are our most valuable asset, and their individual and group contributions drive our performance and success. As a result, we are focused on and invest in our team’s overall health, wellness, and engagement. We employ numerous strategies and initiatives to nurture and nourish our employees’ physical, mental, and emotional well-being, including, among other things, competitive employee benefits (with 100% employer-paid healthcare options), generous paid time off programs, fringe benefits to make both the Broadstone and home office environments more comfortable, transparent and open communication and dialogue between our senior executives and our employee base, events and opportunities for social connectedness and fun family-friendly corporate events, wellness and fitness events, on-site
flu vaccinations administered by a third-party
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health-services provider, flexibility in work location and schedules to meet specific employee needs, and access to an employee assistance program and other health and wellness resources.
•
Community Engagement—We believe in our responsibility to help the communities around us by providing support to charitable organizations and encourage living philanthropically. We offer regular volunteer and giving opportunities throughout the year that provide our employees with meaningful civic involvement. Since our inception, we have facilitated opportunities for our employees to contribute time and resources to benefit local nonprofit organizations. Our community engagement efforts are led by our employees through a dedicated committee that is responsible for engaging with community organizations, planning and organizing various opportunities for employees to make a difference through volunteer giving and service, and civic involvement with non-profit
organizations, and corporate donations.
We believe that the initiatives described above will help us attract, hire, and retain employees.
Principal Executive Offices
Our principal executive offices are located at 800 Clinton Square, Rochester, New York, 14604, and our telephone number is (585) 287-6500.
We occupy approximately 24,072 square feet of space leased from Clinton Asset Holding Associates, L.P. We believe that our offices are adequate for our present and currently planned future operations and that adequate additional space will be available if needed in the future.
Insurance
Our tenants are generally required to maintain liability and property insurance coverage for the properties they lease from us pursuant to net leases. These leases generally require our tenants to name us (and any of our lenders that have a mortgage on the property leased by the tenant) as additional insureds on their liability policies and additional named insured and/or loss payee (or mortgagee, in the case of our lenders) on their property policies. Depending on the location of the property, certain losses of a catastrophic nature, such as those caused by earthquakes and floods, may be covered by insurance policies that are held by our tenant with limitations such as large deductibles or co-payments
that a tenant may not be able to meet. Certain other losses of a catastrophic nature, such as those caused by wind/hail, hurricanes, terrorism or acts of war, may be uninsurable or not economically insurable. In the event there is damage to our properties that is not covered by insurance and such properties are subject to recourse indebtedness, we will continue to be liable for the indebtedness, even if these properties are irreparably damaged.
In addition to being a named insured on our tenants’ liability policies, we separately maintain commercial general liability coverage and, in certain instances, general or specific (e.g., flood) property-level insurance coverage on certain properties or pursuant to the terms of certain of our leases. We also maintain full property coverage on all untenanted properties and other property coverage as may be required by our lenders, which are not required to be carried by our tenants under our leases.
Government Regulation
General
Our investments are subject to various laws, ordinances, and regulations, including, among other things, fire and safety requirements, zoning regulations, land use controls, and environmental controls relating to air and water quality, noise pollution, and indirect environmental impacts. We believe that we have all permits and approvals necessary under current law to operate our investments.
Americans with Disabilities Act (“ADA”)
Under Title III of the ADA, and rules promulgated thereunder, in order to protect individuals with disabilities, public accommodations must remove architectural and communication barriers that are structural in
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nature from existing places of public accommodation to the extent “readily achievable.” In addition, under the ADA, alterations to a place of public accommodation or a commercial facility are to be made so that, to the maximum extent feasible, such altered portions are readily accessible to and usable by disabled individuals. The “readily achievable” standard takes into account, among other factors, the financial resources of the affected site and the owner, lessor or other applicable person.
Compliance with the ADA, as well as other federal, state, and local laws, may require modifications to properties we currently own or may purchase, or may restrict renovations of those properties. Failure to comply with these laws or regulations could result in the imposition of fines or an award of damages to private litigants, as well as the incurrence of the costs of making modifications to attain compliance, and future legislation could impose additional obligations or restrictions on our properties. Although our tenants are generally responsible for all maintenance and repairs of the property pursuant to our lease, including compliance with the ADA and other similar laws or regulations, we could be held liable as the owner of the property for a failure of one of our tenants to comply with these laws or regulations.
Environmental Matters
Federal, state, and local environmental laws and regulations regulate, and impose liability for, releases of hazardous or toxic substances into the environment. Under various of these laws and regulations, a current or previous owner, operator or tenant of real estate may be required to investigate and clean up or otherwise address hazardous or toxic substances, hazardous wastes or petroleum product releases or threats of releases at the property, and may be held liable to a government entity or to third parties for property damage and for investigation, clean-up,
and monitoring costs incurred by those parties in connection with the actual or threatened contamination. These laws may impose clean-up
responsibility and liability without regard to fault, or whether or not the owner, operator, or tenant knew of or caused the presence of the contamination. The liability under these laws may be joint and several for the full amount of the investigation, clean-up,
and monitoring costs incurred or to be incurred or actions to be undertaken, although a party held jointly and severally liable may seek to obtain contributions from other identified, solvent, responsible parties of their fair share toward these costs. These costs may be substantial, and can exceed the value of the property. In addition, some environmental laws may create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. As the owner or operator of real estate, we also may be liable under common law to third parties for damages and injuries resulting from environmental contamination emanating from the real estate. The presence of contamination, or the failure to properly remediate contamination, on a property may adversely affect the ability of the owner, operator or tenant to sell or rent that property or to borrow using the property as collateral, and may adversely impact our investment in that property.
Some of our properties contain, have contained, or are adjacent to or near other properties that have contained or currently contain storage tanks for the storage of petroleum products or other hazardous or toxic substances. Similarly, some of our properties currently are or were used in the past for commercial or industrial purposes that involve or involved the use of petroleum products or other hazardous or toxic substances, or are adjacent to or near properties that have been or are used for similar commercial or industrial purposes. These operations create a potential for the release of petroleum products or other hazardous or toxic substances, and we could potentially be required to pay to clean up any contamination. In addition, environmental laws regulate a variety of activities that can occur on a property, including the storage of petroleum products or other hazardous or toxic substances, air emissions, water discharges, and exposure to lead-based paint. Such laws may impose fines or penalties for violations and may require permits or other governmental approvals to be obtained for the operation of a business involving such activities. Any of the foregoing matters could have a material adverse effect on us.
Environmental laws also govern the presence, maintenance, and removal of asbestos-containing materials (“ACM”). Federal regulations require building owners and those exercising control over a building’s management to identify and warn, through signs and labels, of potential hazards posed by workplace exposure to
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installed ACM in their building. The regulations also have employee training, record keeping, and due diligence requirements pertaining to ACM. Significant fines can be assessed for violation of these regulations. As a result of these regulations, building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to ACM. The regulations may affect the value of a building containing ACM in which we have invested. Federal, state, and local laws and regulations also govern the removal, encapsulation, disturbance, handling, and/or disposal of ACM when those materials are in poor condition or in the event of construction, remodeling, renovation, or demolition of a building. These laws may impose liability for improper handling or a release into the environment of ACM and may provide for fines to, and for third parties to seek recovery from, owners or operators of real properties for personal injury or improper work exposure associated with ACM.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses, and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants, or others if property damage or personal injury occurs.
Before completing any property acquisition, we typically obtain environmental assessments in order to identify potential environmental concerns at the property. These assessments are carried out in accordance with the Standard Practice for Environmental Site Assessments (ASTM Practice E 1527-13)
as set by ASTM International, formerly known as the American Society for Testing and Materials, and generally include a physical site inspection, a review of relevant federal, state, and local environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property’s chain of title, and review of historical aerial photographs and other information on past uses of the property. These assessments are limited in scope. If, however, recommended in the initial assessments, we may undertake additional assessments such as soil and/or groundwater sampling or other limited subsurface investigations and ACM or mold surveys to test for substances of concern. A prior owner or operator of a property or historical operations at or near our properties may have created a material environmental condition that is not known to us or the independent consultants preparing the site assessments. Material environmental conditions may have arisen after the review was completed or may arise in the future, and future laws, ordinances, or regulations may impose material additional environmental liability. If environmental concerns are not satisfactorily resolved in any initial or additional assessments, we may obtain environmental insurance policies to insure against potential environmental risk or loss depending on the type of property, the availability and cost of the insurance, and various other factors we deem relevant (e.g., an environmental occurrence affects one of our properties where our lessee may not have the financial capability to honor its indemnification obligations to us). Our ultimate liability for environmental conditions may exceed the policy limits on any environmental insurance policies we obtain, if any.
Generally, our leases require the lessee to comply with environmental law and provide that the lessee will indemnify us for any loss or expense we incur as a result of lessee’s violation of environmental law or the presence, use or release of hazardous materials on our property attributable to the lessee. If our lessees do not comply with environmental law, or we are unable to enforce the indemnification obligations of our lessees, our results of operations would be adversely affected.
We cannot predict what other environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted, or what environmental conditions may
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be found to exist on the properties in the future. Compliance with existing and new laws and regulations may require us or our tenants to spend funds to remedy environmental problems. If we or our tenants were to become subject to significant environmental liabilities, we could be materially and adversely affected.
Tax Regulation
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, (as amended, the “Code”) beginning with our taxable year ended December 31, 2008. We believe that as of such date we have been organized and have operated in a manner to qualify for taxation as a REIT for U.S. federal income tax purposes. We intend to continue to be organized and operate in such a manner. In order to qualify as a REIT, we are required under the Code, among other things, to distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to income tax at the corporate rate to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gain. As a result of our distribution requirements, we rely, in part, on third-party sources to fund our capital needs. Additionally, if we were to lose REIT status we would face significant tax consequences that would substantially reduce our cash available for distribution to our stockholders.
Company Information
Our filings with the SEC, including our annual reports on Form 10-K,
quarterly reports on Form 10-Q,
current reports on Form 8-K,
and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as our proxy statements, are accessible free of charge at http://investors.bnl.broadstone.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. You may access materials we file with the SEC through the EDGAR database at the SEC’s website at http://www.sec.gov.
We have adopted our Code of Ethics and Business Conduct Policy to ensure that our business is conducted in accordance with the highest moral, legal, and ethical standards by our officers, directors, and employees. The Code of Ethics and Business Conduct Policy is available on our website, http://investors.bnl.broadstone.com, together with the charters of the Board’s Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, as well as other corporate governance policies and documents. Amendments to, and waivers granted to our directors and executive officers under our Codes of Ethics and Business Conduct Policy, if any, will be posted in this area of our website. Copies of these materials are available in print to any stockholder who requests them. Stockholders should direct such requests in writing to Investor Relations Department, Broadstone Net Lease, Inc., 800 Clinton Square, Rochester, New York 14604. Stockholders may also call (585) 287-6500.
The information about our website and its content is for your convenience only. The content of our website is not deemed to be incorporated by reference in this report or filed with the SEC.
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