What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-04 · 509 added, 403 removed, 278 unchanged (77% of the section changed)

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Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from such forward-looking statements.

Factors that could cause actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:

Single-tenant leases involve significant risks of tenant default and tenant vacancies;

We have limited opportunities to increase rents under our long-term leases with tenants;

We may not be able to achieve growth through acquisitions at a rate that is comparable to our historical results, as a result of competition or other factors;

We may not be able to effectively manage our growth;

The departure of any of our key personnel with long-standing business relationships could materially and adversely affect us;

We may not be able to generate cash flows sufficient to pay our dividends or meet our debt service obligations;

Market conditions could adversely affect our ability to refinance existing indebtedness on acceptable terms or at all;

We are a holding company with no direct operations and rely on funds received from the OP to pay liabilities;

There are risks related to our recent Internalization, including our ability to effectively manage the Internalization and the outcome of any legal proceedings relating to the Internalization, and the risk that we may not realize the anticipated benefits from the Internalization or that such benefits are less than anticipated as a result of unexpected costs or liabilities that may arise from the Internalization;

Epidemics, pandemics, and other public health crises, including the ongoing COVID-19 pandemic;

Changing general business and economic conditions could impact us and our tenants, including those arising from natural disasters, acts of terrorism or war, as well as the recent coronavirus pandemic, fluctuating interest rates, and volatility and uncertainty in the credit markets and broader financial markets;

Failure to qualify as a REIT for U.S.

federal income tax purposes would materially and adversely affect us and the value of our stock.

You are cautioned not to place undue reliance on any forward-looking statements included in this Quarterly Report on Form 10-Q.

All forward-looking s tatements are made as of the date of this Quarterly Report on Form 10-Q and the risk that actual results, performance, and achievements will differ materially from the expectations expressed in or referenced by this Quarterly Report on Form 10-Q will incre ase with the passage of time.

We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.

Important factors that could cause re sults to differ materially from the forward-looking statements are described in Item 1.

Important factors that could cause results to differ materially from the forward-looking statements are described in Item 1.

“Business,” Item 1A.

“Risk Factors,” and Item 7.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Annual Report on Fo rm 10-K, as filed with the SEC on February 27, 2020 and in Part II, Item 1A.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Annual Report on Form 10-K, as filed with the SEC on February 27, 2020 and in Part II, Item 1A.

“Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, as filed with the SEC on May 7, 2020.

You are cautioned not to place undue reliance on any forward-looking statements included in this Quarterly Report on Form 10-Q.

All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and the risk that actual results, performance, and achievements will differ materially from the expectations expressed in or referenced by this Quarterly Report on Form 10-Q will increase with the passage of time.

We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.

Explanatory Note and Certain Defined Terms

Unless the context otherwise requires, the following terms and phrases are used throughout this Quarterly Report on Form 10-Q as described below:

Unless the context otherwise requires, the following terms and phrases are used throughout this MD&A as described below:

“annualized base rent” or “ABR” means the annualized contractual cash rent due for the last month of the reporting period, excluding the impacts of the short-term rent deferrals and abatements agreed to as a result of tenant requests for rent relief related to the global coronavirus (“COVID-19”) pandemic, and adjusted to remove rent from properties sold during the month and to include a full month of contractual cash rent for properties acquired during the last month.

As discussed below, as a result of the COVID-19 pandemic, in 2020 we received requests for rent relief from several tenants and agreed to temporarily defer the receipt of rent, or in limited circumstances to abate rent, for a portion of the remaining lease terms.

As a result of these requests, we agreed to partial rent relief requests for 15 tenants related to 93 properties whose total base rents represent approximately 9.7% of our June ABR.

As discussed below, as a result of the COVID-19 pandemic, in the first half 2020 we received requests for rent relief from several tenants and agreed to temporarily defer the receipt of rent, or in limited circumstances to abate rent, for a portion of the remaining lease terms.

As a result of these requests, we agreed to partial rent relief requests for 15 tenants related to 93 properties whose total base rents represent approximately 9.8% of our ABR.

We have excluded the impact of these deferrals and abatements from the calculation of ABR because they are short term in nature relative to the length of our lease terms and relate to a discrete event, and therefore including them in the calculation would not provide an accurate measure of our relative portfolio composition.

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Bureau of Labor Statistics, or other similar index which is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services;

“gross asset value” means the undepreciated book value of an asset, which represents the fair value of the asset as of the date it was acquired, less any subsequent writedowns due to impairment charges;

“gross asset value” means the undeprecia ted book value of an asset, which represents the fair value of the asset as of the date it was acquired, less any subsequent writedowns due to impairment charges;

“occupancy” or a specified percentage of our portfolio that is “occupied” means the quotient of (1) the total square footage of our properties minus the square footage of our properties that are vacant and from which we are not receiving any rental payment, and (2) the total square footage of our properties as of a specified date;

“Revolving Credit Facility” means our $600 million senior unsecured revolving credit facility, dated June 23, 2017, with Manufacturers and Traders Trust Company and the other lenders party thereto, as amended from time to time.

“Revolving Credit Facility” means our $900 million unsecured revolving credit facility, dated September 21, 2020, with J.P.

Morgan Chase Bank, N.A.

and the other lenders party thereto, which replaced our prior $600 million senior unsecured revolving credit facility, dated June 23, 2017, with Manufacturers and Traders Trust Company and the other lenders party thereto, as amended from time to time.

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, office, and retail property types, and as of June 30, 2020, our portfolio has grown to 632 properties in 41 U.S.

Since our inception in 2007, we have selectively invested in net leased assets in the industrial, healthcare, restaurant, office, and retail property types.

As of September 30, 2020, our portfolio has grown to 627 properties in 41 U.S.

states and one property in Canada, with an aggregate gross asset value of approximately $4.0 billion.

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Diversified Portfolio .

As of June 30, 2020, our portfolio comprised approximately 27.4 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):

As of September 30, 2020, our portfolio comprised approximately 27.3 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, office, and retail property types based on our extensive experience in and conviction around these sectors.

Within these sectors, we have meaningful

concentrations in manufacturing, distribution and warehouse, clinical, casual dining, quick service restaurant, strategic operations, corporate headquarters, food processing, flex/research and developmen t, and cold storage.

Within these sectors, we have meaningful concentrations in manufacturing, distribution and warehouse, clinical, casual dining, quick service restaurant, strategic operations, corporate headquarters, food processing, flex/research and development, and cold storage.

Geographic Diversity :

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Strong In-Place Leases with Significant Remaining Lease Term .

As of June 30, 2020, our portfolio was approximately 99.6% leased based on rentable square footage with an ABR weighted average remaining lease term of approximately 11.0 years, excluding renewal options.

As of September 30, 2020, our portfolio was approximately 99.8% leased based on rentable square footage with an ABR weighted average remaining lease term of approximately 10.8 years, excluding renewal options.

Standard Contractual Base Rent Escalation .

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Approximately 88.4% of our ABR is received from tenants that are required to provide us with specified financial information on a periodic basis.

An additional 6.6% of our ABR is received from tenants that are public companies, which are required to file financial statements with the SEC, although they are not required to provide us with specified financial information under the terms of our lease.

Recent Developments — COVID-19 Pandemic

The rapidly evolving circumstances related to the COVID-19 pandemic have resulted in deep economic uncertainty and far-reaching impacts on almost every business and industry.

An additional 6.4% of our ABR is received from tenants who are not required to provide us with specified financial information under the terms of our lease, but whose financial statements are available publicly, either through SEC filings or otherwise.

Further information concerning our real estate portfolio is included in Real Estate Portfolio Information below.

Recent Developments – Stock Split and Initial Public Offering

On September 18, 2020, we effected a four-for-one split on the outstanding shares of our common stock (“Common Stock”).

Concurrent with the stock split, the OP effected a four-for-one stock split of its outstanding OP Units.

No fractional shares or OP Units were issued as a result of the stock split.

All historic share and per share amounts have been adjusted to give retroactive effect to the stock split.

On September 21, 2020, we closed an initial public offering (“IPO”) at $17.00 per share, of 33.5 million shares of a new class of common stock, $0.00025 par value per share (“Class A Common Stock”).

Shares of the Class A Common Stock are listed on the New York Stock Exchange under the symbol “BNL”.

The terms of the Class A Common Stock are ident ical to the terms of the Common Stock, except that each share of Class A Common Stock will automatically convert into one share of Common Stock on March 20 , 2021 .

T he Common Stock will subsequently be listed on the New York Stock Exchange on March 22, 2021 , which represents the first trading day following the 180-day period following the closing of the IPO .

On October 20, 2020, the underwriters of our IPO partially exercised their option to purchase up to an additional 5.025 million shares of our Class A Common Stock at the IPO price of $17.00.

The underwriters ultimately exercised such option by purchasing an additional 3.5 million shares of Class A Common stock.

We subsequently received $55.9 million of additional IPO proceeds as a result of the underwriter’s exercise of their option, net of underwriting fees and discounts.

COVID-19 Pandemic Update

The rapidly evolving circumstances related to the COVID-19 pandemic have resulted in deep economic uncertainty and far-reaching impacts on almost every business and industry, including industries in which our tenants operate.

In response to the COVID-19 pandemic, many countries and U.S.

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Such measures included “shelter in place” or “stay at home” rules, restrictions on travel, and restrictions on the types of businesses that may continue to operate in many countries and U.S.

Although such restrictions have been or were in the process of being lifted in several locations, the recent resurgence of COVID-19 cases has led to a reinstatement or partial reinstatement of restrictions in other locations.

We cannot predict whether and to what extent the restrictions will be reinstated, whether additional states and cities will implement similar restrictions or when restrictions currently in place will expire.

As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including industries in which our tenants operate.

Further, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, and consumer spending, as well as other unanticipated consequences, remain unknown.

The sections below summarize the impacts of the COVID-19 pandemic on our results of operations, liquidity and capital resources, during the three and six months ended June 30, 2020, as well as management’s view of potential impacts on our future results of operations, liquidity and capital resources.

We cannot predict whether and to what extent additional states and cities will implement similar restrictions or when restrictions currently in place will expire.

Further, the impacts of a potential worsening of economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, and consumer spending, as well as other unanticipated consequences, remain unknown.

The sections below summarize the impacts of the COVID-19 pandemic on our results of operations, liquidity and capital resources, during the three and nine months ended September 30, 2020, as well as management’s view of potential impacts on our future results of operations, liquidity and capital resources.

For more discussion on the risks associated with the COVID-19 outbreak, see Part II, Item 1A.

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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, which may be exacerbated by the COVID-19 pandemic, include rental rates and collections, property dispositions, lease renewals and occupancy, acquisition volume, net lease terms, interest expense, general and administrative expenses, tenant bankruptcies, and impairments.

Key factors that typically impact our results of operations and financial condition, which may be exacerbated by the COVID-19 pandemic, include rental rates and collections, property dispositions, lease renewals and occupancy, acquisition activity, net lease terms, interest expense, general and administrative expenses, tenant bankruptcies, and impairments.

Rental Rates and Collections

Our financial results depend on our ability to timely collect contractual rents due under our long-term net leases.

The COVID-19 pandemic’s impact on us has primarily manifested through tenant requests for rent relief, which we started to receive in late March 2020.

Although the requests ranged in scope, the most common request was for a full or partial rent deferment for three months, with repayment over a six- to twelve-month period following the reinstatement of regular rent payments.

As of June 30, 2020, we had resolved all active outstanding requests for rent relief as of that time.

In total, we granted partial rent relief requests to 15 tenants related to 93 properties whose total base contractual rents represent 9.7% of June ABR, compared with total requests received from 59 tenants related to 295 properties whose total base contractual rents represented 33.7% of June ABR.

We evaluated each request for rent relief as a unique situation, employing a rigorous credit and business analysis focusing on, among other things, industry circumstances, the tenant’s financial performance, liquidity position, lease structure, geographic location, and regulatory impacts on the tenant’s operations ( e.g.

The COVID-19 pandemic’s impact on us has primarily manifested through tenant requests for rent relief, which we received in late March 2020 and during the second quarter from 59 tenants related to 295 properties.

As of June 30, 2020, we had resolved all active outstanding requests for rent relief as of that time, and no further requests were received during the third quarter of 2020.

In total, we granted partial rent relief requests to 15 tenants related to 93 properties.

We evaluated each request for rent relief as a unique situation, employing a rigorous credit and business analysis focusing on, among other things, industry circumstances, the tenant’s financial performance, liquidity position, lease structure, and geographic location, and regulatory impacts on the tenant’s operations ( e.g.

, stay-at-home orders, essential v.

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There were several tenants who requested rent relief that we believed were well positioned to continue making rent payments during the pandemic.

Many of those tenants had strong balance sheets and liquidity positions, had applied for or received Paycheck Protection Program loan funding under the CARES Act, or are designated as essential businesses and can continue to operate despite

restrictions on other businesses.

We declined to agree to any rent relief in those circumstances, and in all such cases the tenants continued to pay all rents due as of June 30, 2020.

Many of those tenants had strong balance sheets and liquidity positions, had applied for or received Paycheck Protection Program loan funding under the CARES Act, or were designated as essential businesses and could continue to operate despite restrictions on other businesses.

We declined to agree to any rent relief in those circumstances, and in all such cases the tenants continued to pay all rents due as of September 30, 2020.

The rent relief requests we granted included partial deferral of payment of rent with 14 tenants, and a partial abatement of rent with one tenant.

The partial rent deferrals ranged in length between two and six months, with a weighted average deferral of 3.4 months.

Amounts deferred will be repaid over periods ranging between three months to one year, with a weighted average repayment period of 5.6 months beginning in July 2020.

Amounts deferred will be repaid over periods ranging between three months to one year.

At September 30, 2020, the deferral periods for all 14 tenants who received partial rent deferrals have expired, and the weighted average repayment period for remaining deferrals was 4.2 months.

The partial abatement represents a portion of rents due over a nine-month period, with the minimum required rent payable increasing during the abatement period.

In exchange, we negotiated a three-year lease term extension and an upside percentage rent clause during the abatement period, which we expect to provide us with long-term value accretion.

At June 30, 2020, we had received payment for the base amounts due for the second and third quarters of 2020 under the rent abatement agreement.

In circumstances where we agreed to a rent deferral that is to be repaid over a period of time, and where the terms of the lease and amounts paid under the lease are substantially the same, we will continue to recognize the same amount of GAAP lease revenue each period to the extent the amounts are probable of collection.

In circums tances where we agreed to a rent deferral that is to be repaid over a period of time, and where the terms of the lease and amounts paid under the lease are substantially the same, we will continue to recognize the same amount of GAAP lease revenue each per iod to the extent the amounts are probable of collection.

The amounts we agreed to defer will impact our cash flows from operations .

Other than one tenant that had filed for bankruptcy, all but one tenant paid their rent due for the second quarter, either in full or in accordance with the terms of the agreed-upon rent relief agreements.

Uncollected base rent not subject to deferment, abatement, or bankruptcy, represents less than 0.02% of base rents due for the three months ended June 30, 2020.

The following chart and tables summarize our second quarter 2020 rent collection, in total and by tenant industry and property type:

1 Relates to post-petition rents due from one tenant who had filed for bankruptcy.

The following chart summarizes our third quarter 2020 rent collections to date:

1 Relates to post-petition rents due from one tenant who had filed f or bankruptcy

The following tables summarize our third quarter 2020 rent collection, in total and by tenant industry and property type:

% Base Rent Collected

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Tenant Industry

% of June ABR

Home Furnishing Retail

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Industrial Machinery

Home Furnishings

Life Sciences Tools & Services

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Property Type

% of June ABR

Rent collections have remained strong during the third quarter to date.

As of the date of this filing, we had collected 96.5% of contractual base rents due for July 2020 as well as 100% of amounts due to be repaid in July 2020 under rent deferral agreements.

Despite our continued strong rent collections subsequent to the outbreak of the COVID-19 pandemic, the duration of the pandemic and its impact on our tenants’ ability to return to business after governmental restrictions are fully lifted could have a significant negative impact on our ability to continue to collect future rents.

Rent collections have remained strong during the fourth quarter to date.

As of the date of this filing, we had collected 98.5% of contractual base rents due for October 2020 as well as 100% of amounts due to be repaid in October 2020 under rent deferral agreements.

Despite our continued strong rent collections subsequent to the outbreak of the COVID-19 pandemic, the duration of the pandemic and the potential ongoing impacts of the virus on our tenants’ ability to conduct their business should additional governmental restrictions be implemented, could have a significant negative impact on our ability to continue to collect future rents.

Property Dispositions

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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.

As a result of the COVID-19 pandemic, we have seen a significant slowdown in real estate transactions.

In the short term, the slowdown in market activity may inhibit our ability to dispose of properties we have identified for disposition, including those that experience significant credit deterioration as a result of the COVID-19 pandemic, and the price at which we are able to sell the properties may be negatively impacted.

We were able to dispose of certain properties at the end of the first quarter of 2020 and early in the second quarter 2020 that were already under contract and substantially along in the disposition process, and used the proceeds to bolster our liquidity position.

We also disposed of a property subsequent to June 30, 2020 that had been vacant as of June 30, 2020.

While we successfully disposed of these properties at advantageous prices, we will continue to monitor the pandemic’s impact and continue to selectively dispose of properties when advantageous to do so.

As a result of the COVID-19 pandemic, we have seen a slowdown in real estate transactions and weakening market conditions for several property types resulting from an increase in vacant rental space.

Although we have been able to dispose of properties during the first nine months of 2020 at advantageous prices, in the short term, the slowdown in market activity may inhibit our ability to further dispose of properties we have identified for disposition, including those leased by tenants that experience significant credit deterioration as a result of the COVID-19 pandemic, and the price at which we are able to sell the properties may be negatively impacted.

We will continue to monitor the pandemic’s impact and continue to selectively dispose of properties when advantageous to do so.

Lease Renewals and Occupancy

As of June 30, 2020, the ABR weighted average remaining term of our portfolio was approximately 11.0 years, excluding renewal options, and approximately 8.4% of our leases (based on ABR) will expire prior to January 1, 2025.

As of September 30, 2020, the ABR weighted average remaining term of our portfolio was approximately 10.8 years, excluding renewal options, and approximately 8.2% of our leases (based on ABR) will expire prior to January 1, 2025.

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, 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 occupancy rates have remained strong during the COVID-19 pandemic, standing at 99.5% as of June 30, 2020 based on rentable square footage.

Our occupancy rates have remained strong during the COVID-19 pandemic, standing at 99.6% as of September 30, 2020 based on rentable square footage.

Additionally, when negotiating COVID-19 related rent relief agreements, we have sought to extend lease terms where possible to preserve the continuity of tenants and long-term cash flows derived from our portfolio.

We continue to monitor the impact the COVID-19 pandemic is having on lease renewals and occupancy.

Acquisition Volume

While we believe our portfolio’s diversity should allow us to manage the impact the COVID-19 pandemic may have on lease renewals and occupancy, we continue to monitor the pandemic’s effects on several industries in which our tenants operate, such as bankruptcies by large retailers, continued or increased occupancy limits established by local governments on the casual dining industry, as well as the potential long-term effects on the demand for and utilization of office space as companies consider adopting increased work from home models.

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.

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Our acquisition volume also depends on our ability to access third-party debt and equity financing.

The COVID-19 pandemic caused a slowdown in acquisition volume, and we have not acquired any new properties in the first six months of 2020.

We will continue to monitor the pandemic’s impact on capitalization rates, interest rates, and access and cost of equity and debt capital, and return to our focus on growth through acquisitions when it is prudent to do so.

The COVID-19 pandemic caused a slowdown in acquisition volume, and we did not acquire any new properties during the first nine months of 2020.

We have continued to monitor the pandemic’s impact on capitalization rates, interest rates, and access and cost of equity and debt capital.

We currently have a robust pipeline of potential investment opportunities, including two acquisitions that are currently under executed contract.

We are a party to two purchase and sale agreements for an aggregate purchase price of approximately $33 million (excluding transaction costs) for a weighted average initial cash capitalization rate of approximately 7.03%.

We expect that these transactions will close during the fourth quarter of 2020.

At the time of acquisition, the properties will have an expected weighted average remaining lease term of approximately 18.2 years and weighted average annual rent increases of approximately 1.92%.

In connection with these acquisitions, we expect to enter into or assume leases with an initial ABR of approximately $2.3 million.

While we regard the completion of these pending acquisitions to be probable, these transactions are subject to customary closing conditions, including the completion of due diligence, and there can be no assurance that these acquisitions will be completed on the terms described above or at all.

These acquisitions will be funded using the net proceeds raised pursuant to our initial public offering.

Net Lease Terms

Substantially all of our leases are net leases pursuant to which our tenant generally is obligated to pay all expenses associated with the leased property including real estate taxes, insurance, maintenance, repairs, and capital costs.

A limited number of leases require us to

pay some or all of the property expenses such as the cost of environmental liabilities, roof and structure repairs, real estate taxes, insurance, or certain non-structural repairs and maintenance.

Add itionally, 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 pres erve 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 p roperty types, such as healthcare and industrial.

As of June 30, 2020, master leases contributed approximately 34.4% of our overall ABR (our largest master lease by ABR related to 24 properties and contributed 2.5% of our ABR, and our smallest master lease by ABR related to two properties and contributed 0.1% of our ABR), 72.9% of our restaurant property ABR (161 of our 243 restaurant properties), and 52.8% of our retail property ABR (79 of our 128 retail properties).

A limited number of leases require that we pay some or all of the property expenses such as the cost of environmental liabilities, roof and structure repairs, 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.

As of September 30, 2020, master leases contributed approximately 34.2% of our overall ABR (our largest master lease by ABR related to 24 properties and contributed 2.5% of our ABR, and our smallest master lease by ABR related to two properties and contributed 0.1% of our ABR), 73.4% of our restaurant property ABR (161 of our 240 restaurant properties), and 51.3% of our retail property ABR (78 of our 128 retail properties).

In instances in which we granted rent relief, we generally preserved the rights afforded to us pursuant to our leases.

We continue to monitor the impact the ongoing COVID-19 pandemic, which presents certain risks of modifications to our lease terms.

These lease terms include certain rights we have under master leases and the risk of tenants’ failure to meet their lease obligations, including the risk that the prolonged economic downturn forces tenants into bankruptcy.

An increase in the number of leases under which we are responsible for some or all of these expenses could negatively influence our operating results.

The ongoing COVID-19 pandemic presents certain risks of modifications to our lease terms, including certain rights we have under master leases.

The ongoing impact of the COVID-19 pandemic could also increase the risk of tenants’ failure to meet their lease obligations, including the risk that the prolonged economic downturn forces tenants into bankruptcy.

An increase in the number of leases under which we are responsible for some or all property related expenses could negatively influence our operating results.

Interest Expense

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federal government attempts to combat the economic impacts of the COVID-19 pandemic.

We benefited from this dynamic to the extent our floating rate borrowings were unhedged during the second quarter.

Our floating rate borrowings bear interest at variable rates equal to LIBOR plus a margin based on our credit rating.

The one-month LIBOR rate decreased from 1.76% at December 31, 2019, to 0.16% at June 30, 2020.

Additionally, as of July 31, 2020, the one-month LIBOR rate was 0.15%.

Restrictions in credit markets have simultaneously resulted in an increase in borrowing spreads across the debt capital markets as compared to the end of 2019, although they narrowed during the second quarter of 2020.

Approximately $240 million of borrowings under our 2020 Unsecured Term Loan were set to a mature in 2020.

We exercised the first of two extension options available under the loan, effective as of August 2, 2020, and extended the maturity to February 2, 2021.

We benefited from this dynamic to the extent our floating rate borrowings were unhedged during the third quarter.

Such borrowings bear interest at variable rates equal to LIBOR plus a margin based on our credit rating.

The one-month LIBOR rate decreased from 1.76% at December 31, 2019, to 0.15% at September 30, 2020.

We repaid $456.3 million of unhedged borrowings with the proceeds of our IPO, and approximately $110 million of our outstanding borrowings at September 30, 2020, remained unhedged.

Restrictions in credit markets resulted in increased borrowing spreads across the debt capital markets earlier in the year as compared to the end of 2019, although they have since narrowed.

As market conditions evolve and we return to executing against our growth strategy, additional changes in interest rates and our borrowing spreads could influence our operating results.

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

We transitioned to a work from home policy effective on March 16, 2020, successfully migrating approximately 73 employees out of the office.

Since March 16, 2020, we have been primarily operating under a work from home policy.

As of the date of this filing, the policy remains in effect.

Given our limited headcount, we have not incurred a material amount of cash outlays on information technology or infrastructure to facilitate our remote workforce, and do not believe we will incur significant costs in the future.

We expect a significant decrease in travel and entertainment expenses, as social distancing guidelines and restrictions have limited corporate travel.

We have experienced a significant decrease in travel and entertainment expenses, as social distancing guidelines and restrictions have limited corporate travel.

These benefits, however, may be outweighed by incremental third party legal, accounting, and consulting costs if the impacts of the COVID-19 pandemic worsen.

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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 tenant and maintain our portfolio’s occupancy.

At June 30, 2020, one of our tenants, representing less than 0.5% of June ABR, was subject to bankruptcy proceedings.

To mitigate the negative impact of these bankruptcy proceedings, we successfully re-leased the majority of properties leased to this tenant at the end of the second quarter.

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.

During the nine months ended September 30, 2020, only one of our tenants was subject to bankruptcy proceedings which resulted in vacancies and our assumption of certain landlord responsibilities.

The bankruptcy for this tenant concluded during the third quarter, we successfully re-leased the majority of properties, and reached a court approved settlement whereby we received approximately 86.5% of the total post-petition base rent that had been owed by the tenant.

We have yet to see the long-term effects of the pandemic and the extent to which it may impact our tenants in the future.

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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 asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the asset or asse t group and its eventual disposition.

If, and when, such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the 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 impairmen t should be taken.

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 were to change in the future, an impairment may need to be recognized.

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 as a result of the COVID-19 pandemic, or changes in our long-term hold strategies, could each be indicative of an impairment triggering event.

For the three and six months ended June 30, 2020, we recognized $0.5 million of impairment associated with a lease modification as the result of a tenant’s request for rent relief.

We face the risk of additional impairments depending on the long-term effects of the COVID-19 pandemic and the extent to which it may impact ou r tenants in the future.

For the three and nine months ended September 30, 2020, we recognized $14.7 million and $17.4 million, respectively, of impairment charges, mainly resulting from changes in our long-term hold strategy with respect to the individual properties, which was due in part to unfavorable market trends resulting from the COVID-19 pandemic in geographic areas where we have vacant properties being marketed for re-lease or sale.

We face the risk of additional impairments depending on the long-term effects of the COVID-19 pandemic and the extent to which it may impact our tenants in the future.

Impact to Liquidity and Capital Resources

Given the economic uncertainty and evolving circumstances related to the COVID-19 pandemic and the potential for further tenant requests for rent relief, we continue to evaluate all options for strengthening our liquidity position.

As previously disclosed, we bolstered our liquidity profile and cash on hand position at the end of the first quarter of 2020, partially through additional borrowings on our Revolving Credit Facility as well as through the suspension of our monthly dividend.

Given the strength of our rent collections, better-than-expected liquidity in the financial markets, and careful expense management, we repaid a net $105 million on our Revolving Credit Facility during the second quarter, resulting in lower leverage while maintaining financial flexibility.

As of June 30, 2020, the Revolving Credit Facility had an outstanding balance of $248.3 million, and cash and cash equivalents and restricted cash totaled $9.8 million.

In addition, in light of the economic uncertainty and rapidly evolving circumstances related to the COVID-19 pandemic and then-current tenant rent relief requests, to preserve cash, strengthen our liquidity position, and manage our overall leverage profile, in May 2020 our board of directors determined that we would temporarily suspend our monthly distribution.

At its August 4, 2020 meeting, the board of directors undertook a full review of our rent collection results for the second quarter of 2020, preliminary collection results for July 2020, our outlook for collections in future months, and our overall liquidity position.

Based on our strong collection results and operating performance, the board voted to reinstate a distribution, announcing that the Company would transition to quarterly distribution payments beginning with the quarter ended September 30, 2020.

With the continued uncertainty surrounding the COVID-19 pandemic’s long term impact to our tenants, and the recent resurgence in certain geographical hot spots, the board set a $0.54 distribution per common share and OP Unit to stockholders and OP Unit holders of record as of September 30, 2020, payable on or before October 15, 2020.

The Company believes this quarter’s distribution is also an incrementally important step towards ensuring the Company satisfies its REIT distribution requirements for the year ended December 31, 2020.

In addition to our cash on hand, as of June 30, 2020, we also have $351.7 million of available capacity under our Revolving Credit Facility, and $100 million of available capacity in the form of an accordion feature on our 2026 Unsecured Term Loan.

Most recently, our IPO and upsizing of our Revolving Credit Facility during the third quarter have each bolstered our liquidity, reduced our leverage and allowed us to maintain financial flexibility.

Earlier in the year, we temporarily suspended our distributions to shareholders based upon the uncertainties surrounding the COVID-19 pandemic.

Our board of directors approved a quarterly distribution of $0.135 per share at its August 4, 2020 meeting.

At its November 5, 2020 meeting, the board approved a $0.25 distribution per common share and OP Unit to stockholders and OP Unit holders of record as of December 31, 2020, payable on or before January 15, 2021.

In addition to our $109.0 million of cash and restricted cash on hand at September 30, 2020, we also have $900 million of available capacity under our Revolving Credit Facility.

Under the terms of our credit agreements, we must maintain ratios of total indebtedness to total market value, and total unsecured indebtedness to total unencumbered eligible property value (together, “leverage covenant ratios”), of less than 60%, measured as of each quarter end.

Taking into consideration our leverage covenant ratios, as of June 30, 2020 we had $148.8 million of available borrowing capacity under our covenants.

Management believes we were in compliance with the terms of our covenants as of June 30, 2020.

We believe our cash on-hand, available capacity on our credit facilities, including the restrictions imposed by our covenant ratios, and our ability to manage distributions provide us with the ability to meet all current obligations and to maintain our REIT status, for at least the next four quarters.

However, the COVID-19 pandemic’s ultimate impact to tenants is not yet known, and could result in significantly aged delinquencies and tenant defaults, which would have a direct impact on our leverage covenant ratios.

Taking into consideration our leverage covenant ratios, as of September 30, 2020 we had approximately $738 million of available borrowing capacity under our covenants.

Management believes we were in compliance with the terms of our covenants as of September 30, 2020.

We believe our cash on-hand and available capacity on our credit facilities provides us with the ability to meet all current obligations and to maintain our REIT status.

However, the COVID-19 pandemic’s ultimate impact on our tenants is not yet known, and could result in significantly aged delinquencies and tenant defaults, which would have a direct impact on our leverage covenant ratios.

See further discussion concerning our liquidity in Liquidity and Capital Resources below.

Other Consideratio ns

Other Considerations

Internal Controls over Financial Reporting and Disclosure Controls

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We believe our existing disclosure controls are appropriate to address the reporting complexities presented by the COVID-19 pandemic.

Recent Developments — Internalization

In order to benefit from increasing economies of scale as we continue to grow, our board of directors made the decision to internalize our management structure, which was completed on February 7, 2020.

In connection with the Internalization, we terminated our management agreements with BRE, entered into employment agreements with each of our named executive officers, and began directly employing 71 former employees of BRE.

Our historical results of operations through February 7, 2020, include the payment of management fees that we will no longer pay following the Internalization and do not include the direct compensation expense associated with our current 73 employees, or certain professional fees, consulting, portfolio servicing costs, and other general and administrative expenses not previously incurred based upon our externally managed structure.

Additional details of the Internalization include the following:

As consideration in the Internalization, we issued 780,893 shares of our common stock, and the OP issued 1,319,513 OP U nits and we and the OP paid $ 31.0 million in cash, for aggregate consideration of approximately $209.5 million, and the OP assumed approximately $90.5 million of debt.

Concurrent with the closing, we refinanced $60 million of the assumed debt with a new loan that is guaranteed by Amy L.

Tait, our founder and Chairman, and certain members of her family (“Founding Owners”), and repaid the remaining $30.5 million using borrowings from our Revolving Credit Facility .

In addition to the consideration paid immediately following the Mergers, the Merger Agreement provides that additional “earnout” consideration of up to an aggregate of up to $75 million (payable in four tranches of $10 million, $15 million, $25 million, and $25 million) will be due and payable to the former owners of BRE if certain milestones related to either (a) the 40-day dollar volume-weighted average price of our common stock on the principal exchange or securities market (or over-the-counter market) on which our shares of common stock are then traded, following the completion of an IPO, or (b) our adjusted funds from operations per share, prior to the completion of an IPO, are achieved during specified periods of time following the completion of the Internalization.

Should all earnout milestones be met, an additional 272,250 shares of common stock and 464,820 OP Units would be issued.

The earnout liability had an estimated fair value of $40.1 million at the time of the Internalization.

We entered into a registration rights agreement with our founding owners and Trident BRE, LLC and its affiliates, and the Founding Owners’ Tax Protection Agreement.

Real Estate Portf olio Information

To achieve an appropriate risk-adjusted return, we intend to maintain a highly diversified portfolio of primarily single-tenant commercial real estate properties spread across multiple property types, geographic locations, tenants, and industries and that have cross-diversification within each.

The following charts summarize our portfolio diversification by property type, tenant, brand, industry and geographic location as of September 30, 2020.

The percentages below are calculated based on our ABR of $288.0 million as of September 30, 2020.

Diversification by Property Type

Property Type

ABR as a % of

Total Portfolio

Manufacturing

Distribution & Warehouse

Food Processing

Industrial Total

Animal Health Services

Healthcare Services

Healthcare Total

Quick Service Restaurants

Casual Dining

Restaurant Total

Strategic Operations

Corporate Headquarters

General Merchandise

Home Furnishings

Diversification by Tenant

Property Type

ABR as a % of

Total Portfolio

Red Lobster Hospitality & Red Lobster

Restaurants LLC *

Casual Dining

Jack's Family Restaurants LP *

Quick Service Restaurants

Axcelis Technologies, Inc.

Hensley & Company *

Distribution & Warehouse

Outback Steakhouse of Florida LLC *1

Casual Dining

Krispy Kreme Doughnut Corporation

Quick Service Restaurants/

Food Processing

BluePearl Holdings, LLC *

Animal Health Services

Big Tex Trailer Manufacturing, Inc.

Automotive/Distribution &

Warehouse/Manufacturing/ Corporate Headquarters

Siemens Medical Solutions USA, Inc.

Siemens Corporation

Manufacturing/Flex

Nestle' Dreyer's Ice Cream Company

Total Top 10 Tenants

Nationwide Mutual Insurance Company *

Strategic Operations

Arkansas Surgical Hospital

American Signature, Inc.

Home Furnishings

Cascade Aerospace Inc.

Manufacturing

Fresh Express Incorporated

Food Processing

Aventiv Technologies, LLC

Corporate Headquarters

Bob Evans Restaurants, LLC *

Casual Dining

Tractor Supply Company

General Merchandise

Centene Management Company, LLC

Strategic Operations

Zips Car Wash, LLC *

Total Top 20 Tenants

Tenant’s properties include 21 Outback Steakhouse restaurants and two Carrabba’s Italian Grill restaurants.

Subject to a master lease.

Diversification by Brand

Property Type

ABR as a % of

Total Portfolio

Red Lobster *

Casual Dining

Jack's Family Restaurants *

Quick Service Restaurants

Distribution & Warehouse

Bob Evans Farms *1

Casual Dining/Food

Quick Service Restaurants

Quick Service Restaurants/

Food Processing

BluePearl Veterinary Partners *

Animal Health Services

Big Tex Trailers *

Automotive/Distribution &

Warehouse/Manufacturing/

Corporate Headquarters

Manufacturing/Flex

Total Top 10 Brands

Outback Steakhouse *

Casual Dining

Quick Service Restaurants

Nationwide Mutual Insurance Co.

Strategic Operations

Arkansas Surgical Hospital

Value City Furniture

Home Furnishings

Cascade Aerospace

Manufacturing

Food Processing

Securus Technologies

Corporate Headquarters

Tractor Supply Co.

General Merchandise

Total Top 20 Brands

Subject to a master lease.

Includes properties leased by multiple tenants, some, not all, of which are subject to master leases.

Brand includes one BEF Foods, Inc property and 23 Bob Evans Restaurants, LLC properties.

Diversification by Industry

ABR as a % of

Total Portfolio

Healthcare Facilities

Food Distributors

Packaged Foods & Meats

Auto Parts & Equipment

Metal & Glass Containers

Specialized Consumer Services

Healthcare Services

Home Furnishing Retail

Aerospace & Defense

Electronic Components

Air Freight & Logistics

Specialty Stores

Industrial Machinery

Top 15 Tenant Industries

Other (39 industries)

Diversification by Geography

As of September 30, 2020, approximately 99.8% of our portfolio’s rentable square footage, representing all but six of our properties, was subject to a lease.

Because substantially all of our properties are leased under long-term leases, we are not currentl y required to perform significant ongoing leasing activities on our properties.

The leases for two of our properties, representing less than 0.1% of our ABR, will expire during 2020, and leases for an additional six properties, representing approximately 0 .5% of our ABR, will expire during 2021 excluding renewal options.

During the third quarter of 2020 we extended the terms of leases with two tenants.

As of September 30, 2020, the ABR weighted average remaining term of our leases was approximately 10.8 yea rs.

Less than 5% of the properties in our portfolio are subject to leases without at least one renewal option.

Approximately 59.1% of our rental revenue was derived from leases that will expire during 2030 and thereafter, and no more than 9.2% of our renta l 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 September 30, 2020.

The following table presents certain information based on lease expirations by year.

Amounts are in thousands, except for number of properties.

Expiration Year

ABR as a % of

Total Portfolio

Untenanted properties

Results of Operations

As of June 30, 2020, our real estate investment portfolio had a gross asset value of approximately $4.0 billion, consisting of investments in 632 commercial real estate properties with locations in 41 states and one real estate property located in British Columbia, Canada, and leased to tenants in various industries.

All but seven of our properties were subject to a lease as of June 30, 2020.

Our historical results of operations for the six months ended June 30, 2020 and the three and six months ended June 30, 2019, discussed below, include the payment of asset and property management fees that we will no longer pay following the Internalization, and do not include the expected full impact of direct compensation expense associated with employees employed by us following the Internalization or incremental general and administrative expenses.

As of September 30, 2020, our real estate investment portfolio had a gross asset value of approximately $4.0 billion, consisting of investments in 627 commercial real estate properties with locations in 41 states and one real estate property located in British Columbia, Canada, and leased to tenants in various industries.

All but six of our properties were subject to a lease as of September 30, 2020.

Lease Revenues, net

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Contractual rental amounts billed for

operating leases and straight-line

rent adjustments

operating leases

Adjustment to recognize contractual

operating lease billings on a

straight-line basis

Variable rental amounts earned

Earned income from direct financing leases

Operating expenses billed to tenants

Other income from real estate transactions

Adjustment to revenue recognized for

uncollectible rental amounts billed

Operating expenses billed to/reimbursed

Other income from real estate transactions

Total lease revenues from operating leases

Earned income from direct financing leases

Total Lease revenues, net

The increase in Lease revenues, net for the three and six months ended June 30, 2020, was primarily attributable to the growth in our real estate portfolio, which was achieved through accretive property acquisitions during 2019, weighted towards the second half of the year, and continued strong portfolio operating performance.

The increase in Lease revenues, net for the three and nine months ended September 30, 2020, was primarily attributable to growth in our real estate portfolio through accretive property acquisitions during 2019.

In 2019, we significantly increased the size of our portfolio, adding 74 new properties at an aggregate cost of approximately $1.0 billion, excluding capitalized acquisition costs.

As of June 30, 2020, we had collected approximately 93% of second quarter rents due and our portfolio was 99.5% occupied (based on rentable square footage).

As of June 30, 2020, the ABR weighted average annual rent increases on our properties was 2.1%.

Our acquisitions were largely weighted towards the second half of the year, with the closing of a $735.7 million industrial and office portfolio in August.

As of September 30, 2020, our portfolio was 99.8% occupied (based on rentable square footage), with ABR weighted average annual rent increases of 2.1%.

Operating Expenses

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Depreciation and amortization

The increase in depreciation and amortization expense for the three and six months ended June 30, 2020, is primarily due to the growth in our real estate portfolio.

The increase in depreciation and amortization expense for the three and nine months ended September 30, 2020, is primarily due to the growth in our real estate portfolio.

Asset management fees and Property management fees

Prior to the Internalization on February 7, 2020, we paid our third-party manager a quarterly fee equal to 0.25% of the aggregate value of our equity on a fully diluted basis, based on the determined share value established by our board of directors (“Determined Share Value”).

Prior to the Internalization on February 7, 2020, we paid our third-party manager a quarterly fee equal to 0.25% of the aggregate value of our equity on a fully diluted basis, based on the Determined Share Value established by our board of directors.

Additionally, we paid our third-party manager a monthly fee equal to 3% of gross rentals collected from our real estate portfolio as compensation for its property management services.

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General and administrative

The increase in general and administrative expenses mainly reflects the impact of the Internalization, and our current employment of approximately 73 employees.

Following the Internalization, our asset and property management fees were replaced with compensation and related expenses, which totaled $3.8 million and $6.6 million during the three and six months ended June 30, 2020, respectively, along with associated general and administrative expenses.

The increase in general and administrative expenses mainly reflects the impact of the Internalization associated with our newly acquired employee base.

Following the Internalization, our asset and property management fees were replaced with compensation and related expenses, which totaled $4.6 million and $11.3 million during the three and nine months ended September 30, 2020, respectively, along with associated general and administrative expenses.

We are achieving costs savings from our internalized structure, as the increase in general and administrative expenses is less than the combined decrease in asset management, property management, and disposition fees incurred during the three and nine months ended September 30, 2020 under our prior externally managed structure.

Provision for impairment of investment in rental properties

During the three and six months ended June 30, 2020, we recognized $0.5 million and $2.7 million, respectively, of impairment on our investments in rental properties.

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 asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition.

During the three and nine months ended September 30, 2020, we recognized $14.7 million and $17.4 million, respectively, of impairment on our investments in rental properties, compared to $2.4 million and $3.5 million during the three and nine months ended September 30, 2019, respectively.

The following table presents the impairment charges for their respective periods:

For the three months ended

For the nine months ended

September 30,

(in thousands, except number of properties)

Number of properties

Carrying value prior to impairment charge

Impairment charge

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

1 unchanged sentence

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For the six months ended

For the nine months ended

September 30,

Increase/(Decrease)

September 30,

Increase/(Decrease)

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Change in fair value of earnout liability

Other gains (losses)

Interest expense

The increased interest expense during the three and six months ended June 30, 2020, resulted primarily from an increase in average outstanding borrowings as compared to the three and six months ended June 30, 2019, due mainly to borrowings associated with a significant acquisition in the third quarter of 2019, and incremental borrowings associated with the Internalization, partially offset by a 75 basis point decrease in our weighted average cost of debt, inclusive of our interest rate swaps.

We were able to take advantage of the decreasing interest rates since June 30, 2019, as our percentage of floating-rate debt increased concurrently with our funding of the aforementioned acquisition.

We also amended our 2024 Unsecured Term Loan in July 2019 to reduce the applicable margin from 1.90% to 1.25%.

Increased interest expense during the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, reflects increased average outstanding borrowings in the comparable periods.

We incurred incremental revolver and term loan borrowings in August 2019 to fund a significant acquisition and in February 2020 in connection with the Internalization.

These borrowings were unhedged and bore interest at a variable rate based on LIBOR, which decreased from 1.76% at December 31, 2019 to 0.15% at September 30, 2020.

As a result, we benefited from declining interest rates during the period of time they were outstanding.

The borrowings were fully repaid in September 2020 with proceeds from our IPO.

As of September 30, 2020, approximately $110.0 million of our borrowings remain unhedged.

Gain on sale of real estate

Our recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market.

During the three months ended June 30, 2020, we recognized gains of $1.0 million on the sale of three properties, compared to gains of $2.8 million on the sale of five properties during the three months ended June 30, 2019.

During the six months ended June 30, 2020, we recognized gains of $8.7 million on the sale of 13 properties, compared to gains of $4.2 million on the sale of nine properties during the six months ended June 30, 2019.

During the three months ended September 30, 2020, we recognized gains of $1.1 million on the sale of five properties, compared to gains of $12.6 million on the sale of 16 properties during the three months ended September 30, 2019.

During the nine months ended September 30, 2020, we recognized gains of $9.7 million on the sale of 18 properties, compared to gains of $16.8 million on the sale of 25 properties during the nine months ended September 30, 2019.

Internalization expenses

During the three and six months ended June 30, 2020, we incurred $0.4 million and $1.6 million, respectively, of third-party fees and consulting expenses associated with the Internalization that closed on February 7, 2020, compared to $0.3 million of such expenses in the comparable prior year periods.

We expect incremental internalization expenses in the future to be limited to third party legal and accounting fees related to residual work in connection with the transaction.

During the three and nine months ended September 30, 2020, we incurred $1.9 million and $3.5 million, respectively, of third-party fees and consulting expenses associated with the Internalization, compared to $0.9 million and $1.2 million of such expenses during three and nine months ended September 30, 2019, respectively.

We expect any incremental internalization expenses in the future to be limited to third party legal and accounting fees related to residual work in connection with the transaction.

Change in fair value of earnout liability

As part of the Internalization we may be required to pay additional earnout consideration if certain milestones are achieved during the Earnout Periods.

We record the fair value of this contingent consideration as an Earnout liability in the Condensed Consolidated Balance Sheets, and update the fair value at the end of each reporting period.

We record the fair value of this contingent consideration in the Condensed Consolidated Balance Sheets, and update the fair value at the end of each reporting period.

To the extent the change in fair value relates to a portion of the earnout consideration that is classified as a liability, we record the change through earnings.

We estimate the fair value of the earnout liability by considering weighted-average probabilities of likely outcomes, and using a Monte Carlo simulation and discounted cash flow analysis to estimate fair value.

These estimates require the Company to make various assumptions about future share prices, timing of an IPO, and other items that are unobservable and are considered Level 3 inputs in the fair value hierarchy.

Upon closing of the Internalization, we recorded an earnout liability of $40.1 million through our preliminary purchase price allocation, which decreased to $38.0 million as of June 30, 2020.

The decrease in fair value between March 31, 2020 and June 30, 2020 is primarily a result of a decrease in the estimated net asset value per share assumption used, partially offset by an increase in peer stock price volatility, both of which are attributable to changes in economic circumstances impacting global equity markets, as detailed in Note 2 to the Condensed Consolidated Financial Statements above.

Net Income and Non-GAAP Measures (FFO and AFFO)

Our reported results and net earnings per diluted share are presented in accordance with GAAP.

We also disclose FFO and AFFO, each of which are non-GAAP measures.

We believe the presentation of FFO and AFFO are useful to investors because they are widely accepted industry measures used by analysts and investors to compare the operating performance of REITs.

FFO and AFFO should not be considered alternatives to net income as a performance measure or to cash flows from operations, as reported on our statement of cash flows, or as a liquidity measure, and should be considered in addition to, and not in lieu of, GAAP financial measures.

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, 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, extraordinary items, and other specified non-cash items.

We believe that such items are not a result of normal operations and thus we believe 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 rentals over time.

Our leases do not include significant fron t-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 have granted short-term rent deferrals as a result of the COVID-19 pandemic, and such deferrals are probable of collection and expected to be repaid within a short term, we will continue to recognize the same amount of GAAP lease revenues each period.

The amounts temporarily deferred are recorded in tenant receivables until they are repaid.

Consistent with GAAP lease revenues, the short-term deferrals associated with COVID-19 will not impact our AFFO.

We further exclude 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, and internalization expenses, 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 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 presents our net income and our non-GAAP FFO and AFFO.

Our measures of FFO and AFFO are computed on the basis of amounts attributable to both us and non-controlling interests.

As the non-controlling interests share in our net income on a one-for-one basis, the basic and diluted per share amounts are the same.

These estimates require the Company to make various assumptions about future share prices, and other items that are unobservable and are considered Level 3 inputs in the fair value hierarchy.

The change in the fair value of the earnout liability during the three and nine months ended September 30, 2020, reflects the IPO stock price and changes in the peer stock price volatility assumption, which is attributable to changes in economic circumstances impacting global equity markets.

Net income and Net earnings per diluted share

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Net earnings per diluted share

FFO per diluted share

AFFO per diluted share

Diluted WASO ( a)

Weighted average number of shares of our common stock and OP Units outstanding (“WASO”), computed in accordance with GAAP.

For the three months ended June 30, 2020, compared to the three months ended June 30, 2019, net income decreased primarily due to a $14.6 million increase in depreciation and amortization expense associated with a larger real estate portfolio, a $2.8 million increase in interest expense associated with incremental borrowings used to partially fund our real estate acquisitions and the Internalization, and a $1.7 million decrease in gains on sale of real estate.

These factors were partially offset by revenue growth of $11.3 million and the impact of a $6.3 million adjustment to the fair value of our earnout liability in 2020 with no comparable adjustment in the prior year.

The decrease in net income for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, is primarily due to a $12.3 million increase in impairment charges, an $11.5 million decrease in gains on sale of real estate, and a $3.0 million increase in depreciation and amortization expense associated with a larger real estate portfolio.

These factors were partially offset by revenue growth of $4.3 million and a $6.4 million decrease in the fair value of our earnout liability in 2020 with no comparable adjustment in the prior year.

In addition, as a result of the Internalization, increased general and administrative expenses of $5.9 million were offset by $7.7 million lower asset management and property management fees.

For the six months ended June 30, 2020, compared to the six months ended June 30, 2019, net income decreased primarily due to a $21.5 million increase in depreciation and amortization expense, a $7.9 million increase in interest expense, a $1.7 million increase in impairment charges, a $1.3 million increase in internalization expenses, and a $2.1 million adjustment to the fair value of our earnout liability in 2020 with no comparable adjustment in the prior year.

These factors were partially offset by revenue growth of $21.1 million and increased gains on sale of real estate in the amount of $4.5 million.

The decrease in net income for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, is primarily due to a $24.5 million increase in depreciation and amortization expense, a $13.9 million increase in impairment charges, an $8.0 million increase in interest expense, a $7.0 million decrease in gains on sale of real estate, and a $2.3 million increase in internalization expenses.

These factors were partially offset by revenue growth of $25.5 million and a $8.5 million decrease in the fair value of our earnout liability in 2020 with no comparable adjustment in the prior year.

In addition, as a result of the Internalization, increased general and administrative expenses of $14.9 million were offset by $18.2 million lower asset management and property management fees.

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.

These fluctuations, combined with the increase in our weighted average shares outstanding, contributed to the $0.13 decrease in net earnings per diluted share for the three months ended June 30, 2020 and a $0.34 decrease in net earnings per diluted share for the six months ended June 30, 2020.

The increase in AFFO during the three and six months ended June 30, 2020, as compared to the same periods in 2019, was primarily driven by revenue growth, which resulted from rent escalations associated with our same property portfolio, accretive acquisitions and strong portfolio operating performance, as well as decreased asset and property management fees as a result of terminating the associated agreements in connection with the Internalization, discussed above.

These factors were partially offset by increased general and administrative expense related to incremental compensation and related costs associated with an internalized management structure, combined with increased interest expense associated with incremental borrowings.

We are realizing the cost savings associated with being internally managed.

During the first six months of 2020, amounts incurred for general and administrative expenses were approximately $5.1 million less than the combined asset and property management fees that we would have paid under our previous external management structure.

Approximately $3.5 million of these savings were realized during the second quarter of 2020, our first full quarter operating under an internally managed structure.

The $0.15 increase in AFFO per diluted share during the three and six months ended June 30, 2020, was primarily due to the factors discussed above, partially offset by an increase in BNL’s weighted average shares outstanding resulting from continued equity raises associated with our deleveraging plans subsequent to our Industrial Portfolio acquisition in the third quarter of 2019, combined with the common shares and OP Units issued in conjunction with the Internalization.

The cost savings associated with an internalized manag ement structure, combined with continued positive operating performance, more than offset the dilutive effect of the higher share count as compared to the three and six months ended June 30, 2019.

We expect this accretion will continue to increase as we grow our portfolio and recognize economies of scale.

Reconciliation of Non-GAAP Measures

The following is a reconciliation of net income to FFO and AFFO, which are non-GAAP financial measures.

Also presented are the diluted WASO and per diluted share amounts:

For the three months ended

For the six months ended

(in thousands, except per share data)

Real property depreciation and amortization

Gain on sale of real estate

Provision for impairment on investment in rental properties

Capital improvements / reserves

Straight-line rent adjustment

Adjustment to provision for credit losses

Cost of debt extinguishment

Amortization of debt issuance costs

Amortization of net mortgage premiums

Gain on interest rate swaps and other non-cash interest expense

Amortization of lease intangibles

Internalization expenses

Change in fair value of earnout liability

Net earnings per share, basic and diluted

FFO per diluted share

AFFO per diluted share

These fluctuations, combined with the increase in our weighted average shares outstanding resulting from continued equity raises associated with our deleveraging plans subsequent to a significant acquisition in the third quarter of 2019 and the common shares and OP Units issued in conjunction with the IPO and Internalization, contributed to the $0.16 decrease in net earnings per diluted share for the three months ended September 30, 2020 and the $0.25 decrease in net earnings per diluted share for the nine months ended September 30, 2020.

Liquidity and Capital Resources

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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 model has allowed us to take advantage of the lower cost of debt while simultaneously strengthening our balance sheet, as evidenced by our investment grade credit rating of Baa3 from Moody’s Investors Service (“Moody’s”), which Moody’s reaffirmed on July 31, 2020.

As of June 30, 2020, our leverage ratio was 45.4% of the approximate market value of our assets, compared to 45.8% as of December 31, 2019.

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 model has allowed us to take advantag e of the lower cost of debt while simultaneously strengthening our balance sheet, as evidenced by our investment grade credit rating of Baa3 from Moody’s Investors Service (“Moody’s”), which was reaffirmed in July 2020.

We manage our leverage profil e 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 rating agencies regarding ou r 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 September 30, 2020, we had total debt outstanding of $1,549.1 million and a Net Debt to Annualized Adjusted E BITDAre ratio of approximately 5.20x.

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

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Instead, we expect to meet our long-term liquidity needs primarily by relying upon external sources of capital.

Short-term Li quidity Requirements

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.

Since our portfolio has a strong occupancy level and substantially all of our leases are net leases, we do not currently anticipate making significant capital expenditures or incurring other significant property costs.

We expect to meet our short-term liquidity requirements primarily from cash and cash equivalents balances, net cash provided by operating activities, and borrowing under our Revolving Credit Facility.

Additionally, on May 5, 2020 we exercised our first of two options, effective August 2, 2020, to extend the maturity date of our $240 million 2020 Unsecured Term Loan for a period of six months in exchange for a fee of $0.1 million.

Refer to Recent Developments – COVID-19 Pandemic for additional discussion regarding the pandemic’s impact on our liquidity.

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 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.

Long-term Liquidity Requirements

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Debt capital is provided through unsecured term notes, revolving debt facilities, and senior unsecured notes.

Further, we anticipate access to the public unsecured bond market, which was historically largely unavailable to us, following our IPO.

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 lease terms, 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.

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Mortgages, however, are not currently a strategic focus of the active management of our leverage profile.

Rather, we enter into mortgages and notes payable as ancillary business transactions on an as-needed basis, most often as the result of lease assumption transactions.

Our fiscal strength has enabled us to build a portfolio that is approximately 95% unencumbered on a gross assets basis, with 627 unencumbered properties and approximately $109.3 million of mortgage debt on the remaining properties.

Equity Capital Resources

Equity capital for our real estate acquisition activity has historically been provided from the proceeds of our private offering, including distributions reinvested through our DRIP.

We suspended our private offering on January 10, 2020, in connection with our confidential submission of a draft registration statement on Form S-11 with the SEC relating to a proposed IPO.

Accordingly, we did not raise any equity through our private offering during the first six months of 2020.

During the six months ended June 30, 2020, we raised approximately $5.9 million in equity capital through our DRIP.

See Part II, Item 2.

“Unregistered Sales of Equity Securities and Use of Proceeds” of this Quarterly Report on Form 10-Q for further information.

We announced on January 10, 2020 that we were terminating our DRIP, effective February 10, 2020.

Credit Rating

We achieved our current investment grade credit rating of Baa3 based on our conservative leverage profile, diversified real estate investment portfolio, access to capital, and earnings stability provided by the creditworthiness of our tenants.

Factors that could negatively impact our credit rating include, but are not limited to:

a significant increase in our leverage on a sustained basis, a significant increase in the proportion of secured debt levels, a significant decline in our unencumbered asset base, weakening of our corporate governance structure, and a significant decline in our real estate portfolio diversification or the creditworthiness of our tenants.

Factors that could positively impact our credit rating include, but are not limited to, continued growth in the portfolio, improvement in our leverage profile, lengthening of our debt maturity profile, and our Internalization.

We have aligned our strategic growth priorities with these factors, as we believe the favorable debt pricing and access to multiple sources of debt capital resulting from our investment grade credit rating, provides us with an advantageous cost of capital and risk-adjusted return on investment for our stockholders.

On September 21, 2020, we completed our IPO and issued 33.5 million shares of stock for net proceeds of $532.3 million.

We used $216.5 million of the net proceeds to fully repay the outstanding borrowings and accrued interest under our then existing revolving credit agreement and $240.2 million of the proceeds to fully repay the outstanding principal and accrued interest associated with an unsecured term loan.

Subsequent to quarter end, on October 20, 2020, we received an additional $55.9 million in net proceeds as a result of the exercise in part by the underwriters of the IPO of their option to purchase additional shares at the IPO price of $17.00 per share.

Prior to the IPO, equity capital for our real estate acquisition activity was provided by proceeds from our private offering, including distributions reinvested through our DRIP.

We suspended our private offering on January 10, 2020.

Accordingly, we did not rai se any equity through our private offering during the first nine months of 2020.

During the nine months ended September 30, 2020, we raised approximately $5.9 million in equity capital through our DRIP.

We announced on January 10, 2020 that we were termina ting our DRIP, effective February 10, 2020.

Existing Credit Facilities

The following table sets forth our outstanding Revolving Credit Facility, unsecured term loans and Senior Notes as of June 30, 2020.

The following table sets forth our outstanding Revolving Credit Facility, unsecured term loans and Senior Notes at September 30, 2020.

(in thousands, except interest rates)

2020 Unsecured Term Loan

one-month LIBOR + 1.25%

Unsecured Revolving Credit and Term

Loan Agreement

Revolving Credit Facility

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Debt issuance costs, net

2020 Unsecured Term Loan

The 2020 Unsecured Term loan had an initial maturity date of August 2020.

Borrowings under the 2020 Unsecured Term Loan bear interest at variable rates based on LIBOR plus a margin based on our credit rating ranging between 0.85% and 1.65% per annum.

Based on our current credit rating, the applicable margin is 1.25% as of June 30, 2020.

The 2020 Unsecured Term Loan allows for two six-month extensions, at our option, subject to our being in compliance with the debt covenants and customary representations and warranties, and payment of a fee equal to 0.05% of the outstanding principal balance at the time of extension.

We exercised the first of these options, effective as of August 2, 2020, extending the loan’s maturity to February 2021.

Revolving Credit Facility

The Revolving Credit Facility has a maximum availability of $600 million, and includes a $35 million sublimit for swingline loans and $20 million available for issuance of letters of credit.

The Revolving Credit Facility has an initial maturity date of January 2022 and provides for one five-month extension, at our election, subject to certain conditions set forth in the agreement and payment of a 0.0625% fee on the revolving commitments.

In connection with the IPO, in September 2020 we replaced our prior $600.0 million revolving credit facility with the $900.0 million Revolving Credit Facility that 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.

Based on our current credit rating of Baa3, the facility fee is 0.25% per annum as of June 30, 2020.

Based on our current credit rating of Baa3, the facility fee is 0.25% per annum as of September 30, 2020.

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.

Based on our current credit rating, the applicable margin is 1.20% as of June 30, 2020.

Based on our current credit rating, the applicable margin is 1.20% as of September 30, 2020.

2022 Unsecured Term Loan

We entered into the 2022 Unsecured Term Loan to partially repay BRE debt that we assumed as part of the Internalization.

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.

Based on our current credit rating, the applicable margin is 1.25% as of September 30, 2020.

2023 Unsecured Term Loan

The 2023 Unsecured Term loan has an initial maturity date of January 2023.

Borrowings under the 2023 Unsecured Term Loan bear interest at variable rates based on LIBOR plus a margin based on our credit rating ranging between 0.90% and 1.75% per annum.

Based on our current credit rating, the applicable margin is 1.35% as of June 30, 2020.

Based on our current credit rating, the applicable margin is 1.35% as of September 30, 2020.

2024 Unsecured Term Loan

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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.

Based on our current credit rating, the applicable margin is 1.25% as of June 30, 2020.

2022 Unsecured Term Loan

On February 7, 2020, we entered into a $60 million term loan agreement maturing in February 2022 with JP Morgan Chase Bank, N.A., as administrative agent.

The 2022 Unsecured Term Loan was used to partially repay BRE debt that we assumed as part of the Internalization.

Based on our current credit rating, the applicable margin is 1.25% as of June 30, 2020.

Based on our current credit rating, the applicable margin is 1.25% as of September 30, 2020.

2026 Unsecured Term Loan

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Borrowings under the 2026 Unsecured Term loan bear interest equal to LIBOR plus a margin based on our credit rating ranging between 1.45% and 2.40% per annum.

Based on our current credit rating, the applicable margin is 1.85% as of June 30, 2020.

To mitigate interest rate risk, we have strategically added unsecured, fixed-rate, interest-only senior promissory notes (“Senior Notes”) to our capital structure.

Based on our current credit rating, the applicable margin is 1.85% as of September 30, 2020.

To mitigate interest rate risk and extend the tenor of a portion of our debt, we have strategically added unsecured, fixed-rate, interest-only senior promissory notes (“Senior Notes”) to our capital structure.

The Senior Notes were issued in three series (Series A, B, and C) as described below.

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Debt Covenants

We are subject to various covenants and financial reporting requirements pursuant to our debt facilities.

The table below summarizes the applicable financial covenants, which are substantially the same across each of our debt facilities.

As of June 30, 2020, we believe that we were in compliance with all of our covenants.

We are subject to various covenants and financial reporting requirements pursuant to our debt facilities, which are summarized below.

As of September 30, 2020, 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.

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Refer to Recent Developments – COVID-19 Pandemic for additional discussion of the pandemic’s impact on our ability to satisfy our financial covenants.

June 30, 2020)

Leverage Ratio (a)

Leverage Ratio

≤ 0.60 to 1.00

Secured Indebtedness Ratio (b)

Secured Indebtedness Ratio

≤ 0.40 to 1.00

Unencumbered Coverage Ratio (c)

Unencumbered Coverage Ratio

≥ 1.75 to 1.00

Fixed Charge Coverage Ratio (d)

Fixed Charge Coverage Ratio

≥ 1.50 to 1.00

Total Unsecured Indebtedness to Total

Unencumbered Eligible Property Value (e)

Total Unsecured Indebtedness to Total Unencumbered Eligible Property Value

≤ 0.60 to 1.00

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Only applicable in case of default

Not Applicable

The leverage ratio is calculated as the ratio of total indebtedness to total market value.

For debt covenant purposes, total market value is computed on a consolidated basis as the net operating income for the most recently completed fiscal quarter on properties owned for four consecutive quarters at a capitalization rate of 7.50%, multiplied by four, plus the acquisition price of properties acquired in the last four quarters, and the GAAP book value of mortgages receivable, development property, unimproved real estate, unrestricted cash and cash equivalents, and all other tangible assets (the latter subject to a cap of 5% of total market value).

For purposes of determining total market value, net operating income from properties disposed of during the immediately preceding period of four consecutive fiscal quarters is excluded.

The secured indebtedness ratio is the ratio of secured indebtedness to total market value.

Secured indebtedness represents outstanding mortgage borrowings.

The unencumbered coverage ratio is the ratio of net operating income for all eligible properties to unsecured interest expense for the most recent fiscal quarter.

The fixed charge coverage ratio is the ratio of adjusted EBITDA to fixed charges for the most recent fiscal quarter.

Adjusted EBITDA is computed as net income adjusted for depreciation and amortization, interest expense, income tax expense and franchise tax expense, gains and losses from the sale of properties, equity in net income of unconsolidated subsidiaries, non-cash expenses related to mark to market exposure under derivatives contracts, straight-line rent adjustments, amortization of intangibles, gains and losses on early extinguishment of debt, non-cash severance and restructuring charges, transaction costs expensed, and reserves for replacements with respect to certain properties.

Fixed charges are computed as interest expense, plus scheduled principal repayments of debt, excluding balloon payments if applicable, plus preferred dividends paid or accrued, if applicable.

The ratio is calculated as the ratio of total unsecured indebtedness to unencumbered property value.

Cash and cash equivalents and restricted cash totaled $9.8 million and $12.7 million at June 30, 2020 and 2019, respectively.

The table below shows information concerning cash flows for the six months ended June 30, 2020 and 2019:

For the six months ended

Cash and cash equivalents and restricted cash totaled $109.0 million and $44.1 million at September 30, 2020 and 2019, respectively.

The table below shows information concerning cash flows for the nine months ended September 30, 2020 and 2019:

For the nine months ended

September 30,

(In thousands)

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Net cash (used in) provided by financing activities

Decrease in cash and cash equivalents and restricted cash

The increase in net cash provided by operating activities during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, was mainly due to growth in our real estate portfolio and cost savings associated with the Internalization.

The change in net cash provided (used in) by investing activities during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, was mainly due to decreased acquisition volume and increased proceeds from the disposal of properties in 2020, offset by cash paid in connection with the Internalization.

The change in net cash (used in) provided by financing activities during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, mainly reflects a decrease in proceeds from the issuance of our common stock and increased distributions resulting from an increase in the number of shares of common stock outstanding.

Increase in cash and cash equivalents and restricted cash

The increase in net cash provided by operating activities during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, was mainly due to growth in our real estate portfolio and cost savings associated with the Internalization.

The change in net cash provided by (used in) investing activities during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 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 change in net cash (used in) provided by financing activities during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, mainly reflects a net repayment of debt in 2020, compared to net borrowings in 2019, partially offset by increased proceeds from the sale of common stock.

Distributions and Distribution Reinvestment

In light of the economic uncertainty and rapidly evolving circumstances related to the COVID-19 pandemic and then-current tenant rent relief requests, to preserve cash, strengthen our liquidity position, and manage our overall leverage profile, in May 2020 our board of directors determined that we would temporarily suspend our monthly distribution.

At its August 4, 2020 meeting, based on our strong collection results and second quarter operating performance, the board voted to reinstate a distribution, announcing that the Company would transition to quarterly distribution payments beginning with the quarter ended September 30, 2020.

The board set a $0.135 distribution per common share and OP Unit to stockholders and OP Unit holders of record as of September 30, 2020, which was paid on October 15, 2020.

At its November 5, 2020 meeting, the board set a $0.25 distribution per common share and OP Unit to stockholders and OP Unit holders of record as of December 31, 2020, payable on or before January 15, 2021.

We terminated our DRIP and share redemption program, effective February 10, 2020.

Prior to its termination, pursuant to the terms of our DRIP, stockholders and OP Unit holders (other than us) could elect to have cash distributions reinvested in additional shares of our common stock.

Shares of our common stock acquired through our DRIP have the same rights and are subject to the same restrictions on transferability as all other shares of our common stock.

The following table summarizes distributions paid in cash and pursuant to our DRIP for the nine months ended September 30, 2020 (in thousands).

Distribution −

September (b)

Distributions were paid in shares of common stock.

Dividends totaling $20,722 declared for the third quarter of 2020 and payable to stockholders and OP Unit holders of record as of September 30, 2020, were paid on October 15, 2020.

The following table summarizes our distributions paid, including the source of distributions and a comparison against Funds From Operations (“FFO”) (in thousands).

Refer to Non-GAAP Measures for further discussion of our FFO.

For the nine months ended

September 30,

Distributions:

Reinvested in shares

Total Distributions

Source of Distributions:

Cash flow from operating activities

We intend to fund future distributions from cash generated by operations;

however, we may fund distributions from the sale of assets, borrowings, or proceeds from the sale of our securities.

Impact of Inflation

The leases in our portfolio are long-term in nature, with a current ABR weighted average remaining lease term of 11.0 years as of June 30, 2020.

The leases in our portfolio are long-term in nature, with a current ABR weighted average remaining lease term of 10.8 years as of September 30, 2020.

Our rental revenues may be impacted by inflation.

Substantially all of our leases have contractual lease escalations, with an

ABR weighted average of 2.1% as of June 30, 2020.

Man y of our leases contain rent escalators that increase rent at a fixed amount and may not be sufficient during periods of high inflation.

Leases that contributed approximately 15.7% of our ABR as of June 30, 2020, contained rent escalators based on increase s in CPI and the associated increases in rental revenue may be limited during periods of low inflation.

The impact of inflation on our property and operating expenses is limited since substantially all of our leases are net leases, and property-level expen ses are generally paid by our tenants.

Substantially all of our leases have contractual lease escalations, with an ABR weighted average of 2.1% as of September 30, 2020.

Many of our leases contain rent escalators that increase rent at a fixed amount and may not be sufficient during periods of high inflation.

Leases that contributed approximately 15.8% of our ABR as of September 30, 2020, contained rent escalators based on increases in CPI and the associated increases in rental revenue may be limited during periods of low inflation.

The impact of inflation on our property and operating expenses is limited since substantially all of our leases are net leases, and property-level expenses are generally paid by our tenants.

To the extent we bear the cost of such expense, 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.

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Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of June 30, 2020, or December 31, 2019.

We had no off-balance sheet arrangements as of September 30, 2020, or December 31, 2019.

Contractual Obligations

The following table provides information with respect to our contractual commitments and obligations as of June 30, 2020 (in thousands).

Term Loans (a)

Revolving Credit Facility (b)

Allowances (d)

The following table provides information with respect to our contractual commitments and obligations as of September 30, 2020 (in thousands).

Revolving Credit Facility (a)

Allowances (c)

Remainder of 2020

The 2020 Unsecured Term Loan had an original maturity date of August 2020, and allows two six-month extensions, at our option, subject to our being in compliance with the debt covenants and customary representations and warranties, and payment of a fee equal to 0.05% of the outstanding principal balance at the time of extension.

On May 5, 2020, we exercised the first of these options, effective on August 2, 2020, extending the maturity date of the 2020 Unsecured Term Loan to February 2, 2021.

Accordingly, we have included principal repayment of this loan in 2021.

We may extend the Revolving Credit Facility once, for a five-month period, subject to certain conditions, including the payment of an extension fee equal to 0.0625% of the revolving commitments.

Interest expense is projected based on the outstanding borrowings and interest rates in effect as of June 30, 2020.

We may extend the Revolving Credit Facility twice, each for a six-month period, subject to certain conditions, including the payment of an extension fee equal to 0.0625% of the revolving commitments.

Interest expense is projected based on the outstanding borrowings and interest rates in effect as of September 30, 2020.

This amount includes the impact of interest rate swap agreements.

We expect to pay tenant improvement allowances out of cash flows from operations or from additional borrowings.

At June 30, 2020 and December 31, 2019, investment in rental property of $175.7 million and $178.7 mil lion, respectively, was pledged as collateral against our mortgages and notes payable.

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 with our founding owners in connection with the Internalization.

The tax protection agreements require us to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, or 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 June 30, 2020, 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.

At September 30, 2020 and December 31, 2019, investment in rental property of $174.6 million and $178.7 million, respectively, was pledged as collateral against our mortgages and notes payable.

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 with ou r founding owners in connection with the Internalization.

The tax protection agreements require us to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, or in the case of the Founding Owne rs’ 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 September 30, 2020, taxable sale s 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 i n the foreseeable future.

Accordingly, we have excluded these commitments from the contractual commitments table above.

Critical Accounting Policies

Non-GAAP Measures

real estate and capital markets.

To derive Adjusted Funds From Operations (“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, 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 expense, severance, extraordinary items, and other specified non-cash items.

Our leases include cash rents that increase over the term of the lease to compensate us for anticipated increases in market rentals 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.

The amounts temporarily deferred are recorded in tenant receivables until they are repaid.

Consistent with GAAP lease revenues, the short-term deferrals associated with COVID-19 will not impact our AFFO.

We further exclude contingent consideration expense (income), 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 expense 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.

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.

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

For the three months ended

For the nine months ended

September 30,

(in thousands, except per share data)

Real property depreciation and amortization

Gain on sale of real estate

Provision for impairment on investment in rental properties

Capital improvements / reserves

Straight-line rent adjustment

Adjustment to provision for credit losses

Cost of debt extinguishment

Amortization of debt issuance costs

Amortization of net mortgage premiums

Gain on interest rate swaps and other non-cash interest expense

Amortization of lease intangibles

Internalization expenses

Stock-based compensation

Change in fair value of earnout liability

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 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.

As we fund new acquisitions initially using our unsecured Revolving Credit Facility, our leverage profile and Net Debt (defined below) are immediately impacted by current quarter acquisitions.

However, the full benefit of EBITDAre from newly acquired properties is not 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, which are not a result of normal operations.

We then annualize quarterly Adjusted EBITDAre by multiplying it by four (“Annualized Adjusted EBITDAre”).

You should not unduly rely on this measure as it is based on assumptions and estimates that may prove to be inaccurate.

Our actual reported EBITDAre for future periods may be significantly different from our Annualized Adjusted EBITDAre.

Adjusted EBITDAre and Annualized Adjusted EBITDAre are not measurements of performance under GAAP, and our Adjusted EBITDAre and Annualized Adjusted EBITDAre may not be comparable to similarly titled measures of other companies.

You should not consider our Adjusted EBITDAre and Annualized Adjusted EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.

The following table reconciles net income (which is the most comparable GAAP measure) t o EBITDA and EBITDAre:

For the three months ended

September 30,

For the nine months ended

September 30,

(in thousands)

Depreciation and amortization

Interest expense

Provision for impairment of investment in

rental properties

Gain on sale of real estate

The following table reconciles EBITDAre to Adjusted EBITDAre.

Information is also presented with respect to Annualized EBITDAre and Annualized Adjusted EBITDAre:

For the three months ended September 30,

(in thousands)

Adjustment for current quarter investment activity (a)

Adjustment for current quarter disposition activity (b)

Adjustment to exclude non-recurring expenses (income) (c)

Adjustment to exclude change in fair value of earnout liability

Adjustment to exclude cost of debt extinguishments

Adjustment to exclude lease termination fees

Adjusted EBITDAre

Annualized EBITDAre

Annualized Adjusted EBITDAre

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.

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.

Amounts represent expense directly associated with the Internalization.

Net Debt to Annualized EBITDAre and Annualized Adjusted EBITDAre

We define Net Debt as our gross debt (total reported debt plus deferred financing 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 useful to repay debt, compared to our performance as measured using EBITDAre.

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:

(in thousands)

September 30, 2020

September 30, 2019

Mortgages and notes payable, net

Unsecured term notes, net

Revolving Credit Facility

Debt issuance costs

Cash and cash equivalents

Restricted cash

Net Debt to Annualized EBITDAre

Net Debt to Annualized Adjusted EBITDAre

Critical Accoun ting Policies

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP.

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A summary of our significant accounting policies and procedures are included in Note 2, “Summary of Significant Accounting Policies,” in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

We believe there have been no significant changes during the six months ended June 30, 2020, to the items that we disclosed as our critical accounting policies in our 2019 Annual Report on Form 10-K.

Impact of Recent Accou nting Pronouncements

We believe there have been no significant changes during the nine months ended September 30, 2020, to the items that we disclosed as our critical accounting policies in our 2019 Annual Report on Form 10-K.

Impact of Recent Accounting Pronouncements

For information on the impact of recent accounting pronouncements on our business, see Note 2 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Determined Share Value

Historically, we have sold shares of common stock in a private offering at a price equal to the Determined Share Value (“DSV”), which was established at least quarterly by the board of directors based on the net asset value (“NAV”, or “Private Enterprise NAV”) of our portfolio, input from management and third-party consultants, and such other factors as the board of directors may determine.

The DSV was historically used for purchases, distribution reinvestment, and redemptions.

On January 10, 2020, we suspended our private offering of our common stock effective immediately and until further notice, and terminated our dividend reinvestment plan (“DRIP”) and share redemption program, each effective as of February 10, 2020.

At its August 4, 2020, meeting, our board of directors voted to retain the determined share value (“DSV”) at $82.00 per share until October 31, 2020.

The DSV is established in good faith by the board of directors based upon the net asset value (“NAV”) of our portfolio, input from management and third-party consultants, and such other factors as the board of directors may determine.

The Company’s NAV calculation as of June 30, 2020, was calculated using its established valuation process, starting with an estimate of the fair value of the properties in the portfolio as of that date based upon, among other factors, the implied market price for each asset based upon a review of market capitalization rates.

Beginning with the NAV as of June 30, 2020, we revised our calculation to include only the portion of the earnout liability fair value expected to be paid in cash.

We also adjusted the number of outstanding shares, including noncontrolling interests, used to compute NAV per diluted share, to include the portion of the earnout liability fair value expected to be paid in common stock and OP units.

These adjustments reflect our expectation of how the earnout liability will be settled if earned.

Additional information regarding our valuation policy and procedures, including significant assumptions used to value our real estate portfolio, and the determination of the DSV by the board of directors, is available in Item 5.

“Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” in our 2019 Annual Report on Form 10-K filed with the SEC on February 27, 2020, under the heading Determined Share Value .

Private Enterprise NAV per

diluted share

Real Estate NAV per

diluted share

August 1, 2020 - October 31, 2020

June 30, 2020

May 1, 2020 - July 31, 2020

March 31, 2020

February 1, 2020 - April 30, 2020

December 31, 2019

The adjustments made to NAV per diluted share in arriving at the Determined Share Value for the periods presented above account for the inherent imprecision in the valuation estimates.

The following table provides a breakdown of the major compo nents of our estimated NAV and NAV per diluted share amounts (in thousands, except per share amounts), and a reconciliation of the amounts previously reported as March 31, 2020 NAV, to the current methodology, which is provided for comparative purposes onl y:

( in thousands, except per share amounts)

Adjustment for Earnout Shares and OP Units

Current Methodology

Investment in rental property

Other assets and liabilities, net

Real Estate NAV

Private Enterprise NAV

Number of outstanding shares, including non-controlling interests

Earnout shares and OP Units (a)

Real Estate NAV per share

Private Enterprise NAV per share

Earnout shares and OP Units were calculated as the portion of the fair value of the earnout liability payable in shares or OP Units as of the appropriate date, divided by $85 per share.

The following table details the implied market capitalization rates (shown on a weighted average basis) used to value the investment in rental property, by property type, as of June 30, 2020, and March 31, 2020, supporting the Determined Share Value in effect for the periods of August 1, 2020 through October 31, 2020, and May 1, 2020, through July 31, 2020, respectively:

Market capitalization rates, as of:

June 30, 2020

March 31, 2020

While we believe our assumptions are reasonable, a change in these assumptions would impact the calculation of the value of our real estate investments.

For example, assuming all other factors remain unchanged, an increase in the weighted average implied market capitalization rate used as of June 30, 2020, of 0.25% would result in a decrease in the fair value of our investment in rental property of 3.6%, and our Real Estate NAV per diluted share and Private Enterprise NAV per diluted share would have been $65.92 and $77.14, respectively.

Conversely, a decrease in the weighted average implied capitalization rate used as of June 30, 2020 of 0.25% would result in an increase in the fair value of our investment in rental property of 3.9%, and our Real Estate NAV per diluted share and Private Enterprise NAV per diluted share would have been $76.59 and $87.81, respectively.

The 0.04% decrease in the portfolio total implied market capitalization rate between March 31, 2020 and June 30, 2020, is primarily the result of our re-leasing certain properties previously subject to bankruptcy proceedings in the retail – home furnishings property type to a creditworthy tenant as of June 30, 2020.

Additionally, the ongoing COVID-19 pandemic, together with the restrictions on travel and other measures enacted in response to the pandemic, has had and will continue to have a significant adverse impact on our tenants’ operations and the value of our properties for an unknown period of time.

Due to the reliance on historical information when valuing a property and the number of unknown variables with respect to the COVID-19 pandemic at this time, the impact of the pandemic on a particular property will likely not be reflected in a property-level valuation for several calendar quarters.

Additionally, when conducting property-level valuations, management and our third-party consultants and appraisers utilize available sales data, such as purchase price, from transactions involving comparable assets.

Due to the current economic downturn and significant reduction in real estate transactions in the wake of the pandemic, it is difficult for the Company to obtain or utilize meaningful comparable sales data as part of its valuation process.

Management expects this will continue to be the case for several calendar quarters.

Accordingly, the current Determined Share Value does not accurately reflect the impact of the COVID-19 pandemic on the value of our shares as of the date of this filing.

In estimating the fair value of its real estate assets as of June 30, 2020, the Company considered that the COVID-19 pandemic most significantly impacted tenants leasing properties for casual dining restaurants, retail furniture outlets, and corporate offices, and on a case by case basis, reduced its fair value estimate for certain of these properties as part of the determination of NAV.

The board of directors will continue to utilize all available valuation information when setting the DSV in future periods as the impacts of the COVID-19 pandemic on real estate asset values continues to unfold.

Distributions and Distr ibution Reinvestment

We terminated our DRIP and share redemption program, effective February 10, 2020.

Shares of our common stock acquired through our DRIP have the same rights and are subject to the same restrictions on transferability as all other shares of our common stock.

The following table summarizes distributions paid in cash and pursuant to our DRIP for the six months ended June 30, 2020 (in thousands).

Distribution −

Distributions are paid in shares of common stock.

The following table summarizes our distributions paid, including the source of distributions and a comparison against FFO (in thousands).

Refer to Net Income and Non-GAAP Measures (FFO and AFFO) below for further discussion of our FFO.

For the six months ended

Distributions:

Reinvested in shares

Total Distributions

Source of Distributions:

Cash flow from operating activities

We intend to fund future distributions from cash generated by operations;

however, we may fund distributions from the sale of assets, borrowings, or proceeds from the sale of our securities.

Quantitative and Qualitat ive Disclosures About Market Risk

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Our fixed-rate debt includes our Senior Notes, mortgages, and variable-rate debt converted to a fixed rate with the use of interest rate swaps.

Our fixed-rate debt and outstanding interest rate swaps had carrying values and fair values of approximately $1.6 billion as of June 30, 2020.

Our fixed-rate debt and outstanding interest rate swaps had carrying values and fair values of approximately $1.4 billion and $1.6 billion, respectively, as of September 30, 2020.

Changes in market interest rates impact the fair value of our fixed-rate debt and interest rate swaps, but they have no impact on interest incurred or on cash flows.

For instance, if interest rates were to increase 1%, and the fixed-rate debt balance were to remain constant, we would expect the fair value of our debt to decrease, similar to how the price of a bond decreases as interest rates rise.

A 1% increase in market interest rates would have resulted in a decrease in the fair value of our fixed-rate debt and interest rate swaps of approximately $85.9 million as of June 30, 2020.

Borrowings pursuant to our Revolving Credit Facility and other variable-rate debt bear interest at rates based on LIBOR plus an applicable margin, and totaled $1.5 billion as of June 30, 2020, of which $859.8 million was swapped to a fixed rate by our use of interest rate swaps.

Taking into account the effect of our interest rate swaps, interest expense would have increased by approximately $3.1 million in the six months ended June 30, 2020, if the applicable LIBOR rate had been 1% higher.

A 1% increase in market interest rates would have resulted in a decrease in the fair value of our fixed-rate debt and interest rate swaps of approximately $82.6 million as of September 30, 2020.

Borrowings pursuant to our Revolving Credit Facility and other variable-rate debt bear interest at rates based on LIBOR plus an applicable margin, and totaled $969.8 million as of September 30, 2020, of which $859.8 million was swapped to a fixed rate by our use of interest rate swaps.

Taking into account the effect of our interest rate swaps, interest expense would have increased by approximately $4.5 million in the nine months ended September 30, 2020, if the applicable LIBOR rate had been 1% higher.

With the exception of our interest rate swap transactions, we have not engaged in transactions in derivative financial instruments or derivative commodity instruments.

As of June 30, 2020, our financial instruments were not exposed to significant market risk due to foreign currency exchange risk.

As of September 30, 2020, our financial instruments were not exposed to significant market risk due to foreign currency exchange risk.

Control s and Procedures

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We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of and for the quarter ended June 30, 2020, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer.

As of and for the quarter ended September 30, 2020, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer.

Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – OTH ER INFORMATION

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – OTHER INFORMATION

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What changed 10-Q

Item 2. Management’s Discussion and Analysis