Broadstone Net Lease, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Except where the context suggests otherwise, as used in this Quarterly Report on Form 10-Q, the terms “BNL,” “we,” “us,” “our,” and “our company” refer to Broadstone Net Lease, Inc., a Maryland corporation incorporated on October 18, 2007, and, as required by context, Broadstone Net Lease, LLC, a New York limited liability company (the “OP”), which we refer to as the or our “OP,” and to their respective subsidiaries. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q. Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements, which reflect our current views regarding our business, financial performance, growth prospects and strategies, market opportunities, and market trends, that are intended to be made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of these words or other comparable words. All of the forward-looking statements included in this Quarterly Report on Form 10-Q are subject to various risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results, performance, and achievements could differ materially from those expressed in or by the forward-looking statements and may be affected by a variety of risks and other factors. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from such forward-looking statements. 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 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 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 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. • “cash capitalization rate” represents the estimated first year cash yield to be generated on a real estate investment property, which was estimated at the time of investment based on the contractually specified cash base rent for the first full year after the date of the investment, divided by the purchase price for the property; • “CPI” means the Consumer Price Index for All Urban Consumers (CPI-U): U.S. City Average, All Items, as published by the U.S. 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; 32 • “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; and • “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. Overview We acquire, own, and manage primarily single-tenant commercial real estate properties that are net leased on a long-term basis to a diversified group of tenants. Since our inception in 2007, we have selectively invested in net leased assets in the industrial, healthcare, restaurant, 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. We focus on investing in real estate that is operated by creditworthy single tenants in industries characterized by positive business drivers and trends, where the properties are an integral part of the tenants’ businesses and there are opportunities to secure long-term net leases. Through long-term net leases, our tenants are able to retain operational control of their strategically important locations, while allocating their debt and equity capital to fund their core business operations rather than real estate ownership. - Diversified Portfolio . 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): o 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 development, and cold storage. o Geographic Diversity : Our properties are located in 41 U.S. states and British Columbia, Canada, with no single geographic concentration exceeding 10.5% of our ABR. o Tenant and Industry Diversity : Our properties are occupied by approximately 182 different commercial tenants who operate 169 different brands that are diversified across 54 differing industries, with no single tenant accounting for more than 2.5% of our ABR. - Strong In-Place Leases with Significant Remaining Lease Term . 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 . Approximately 98.3% of our leases have contractual rent escalations, with an ABR weighted average minimum increase of 2.1%. - Extensive Tenant Financial Reporting . 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 6.4% 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. 33 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. states, including the areas in which we operate, adopted certain measures to mitigate the ongoing public health crises. 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. states. 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 some locations. 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. “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 7, 2020. Impact to Results of Operations Our results of operations and financial condition are affected by numerous factors, many of which are beyond our control. Key factors that typically impact our results of operations and financial condition, 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 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. nonessential business designations). Based on our analyses, we granted relief on a select basis only to those tenants we determined to be most in need. In cases where we granted rent relief, we focused on negotiating the shortest possible repayment period and, when possible, lease enhancements ( e.g. extensions of term). 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 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. 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. 34 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 . 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: % of September % Base Rent Collected % Base Rent Not Collected Tenant Industry ABR July August September Q3 Deferred Abated Bankruptcy Restaurants 15.8% 89.6% 92.0% 92.0% 91.2% — 8.8% — Home Furnishing Retail 2.8% 90.5% 100.0% 100.0% 96.7% — — 3.3% Specialty Stores 2.2% 89.4% 89.4% 89.5% 89.5% 10.5% — — Industrial Machinery 1.9% 84.6% 100.0% 100.0% 94.9% 5.1% — — Life Sciences Tools & Services 1.4% 82.0% 100.0% 100.0% 94.0% 6.0% — — Movies & Entertainment 2 1.1% 50.0% 100.0% 100.0% 83.5% 16.5% — — All Other 74.8% 100.0% 100.0% 100.0% 100.0% — — — Grand Total 100.0% 96.7% 98.5% 98.5% 97.9% 0.6% 1.4% 0.1% 2 Industrial tenant. % of September % Base Rent Collected % Base Rent Not Collected Property Type ABR July August September Q3 Deferred Abated Bankruptcy Industrial 44.4% 97.6% 99.5% 99.4% 98.8% 1.2% — — Healthcare 20.1% 98.6% 99.9% 99.9% 99.5% 0.5% — — Restaurant 15.5% 89.4% 91.9% 91.9% 91.1% — 8.9% — Office 10.0% 100.0% 100.0% 100.0% 100.0% — — — Retail 8.3% 96.2% 100.0% 100.0% 98.7% — — 1.3% Other 1.7% 100.0% 100.0% 100.0% 100.0% — — — Grand Total 100.0% 96.7% 98.5% 98.5% 97.9% 0.6% 1.4% 0.1% 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. 35 Property Dispositions From time to time, we strategically dispose of properties, primarily when we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives. The resulting gains or losses on dispositions may materially impact our operating results, and the recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market at the time a property is listed for sale. 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 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 99.6% 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. 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. Our ability to grow revenue will depend, to a significant degree, on our ability to identify and complete acquisitions that meet our investment criteria. Changes in capitalization rates, interest rates, or other factors may impact our acquisition opportunities in the future. Market conditions may also impact the total returns we can achieve on our investments. Our acquisition volume also depends on our ability to access third-party debt and equity financing. 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. 36 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 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. We believe the master lease structure is most prevalent and applicable to leases in our restaurant and retail property types, while less relevant to our other property types, such as healthcare and industrial. As of 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. 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 We anticipate that we will continue to incur debt to fund future acquisition activity, which will increase the amount of interest expense we incur. In addition, although we attempt to limit our total floating-rate debt exposure, changes in the interest rate environment could either increase or decrease our weighted average interest rate in the future. Any changes to our debt structure or debt financing associated with property acquisitions, could materially influence our operating results depending on the terms of any such debt. A downgrade in our credit rating could also increase the amount of interest we pay under our debt agreements. Interest rates have continued to decline as the U.S. 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 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. General and Administrative Expenses 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. 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 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. Tenant Bankruptcies Adverse economic conditions, particularly those that affect the markets in which our properties are located, or downturns in our tenants’ industries could impair our tenants’ ability to meet their lease obligations to us and our ability to renew expiring leases or re-lease space. In particular, the bankruptcy of one or more of our tenants could adversely affect our ability to collect rents from such tenants and maintain our portfolio’s occupancy. We have historically experienced only a limited number of tenant bankruptcies, which have not been material to our financial results. 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. A prolonged exposure to the negative economic impacts of the pandemic may result in additional tenant bankruptcies. 37 Impairments We review long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If, and when, such events or changes 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 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 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. 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 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 Considerations Internal Controls over Financial Reporting and Disclosure Controls We have taken proactive steps to maintain an appropriate internal control environment while migrating our workforce to a work from home dynamic. Our access to technology and online communications has required minimal changes to controls, none of which we deem material. We believe our existing disclosure controls are appropriate to address the reporting complexities presented by the COVID-19 pandemic. 38 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 $288.0 million as of September 30, 2020. Diversification by Property Type 39 Property Type # Properties ABR ($'000s) ABR as a % of Total Portfolio Square Feet ('000s) SF as a % of Total Portfolio Industrial Manufacturing 55 $ 40,876 14.2 % 7,635 28.0 % Distribution & Warehouse 32 39,759 13.8 % 7,013 25.7 % Food Processing 14 18,275 6.3 % 2,131 7.8 % Flex and R&D 7 16,600 5.8 % 1,457 5.3 % Cold Storage 4 12,497 4.3 % 933 3.4 % Industrial Total 112 128,007 44.4 % 19,169 70.2 % Healthcare Clinical 50 25,540 8.9 % 1,081 3.9 % Surgical 15 9,701 3.4 % 345 1.3 % Animal Health Services 20 8,072 2.8 % 314 1.1 % Life Science 9 7,478 2.6 % 549 2.0 % Healthcare Services 26 6,771 2.4 % 262 1.0 % Healthcare Total 120 57,562 20.1 % 2,551 9.3 % Restaurant Quick Service Restaurants 150 24,589 8.5 % 506 1.9 % Casual Dining 90 20,117 7.0 % 575 2.1 % Restaurant Total 240 44,706 15.5 % 1,081 4.0 % Office Strategic Operations 7 13,554 4.7 % 1,021 3.7 % Corporate Headquarters 6 9,636 3.3 % 671 2.5 % Call Center 4 5,683 2.0 % 392 1.4 % Office Total 17 28,873 10.0 % 2,084 7.6 % Retail Automotive 56 9,722 3.4 % 784 2.9 % General Merchandise 57 8,451 2.9 % 677 2.5 % Home Furnishings 15 5,713 2.0 % 860 3.1 % Retail Total 128 23,886 8.3 % 2,321 8.5 % Other 11 4,963 1.7 % 117 0.4 % Total 628 $ 287,997 100.0 % 27,323 100.0 % 40 Diversification by Tenant Tenant Property Type # Properties ABR ($'000s) ABR as a % of Total Portfolio Square Feet ('000s) SF as a % of Total Portfolio Red Lobster Hospitality & Red Lobster Restaurants LLC * Casual Dining 24 $ 7,306 2.5 % 196 0.7 % Jack's Family Restaurants LP * Quick Service Restaurants 36 6,067 2.1 % 121 0.5 % Axcelis Technologies, Inc. Flex and R&D 1 5,730 2.0 % 417 1.5 % Hensley & Company * Distribution & Warehouse 3 5,643 2.0 % 577 2.1 % Outback Steakhouse of Florida LLC *1 Casual Dining 23 5,313 1.8 % 146 0.5 % Krispy Kreme Doughnut Corporation Quick Service Restaurants/ Food Processing 27 5,034 1.8 % 156 0.6 % BluePearl Holdings, LLC * Animal Health Services 12 5,009 1.7 % 154 0.6 % Big Tex Trailer Manufacturing, Inc. * Automotive/Distribution & Warehouse/Manufacturing/ Corporate Headquarters 17 4,764 1.7 % 1,302 4.8 % Siemens Medical Solutions USA, Inc. & Siemens Corporation Manufacturing/Flex and R&D 2 4,646 1.6 % 545 2.0 % Nestle' Dreyer's Ice Cream Company Cold Storage 1 4,344 1.5 % 310 1.1 % Total Top 10 Tenants 146 53,856 18.7 % 3,924 14.4 % Nationwide Mutual Insurance Company * Strategic Operations 2 4,165 1.5 % 407 1.5 % Arkansas Surgical Hospital Surgical 1 4,156 1.5 % 129 0.5 % American Signature, Inc. Home Furnishings 6 4,141 1.4 % 474 1.7 % Cascade Aerospace Inc. Manufacturing 1 3,884 1.3 % 231 0.9 % Fresh Express Incorporated Food Processing 1 3,819 1.3 % 335 1.2 % Aventiv Technologies, LLC Corporate Headquarters 1 3,742 1.3 % 154 0.6 % Bob Evans Restaurants, LLC * Casual Dining 23 3,728 1.3 % 121 0.4 % Tractor Supply Company General Merchandise 14 3,604 1.2 % 281 1.0 % Centene Management Company, LLC Strategic Operations 1 3,267 1.2 % 220 0.8 % Zips Car Wash, LLC * Automotive 14 3,255 1.1 % 57 0.2 % Total Top 20 Tenants 210 $ 91,617 31.8 % 6,333 23.2 % 1 Tenant’s properties include 21 Outback Steakhouse restaurants and two Carrabba’s Italian Grill restaurants. * Subject to a master lease. Diversification by Brand Brand Property Type # Properties ABR ($'000s) ABR as a % of Total Portfolio Square Feet ('000s) SF as a % of Total Portfolio Red Lobster * Casual Dining 24 $ 7,306 2.5 % 196 0.7 % Jack's Family Restaurants * Quick Service Restaurants 36 6,067 2.1 % 121 0.5 % Axcelis Flex and R&D 1 5,730 2.0 % 417 1.5 % Hensley * Distribution & Warehouse 3 5,643 2.0 % 577 2.1 % Bob Evans Farms *1 Casual Dining/Food Processing 24 5,574 1.9 % 297 1.0 % Wendy's # Quick Service Restaurants 39 5,568 1.9 % 115 0.4 % Krispy Kreme Quick Service Restaurants/ Food Processing 27 5,034 1.8 % 156 0.6 % BluePearl Veterinary Partners * Animal Health Services 12 5,009 1.7 % 154 0.6 % Big Tex Trailers * Automotive/Distribution & Warehouse/Manufacturing/ Corporate Headquarters 17 4,764 1.7 % 1,302 4.8 % Siemens Manufacturing/Flex and R&D 2 4,646 1.6 % 545 2.0 % Total Top 10 Brands 185 55,341 19.2 % 3,880 14.2 % Outback Steakhouse * Casual Dining 21 4,624 1.6 % 133 0.5 % Nestle' Cold Storage 1 4,344 1.5 % 310 1.1 % Taco Bell # Quick Service Restaurants 32 4,169 1.5 % 82 0.3 % Nationwide Mutual Insurance Co. * Strategic Operations 2 4,165 1.5 % 407 1.5 % Arkansas Surgical Hospital Surgical 1 4,156 1.5 % 129 0.5 % Value City Furniture Home Furnishings 6 4,141 1.4 % 474 1.7 % Cascade Aerospace Manufacturing 1 3,884 1.3 % 231 0.9 % Chiquita Food Processing 1 3,819 1.3 % 335 1.2 % Securus Technologies Corporate Headquarters 1 3,742 1.3 % 154 0.6 % Tractor Supply Co. General Merchandise 14 3,604 1.2 % 281 1.0 % Total Top 20 Brands 265 $ 95,989 33.3 % 6,416 23.5 % * Subject to a master lease. # Includes properties leased by multiple tenants, some, not all, of which are subject to master leases. 1 Brand includes one BEF Foods, Inc property and 23 Bob Evans Restaurants, LLC properties. 41 Diversification by Industry Industry ABR as a % of Total Portfolio Healthcare Facilities 15.8 % Restaurants 15.8 % Food Distributors 4.4 % Packaged Foods & Meats 3.9 % Auto Parts & Equipment 3.5 % Metal & Glass Containers 3.3 % Specialized Consumer Services 3.3 % Healthcare Services 2.8 % Home Furnishing Retail 2.8 % Aerospace & Defense 2.6 % Distributors 2.4 % Electronic Components 2.3 % Air Freight & Logistics 2.2 % Specialty Stores 2.2 % Industrial Machinery 1.9 % Top 15 Tenant Industries 69.2 % Other (39 industries) 30.8 % Total 100.0 % 42 Diversification by Geography State # Properties ABR ($'000s) ABR as a % of Total Portfolio Square Feet ('000s) SF as a % of Total Portfolio State # Properties ABR ($'000s) ABR as a % of Total Portfolio Square Feet ('000s) SF as a % of Total Portfolio TX 53 $ 30,167 10.5 % 3,141 11.5 % VA 13 $ 4,351 1.5 % 110 0.4 % IL 26 18,207 6.3 % 1,981 7.2 % WA 15 4,115 1.4 % 150 0.6 % CA 11 15,564 5.4 % 1,554 5.7 % MO 9 3,882 1.3 % 733 2.7 % WI 32 15,447 5.4 % 1,611 5.9 % KY 17 3,446 1.2 % 176 0.6 % FL 46 15,190 5.3 % 792 2.9 % LA 3 3,122 1.1 % 175 0.6 % MI 35 14,413 5.0 % 1,439 5.3 % NE 6 2,958 1.0 % 509 1.9 % OH 35 14,024 4.9 % 1,369 5.0 % MD 4 2,856 1.0 % 293 1.1 % IN 29 12,385 4.3 % 1,738 6.4 % NM 8 2,730 0.9 % 96 0.4 % NC 28 10,607 3.7 % 1,139 4.2 % IA 4 2,644 0.9 % 622 2.3 % MA 4 9,551 3.3 % 1,009 3.7 % SC 11 2,435 0.8 % 289 1.1 % PA 16 9,372 3.3 % 1,071 3.9 % UT 3 2,289 0.8 % 280 1.0 % MN 20 9,075 3.2 % 1,225 4.5 % MS 3 1,866 0.6 % 258 0.9 % NY 15 9,048 3.1 % 572 2.1 % CT 2 1,648 0.6 % 55 0.2 % TN 37 9,029 3.1 % 372 1.4 % WV 8 1,630 0.6 % 36 0.1 % AZ 8 8,434 2.9 % 761 2.8 % MT 7 1,526 0.5 % 43 0.2 % AL 45 7,725 2.7 % 177 0.6 % CO 3 1,434 0.5 % 94 0.3 % AR 10 7,117 2.5 % 278 1.0 % NV 2 1,307 0.5 % 81 0.3 % OK 21 6,923 2.4 % 806 2.9 % ND 2 923 0.3 % 28 0.1 % GA 19 5,984 2.1 % 968 3.5 % DE 3 663 0.2 % 35 0.1 % KS 10 4,893 1.7 % 639 2.3 % WY 1 307 0.1 % 21 0.1 % NJ 3 4,826 1.7 % 366 1.3 % Total US 627 $ 284,113 98.6 % 27,092 99.1 % Total Canada 1 3,884 1.4 % 231 0.9 % Grand Total 628 $ 287,997 100.0 % 27,323 100.0 % 43 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 # Properties ABR ($'000s) ABR as a % of Total Portfolio Square Feet ('000s) SF as a % of Total Portfolio 2020 2 $ 42 — 157 0.6 % 2021 6 1,546 0.5 % 89 0.3 % 2022 4 3,347 1.2 % 124 0.4 % 2023 8 5,154 1.8 % 538 2.0 % 2024 12 13,629 4.7 % 1,694 6.2 % 2025 19 7,697 2.7 % 682 2.5 % 2026 33 17,985 6.2 % 1,394 5.1 % 2027 30 23,098 8.0 % 2,029 7.4 % 2028 33 26,392 9.2 % 2,708 9.9 % 2029 60 19,020 6.6 % 2,529 9.3 % 2030 89 49,394 17.2 % 5,046 18.5 % 2031 16 5,078 1.8 % 503 1.8 % 2032 36 21,723 7.5 % 2,295 8.4 % 2033 37 15,123 5.3 % 1,635 6.0 % 2034 30 5,358 1.9 % 344 1.3 % 2035 54 17,731 6.2 % 1,959 7.2 % 2036 28 9,588 3.3 % 811 3.0 % 2037 19 14,794 5.1 % 913 3.3 % 2038 32 6,653 2.3 % 303 1.1 % 2039 12 8,974 3.1 % 933 3.4 % Thereafter 62 15,671 5.4 % 570 2.1 % Untenanted properties 6 — — 67 0.2 % Total 628 $ 287,997 100.0 % 27,323 100.0 % 44 Results of Operations Overview 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 For the three months ended For the nine months ended September 30, Increase/(Decrease) September 30, Increase/(Decrease) (in thousands) 2020 2019 $ % 2020 2019 $ % Contractual rental amounts billed for operating leases $ 69,270 $ 65,579 $ 3,691 5.6 % $ 209,440 $ 184,292 $ 25,148 13.6 % Adjustment to recognize contractual operating lease billings on a straight-line basis 6,768 5,575 1,193 21.4 % 16,709 16,015 694 4.3 % Variable rental amounts earned 234 — 234 >100.0 % 308 — 308 >100.0 % Earned income from direct financing leases 757 1,005 (248 ) (24.7 )% 2,599 3,014 (415 ) (13.8 )% Operating expenses billed to tenants 3,389 3,811 (422 ) (11.1 )% 11,456 10,572 884 8.4 % Other income from real estate transactions 64 431 (367 ) (85.2 )% 795 431 364 84.5 % Adjustment to revenue recognized for uncollectible rental amounts billed 262 — 262 >100.0 % (1,961 ) (440 ) (1,521 ) >(100.0 )% Total Lease revenues, net $ 80,744 $ 76,401 $ 4,343 5.7 % $ 239,346 $ 213,884 $ 25,462 11.9 % 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. 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 For the three months ended For the nine months ended September 30, Increase/(Decrease) September 30, Increase/(Decrease) (in thousands) 2020 2019 $ % 2020 2019 $ % Operating expenses Depreciation and amortization $ 31,363 $ 28,392 $ 2,971 10.5 % $ 102,503 $ 77,989 $ 24,514 31.4 % Asset management fees — 5,610 (5,610 ) (100.0 )% 2,461 16,048 (13,587 ) (84.7 )% Property management fees — 2,098 (2,098 ) (100.0 )% 1,275 5,918 (4,643 ) (78.5 )% Property and operating expense 4,187 3,855 332 8.6 % 12,492 11,497 995 8.7 % General and administrative 7,214 1,315 5,899 >100.0 % 18,756 3,807 14,949 >100.0 % Provision for impairment of investment in rental properties 14,732 2,435 12,297 >100.0 % 17,399 3,452 13,947 >100.0 % Total operating expenses $ 57,496 $ 43,705 $ 13,791 31.6 % $ 154,886 $ 118,711 $ 36,175 30.5 % Depreciation and amortization 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. 45 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. 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. Upon completion of the Internalization, the agreements with the third-party manager were terminated, resulting in a decrease in these expenses as compared to the prior year period. Our management fees were replaced by compensation and related costs associated with an internalized management structure, and corresponding general and administrative expenses. General and administrative 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 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, September 30, (in thousands, except number of properties) 2020 2019 2020 2019 Number of properties 3 3 6 4 Carrying value prior to impairment charge $ 27,229 $ 12,884 $ 51,445 $ 15,901 Fair value 12,497 10,449 34,046 12,449 Impairment charge $ 14,732 $ 2,435 $ 17,399 $ 3,452 The timing and amount of impairment fluctuates from period to period depending on the specific facts and circumstances. Other income (expenses) For the three months ended For the nine months ended September 30, Increase/(Decrease) September 30, Increase/(Decrease) (in thousands) 2020 2019 $ % 2020 2019 $ % Other income (expenses) Interest income $ — $ 5 $ (5 ) (100.0 )% $ 20 $ 6 $ 14 >100.0 % Interest expense (18,511 ) (18,465 ) 46 0.2 % (59,015 ) (51,025 ) 7,990 15.7 % Cost of debt extinguishment (392 ) (455 ) (63 ) (13.8 )% (414 ) (1,176 ) (762 ) (64.8 )% Gain on sale of real estate 1,060 12,585 (11,525 ) (91.6 )% 9,725 16,772 (7,047 ) (42.0 )% Income taxes (129 ) (405 ) (276 ) (68.1 )% (1,080 ) (1,153 ) (73 ) (6.3 )% Internalization expenses (1,929 ) (923 ) 1,006 >100.0 % (3,523 ) (1,195 ) 2,328 >100.0 % Change in fair value of earnout liability 6,362 — 6,362 >100.0 % 8,506 — 8,506 >100.0 % Other gains (losses) 2 — 2 >100.0 % (22 ) — (22 ) >(100.0 )% Interest expense 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. 46 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 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 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 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, 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 For the three months ended For the nine months ended September 30, Increase/(Decrease) September 30, Increase/(Decrease) (in thousands, except per share data) 2020 2019 $ % 2020 2019 $ % Net income $ 9,711 $ 25,038 $ (15,327 ) (61.2 )% $ 38,657 $ 57,402 $ (18,745 ) (32.7 )% Net earnings per diluted share 0.08 0.24 (0.16 ) (66.7 )% 0.32 0.57 (0.25 ) (43.9 )% 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. 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 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 General We acquire real estate using a combination of debt and equity capital and with cash from operations that is not otherwise distributed to our stockholders. Our focus is on maximizing the risk-adjusted return to our stockholders through an appropriate balance of debt and equity in our capital structure. We are committed to maintaining an investment grade balance sheet through active management of our 47 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 Liquidity is a measure of our ability to meet potential cash requirements, including our ongoing commitments to repay debt, fund our operations, acquire properties, make distributions to our stockholders, and other general business needs. As a REIT, we are required to distribute to our stockholders at least 90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital gain, on an annual basis. As a result, it is unlikely that we will be able to retain substantial cash balances to meet our long-term liquidity needs, including repayment of debt and the acquisition of additional properties, from our annual taxable income. Instead, we expect to meet our long-term liquidity needs primarily by relying upon external sources of capital. Short-term Liquidity Requirements Our short-term liquidity requirements consist primarily of funds necessary to pay for our operating expenses, including our general and administrative expenses as well as interest payments on our outstanding debt, and to pay distributions. We do not currently anticipate making significant capital expenditures or incurring other significant property costs because of the strong occupancy levels across our portfolio and the 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 Our long-term liquidity requirements consist primarily of funds necessary to repay debt and invest in additional revenue generating properties. 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. We expect to meet our long-term liquidity requirements primarily from borrowings under our Revolving Credit Facility, future debt and equity financings, and proceeds from limited sales of our properties. Our ability to access these capital sources may be impacted by unfavorable market conditions, particularly in the debt and equity capital markets, that are outside of our control. In addition, our success will depend on our operating performance, our borrowing restrictions, our degree of leverage, and other factors. Our acquisition growth strategy significantly depends on our ability to obtain acquisition financing on favorable terms. We seek to reduce the risk that long-term debt capital may be unavailable to us by strengthening our balance sheet by investing in real estate with creditworthy tenants and lease guarantors, and by maintaining an appropriate mix of debt and equity capitalization. We also, from time to time, obtain or assume non-recourse mortgage financing from banks and insurance companies secured by mortgages on the corresponding specific property. Mortgages, however, are not currently a strategic focus of the active management of our leverage profile. Equity Capital Resources 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. 48 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 at September 30, 2020. (in thousands, except interest rates) Outstanding Balance Interest Rate Maturity Date Revolving Credit Facility $ — one-month LIBOR + 1.20% Sept. 2023 2022 Unsecured Term Loan 60,000 one-month LIBOR + 1.25% Feb. 2022 2023 Unsecured Term Loan 265,000 one-month LIBOR + 1.35% Jan. 2023 2024 Unsecured Term Loan 190,000 one-month LIBOR + 1.25% Jun. 2024 2026 Unsecured Term Loan 450,000 one-month LIBOR + 1.85% Feb. 2026 Senior Notes Series A 150,000 4.84% Apr. 2027 Series B 225,000 5.09% Jul. 2028 Series C 100,000 5.19% Jul. 2030 475,000 Total 1,440,000 Debt issuance costs, net (6,505 ) $ 1,433,495 Revolving Credit Facility 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 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 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 September 30, 2020. 2024 Unsecured Term Loan The 2024 Unsecured Term Loan has an initial maturity date of June 2024. Borrowings under the 2024 Unsecured Term Loan are subject to interest at variable rates based on LIBOR plus a margin based on our credit rating ranging between 0.85% and 1.65% per annum. Based on our current credit rating, the applicable margin is 1.25% as of September 30, 2020. 49 2026 Unsecured Term Loan The 2026 Unsecured Term Loan includes an accordion feature that provides for an increase in the facility size up to a total of $550 million of available capacity. Borrowings under the 2026 Unsecured Term Loan are payable interest only on a monthly basis during the term of the loan, with the principal amount due in February 2026. 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 September 30, 2020. Senior Notes 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. Series A Notes The Series A Notes are payable interest only semiannually during their term, bear interest at a fixed rate of 4.84% per annum, and mature on April 18, 2027. Series B and Series C Notes The Series B and Series C Notes are payable interest only semiannually during their term, and bear interest at fixed rates of 5.09% per annum and 5.19% per annum, respectively. The Series B Notes mature on July 2, 2028, and the Series C Notes mature on July 2, 2030. Debt 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. For each of the previous three years, we paid dividends out of our cash flows from operations in excess of the distribution amounts required to maintain our REIT qualification. Refer to Recent Developments – COVID-19 Pandemic for additional discussion of the pandemic’s impact on our ability to satisfy our financial covenants. Covenants Requirement Leverage Ratio ≤ 0.60 to 1.00 Secured Indebtedness Ratio ≤ 0.40 to 1.00 Unencumbered Coverage Ratio ≥ 1.75 to 1.00 Fixed Charge Coverage Ratio ≥ 1.50 to 1.00 Total Unsecured Indebtedness to Total Unencumbered Eligible Property Value ≤ 0.60 to 1.00 Dividends and Other Restricted Payments Only applicable in case of default Cash Flows 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) 2020 2019 Net cash provided by operating activities $ 132,964 $ 110,933 Net cash provided by (used in) investing activities 16,207 (870,227 ) Net cash (used in) provided by financing activities (60,495 ) 784,420 Increase in cash and cash equivalents and restricted cash $ 88,676 $ 25,126 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. 50 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). Month Year Cash Distribution − Common Stockholders Cash Distribution − Membership Units Distribution Paid Pursuant to DRIP on Common Stock (a) Distribution Paid Pursuant to DRIP on Membership Units (a) Total Amount of Distribution January 2020 $ 5,663 $ 632 $ 5,734 $ 133 $ 12,162 February 2020 11,472 764 — — 12,236 March 2020 11,815 1,345 — — 13,160 April 2020 11,815 1,345 — — 13,160 May 2020 11,816 1,345 — — 13,161 June 2020 — — — — — July 2020 — — — — — August 2020 — — — — — September (b) 2020 — — — — — Total $ 52,581 $ 5,431 $ 5,734 $ 133 $ 63,879 (a) Distributions were paid in shares of common stock. (b) 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. 51 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, 2020 2019 Distributions: Paid in cash $ 58,145 $ 51,505 Reinvested in shares 5,734 46,078 Total Distributions $ 63,879 $ 97,583 Source of Distributions: Cash flow from operating activities $ 63,879 $ 97,583 FFO $ 148,783 $ 122,071 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 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 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. Inflation and increased costs may also have an adverse impact to our tenants and their creditworthiness if the increase in property-level expenses is greater than their increase in revenues. Off-Balance Sheet Arrangements 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 September 30, 2020 (in thousands). Year of Maturity Term Loans Revolving Credit Facility (a) Senior Notes Mortgages and Notes Payable Interest Expense (b) Tenant Improvement Allowances (c) Operating Leases Total Remainder of 2020 $ — $ — $ — $ 818 $ 16,149 $ 396 $ 176 $ 17,539 2021 — — — 18,006 63,329 1,585 711 83,631 2022 60,000 — — 2,907 61,485 — 686 125,078 2023 265,000 — — 8,173 56,096 — 505 329,774 2024 190,000 — — 2,260 50,481 — 120 242,861 Thereafter 450,000 — 475,000 76,912 129,228 — 2,411 1,133,551 Total $ 965,000 $ — $ 475,000 $ 109,076 $ 376,768 $ 1,981 $ 4,609 $ 1,932,434 (a) 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. (b) 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. (c) We expect to pay tenant improvement allowances out of cash flows from operations or from additional borrowings. 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. 52 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. Non-GAAP Measures FFO and AFFO We compute FFO in accordance with the standards established by the Board of Governors of Nareit, the worldwide representative voice for REITs and publicly traded real estate companies with an interest in the U.S. real estate and capital markets. Nareit defines FFO as GAAP net income or loss adjusted to exclude net gains (losses) from sales of certain depreciated real estate assets, depreciation and amortization expense from real estate assets, gains and losses from change in control, and impairment charges related to certain previously depreciated real estate assets. To derive 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. 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 front-loading or back-loading of payments, or significant rent-free periods. Therefore, we find it useful to evaluate rent on a contractual basis as it allows for comparison of existing rental rates to market rental rates. In situations where we 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 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. 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. 53 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, September 30, (in thousands, except per share data) 2020 2019 2020 2019 Net income $ 9,711 $ 25,038 $ 38,657 $ 57,402 Real property depreciation and amortization 31,343 28,392 102,452 77,989 Gain on sale of real estate (1,060 ) (12,585 ) (9,725 ) (16,772 ) Provision for impairment on investment in rental properties 14,732 2,435 17,399 3,452 FFO $ 54,726 $ 43,280 $ 148,783 $ 122,071 Capital improvements / reserves 1,662 — 1,662 (97 ) Straight-line rent adjustment (6,943 ) (5,499 ) (14,706 ) (15,882 ) Adjustment to provision for credit losses (15 ) — (142 ) — Cost of debt extinguishment 392 455 414 1,176 Amortization of debt issuance costs 819 611 2,528 1,761 Amortization of net mortgage premiums (34 ) (37 ) (106 ) (108 ) Gain on interest rate swaps and other non-cash interest expense (42 ) (41 ) (125 ) (163 ) Amortization of lease intangibles 151 (873 ) 32 (2,328 ) Internalization expenses 1,929 923 3,523 1,195 Stock-based compensation 796 — 796 — Severance — — 26 — Change in fair value of earnout liability (6,362 ) — (8,506 ) — Other losses (2 ) — 22 — AFFO $ 47,077 $ 38,819 $ 134,201 $ 107,625 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. 54 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) 2020 2019 2020 2019 Net income $ 9,711 $ 25,038 $ 38,657 $ 57,402 Depreciation and amortization 31,363 28,392 102,503 77,989 Interest expense 18,511 18,465 59,015 51,025 Income taxes 129 405 1,080 1,153 EBITDA $ 59,714 $ 72,300 $ 201,255 $ 187,569 Provision for impairment of investment in rental properties 14,732 2,435 17,399 3,452 Gain on sale of real estate (1,060 ) (12,585 ) (9,725 ) (16,772 ) EBITDAre $ 73,386 $ 62,150 $ 208,929 $ 174,249 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) 2020 2019 EBITDAre $ 73,386 $ 62,150 Adjustment for current quarter investment activity (a) — 8,898 Adjustment for current quarter disposition activity (b) (78 ) (549 ) Adjustment to exclude non-recurring expenses (income) (c) 1,929 923 Adjustment to exclude change in fair value of earnout liability (6,362 ) — Adjustment to exclude cost of debt extinguishments 392 455 Adjustment to exclude lease termination fees — (407 ) Adjusted EBITDAre $ 69,267 $ 71,470 Annualized EBITDAre $ 293,544 $ 248,600 Annualized Adjusted EBITDAre $ 277,068 $ 285,880 ( a ) 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. ( b ) 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. ( c ) 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 Debt Mortgages and notes payable, net $ 108,752 $ 112,562 Unsecured term notes, net 1,433,495 1,671,511 Revolving Credit Facility — 303,300 Debt issuance costs 6,829 8,862 Gross Debt 1,549,076 2,096,235 Cash and cash equivalents (101,787 ) (14,008 ) Restricted cash (7,200 ) (30,107 ) Net Debt $ 1,440,089 $ 2,052,120 Net Debt to Annualized EBITDAre 4.91x 8.25x Net Debt to Annualized Adjusted EBITDAre 5.20x 7.18x 55 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. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses as well as other disclosures in the financial statements. On an ongoing basis, management evaluates its estimates and assumptions; however, actual results may differ from these estimates and assumptions, which in turn could have a material impact on our financial statements. A summary of our significant accounting policies and procedures are included in Note 2, “Summary of Significant Accounting Policies,” 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 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. Item 3. Quantitative and Qualitat ive Disclosures About Market Risk We are exposed to certain market risks, one of the most predominant of which is a change in interest rates. Increases in interest rates can result in increased interest expense under our Revolving Credit Facility and other variable-rate debt. Increases in interest rates can also result in increased interest expense when our fixed rate debt matures and needs to be refinanced. We attempt to manage interest rate risk by entering into long-term fixed rate debt or by entering into interest rate swaps to convert certain variable-rate debt to a fixed rate. The interest rate swaps have been designated by us as cash flow hedges for accounting purposes and are reported at fair value. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes. Further information concerning our interest rate swaps can be found in Note 11 in our Condensed Consolidated Financial Statements contained elsewhere in this Quarterly Report on Form 10-Q. 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 $1.4 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 $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 September 30, 2020, our financial instruments were not exposed to significant market risk due to foreign currency exchange risk. 56 Item 4. Control s and Procedures Evaluation of Disclosure Controls and Procedures 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 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 September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 57 Part II – OTHER INFORMATION