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 2020 Annual Report on Form 10-K, as filed with the SEC on February 25, 2021. The “Risk Factors” of our 2020 Annual Report should not be construed as exhaustive and should be read in conjunction with other cautionary statements included elsewhere in this Quarterly Report on Form 10-Q. 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 short-term rent deferrals, abatements, free rent, or discounted rent periods 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. • “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; • “occupancy” or a specified percentage of our portfolio that is “occupied” means as of a specified date the quotient of (1) the total rentable 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; 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. 22 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 March 31, 2021, our portfolio has grown to 661 properties, with 660 properties located in 41 U.S. states and one property located in British Columbia, Canada. We focus on investing in real estate that is operated by creditworthy single tenants in industries characterized by positive business drivers and trends. We target properties that are an integral part of the tenants’ businesses and for which there are therefore opportunities to secure long-term net leases. Through long-term net leases, our tenants are able to retain operational control of their strategically important locations, while allocating their debt and equity capital to fund their core business operations rather than real estate ownership. - Diversified Portfolio . As of March 31, 2021, our portfolio comprised approximately 28.4 million rentable square feet of operational space, and was highly diversified based on property type, geography, tenant, and industry, and is cross-diversified within each ( e.g., property-type diversification within a geographic concentration): 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 10.2% of our ABR. o Tenant and Industry Diversity : Our properties are occupied by approximately 185 different commercial tenants who operate 171 different brands that are diversified across 55 differing industries, with no single tenant accounting for more than 2.4% of our ABR. - Strong In-Place Leases with Significant Remaining Lease Term . As of March 31, 2021, our portfolio was approximately 99.7% leased based on rentable square footage with an ABR weighted average remaining lease term of approximately 10.6 years, excluding renewal options. - Standard Contractual Base Rent Escalation . Approximately 98.2% of our leases have contractual rent escalations, with an ABR weighted average minimum increase of 2.1%. - Extensive Tenant Financial Reporting . Approximately 88.1% of our ABR is received from tenants that are required to provide us with specified financial information on a periodic basis. An additional 7.1% 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. 23 Real Estate Portfolio Information The following charts summarize our portfolio diversification by property type, tenant, brand, industry and geographic location as of March 31, 2021. The percentages below are calculated based on our ABR of $302.3 million as of March 31, 2021. Diversification by Property Type 24 Property Type # Properties ABR ($'000s) ABR as a % of Total Portfolio Square Feet ('000s) SF as a % of Total Portfolio Industrial Manufacturing 56 $ 42,455 14.0 % 7,732 27.3 % Distribution & Warehouse 31 40,250 13.3 % 7,414 26.1 % Food Processing 14 18,386 6.1 % 2,132 7.5 % Flex and R&D 7 16,934 5.6 % 1,457 5.1 % Cold Storage 4 12,578 4.2 % 933 3.3 % Services 18 7,168 2.4 % 429 1.5 % Industrial Total 130 137,771 45.6 % 20,097 70.8 % Healthcare Clinical 50 24,958 8.3 % 1,062 3.7 % Surgical 11 9,166 3.0 % 306 1.1 % Animal Health Services 20 8,209 2.7 % 314 1.1 % Life Science 9 7,994 2.6 % 550 1.9 % Healthcare Services 26 7,520 2.5 % 302 1.1 % Healthcare Total 116 57,847 19.1 % 2,534 8.9 % Restaurant Quick Service Restaurants 156 25,495 8.4 % 530 1.9 % Casual Dining 88 19,858 6.6 % 563 2.0 % Restaurant Total 244 45,353 15.0 % 1,093 3.9 % Retail Automotive 68 12,767 4.2 % 844 3.0 % General Merchandise 71 12,215 4.1 % 855 3.0 % Home Furnishings 15 6,932 2.3 % 860 3.0 % Retail Total 154 31,914 10.6 % 2,559 9.0 % Office Strategic Operations 7 13,639 4.5 % 1,021 3.6 % Corporate Headquarters 6 10,016 3.3 % 671 2.4 % Call Center 4 5,716 1.9 % 392 1.4 % Office Total 17 29,371 9.7 % 2,084 7.4 % Total 661 $ 302,256 100.0 % 28,367 100.0 % 25 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 2.4 % 196 0.7 % Jack's Family Restaurants LP * Quick Service Restaurants 43 7,026 2.3 % 147 0.5 % Axcelis Technologies, Inc. Flex and R&D 1 5,859 1.9 % 417 1.5 % Hensley & Company * Distribution & Warehouse 3 5,756 1.9 % 577 2.0 % Outback Steakhouse of Florida LLC *1 Casual Dining 22 5,192 1.7 % 140 0.5 % BluePearl Holdings, LLC * Animal Health Services 12 5,137 1.7 % 154 0.5 % Krispy Kreme Doughnut Corporation Quick Service Restaurants/ Food Processing 27 5,034 1.7 % 156 0.6 % Big Tex Trailer Manufacturing, Inc. * Automotive/Distribution & Warehouse/Manufacturing/ Corporate Headquarters 17 4,860 1.6 % 1,302 4.6 % Siemens Medical Solutions USA, Inc. & Siemens Corporation Manufacturing/Flex and R&D 2 4,718 1.6 % 545 1.9 % Nestle' Dreyer's Ice Cream Company Cold Storage 1 4,409 1.5 % 310 1.1 % Total Top 10 Tenants 152 55,297 18.3 % 3,944 13.9 % Arkansas Surgical Hospital Surgical 1 4,260 1.4 % 129 0.4 % Nationwide Mutual Insurance Company * Strategic Operations 2 4,165 1.4 % 407 1.4 % American Signature, Inc. Home Furnishings 6 4,142 1.4 % 474 1.7 % Cascade Aerospace Inc. Manufacturing 1 4,122 1.4 % 231 0.8 % Tractor Supply Company General Merchandise 15 3,872 1.3 % 300 1.1 % Aventiv Technologies, LLC Corporate Headquarters 1 3,819 1.2 % 154 0.5 % Fresh Express Incorporated Food Processing 1 3,819 1.2 % 335 1.2 % Bob Evans Restaurants, LLC * Casual Dining 22 3,566 1.2 % 116 0.4 % Zips Car Wash, LLC * Automotive 14 3,292 1.1 % 57 0.2 % Centene Management Company, LLC Strategic Operations 1 3,267 1.1 % 220 0.8 % Total Top 20 Tenants 216 $ 93,621 31.0 % 6,367 22.4 % 1 Tenant’s properties include 20 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 2.4 % 196 0.7 % Jack's Family Restaurants * Quick Service Restaurants 43 7,026 2.3 % 147 0.5 % Axcelis Flex and R&D 1 5,859 1.9 % 417 1.5 % Hensley * Distribution & Warehouse 3 5,756 1.9 % 577 2.0 % Bob Evans Farms *1 Casual Dining/Food Processing 23 5,449 1.8 % 292 1.0 % Wendy's # Quick Service Restaurants 38 5,433 1.8 % 113 0.4 % BluePearl Veterinary Partners * Animal Health Services 12 5,137 1.7 % 154 0.5 % Krispy Kreme Quick Service Restaurants/ Food Processing 27 5,034 1.7 % 156 0.6 % Big Tex Trailers * Automotive/Distribution & Warehouse/Manufacturing/ Corporate Headquarters 17 4,860 1.6 % 1,302 4.6 % Siemens Manufacturing/Flex and R&D 2 4,718 1.6 % 545 1.9 % Total Top 10 Brands 190 56,578 18.7 % 3,899 13.7 % Outback Steakhouse * Casual Dining 20 4,492 1.5 % 126 0.5 % Nestle' Cold Storage 1 4,409 1.5 % 310 1.1 % Arkansas Surgical Hospital Surgical 1 4,260 1.4 % 129 0.4 % Taco Bell # Quick Service Restaurants 32 4,226 1.4 % 82 0.3 % Nationwide Mutual Insurance Co. * Strategic Operations 2 4,165 1.4 % 407 1.4 % Value City Furniture Home Furnishings 6 4,142 1.4 % 474 1.7 % Cascade Aerospace Manufacturing 1 4,122 1.4 % 231 0.8 % Tractor Supply Co. General Merchandise 15 3,872 1.3 % 300 1.1 % Securus Technologies Corporate Headquarters 1 3,819 1.2 % 154 0.5 % Chiquita Food Processing 1 3,819 1.2 % 335 1.2 % Total Top 20 Brands 270 $ 97,904 32.4 % 6,447 22.7 % * 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 22 Bob Evans Restaurants, LLC properties. 26 Diversification by Industry Industry # Properties ABR ($'000s) ABR as a % of Total Portfolio Square Feet ('000s) ABR as a % of Total Portfolio Restaurants 244 $ 46,018 15.2 % 1,118 4.0 % Healthcare Facilities 88 44,345 14.7 % 1,738 6.1 % Food Distributors 7 12,907 4.3 % 1,556 5.5 % Auto Parts & Equipment 39 12,369 4.1 % 2,387 8.4 % Specialized Consumer Services 47 11,790 3.9 % 720 2.5 % Packaged Foods & Meats 6 11,371 3.7 % 1,130 4.0 % Metal & Glass Containers 8 9,686 3.2 % 2,206 7.8 % Healthcare Services 19 9,152 3.0 % 522 1.8 % Home Furnishing Retail 16 8,711 2.9 % 1,149 4.1 % Aerospace & Defense 6 7,760 2.6 % 921 3.3 % Distributors 12 6,909 2.3 % 966 3.4 % Specialty Stores 17 6,913 2.3 % 888 3.1 % Electronic Components 2 6,658 2.2 % 466 1.7 % Air Freight & Logistics 3 6,494 2.1 % 436 1.5 % Industrial Machinery 16 6,021 2.0 % 1,174 4.1 % Other (40 industries) 125 95,152 31.5 % 10,894 38.4 % Untenanted properties 6 — — 96 0.3 % Total 661 $ 302,256 100.0 % 28,367 100.0 % 27 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 54 $ 30,771 10.2 % 3,207 11.3 % VA 13 $ 4,368 1.4 % 110 0.4 % IL 25 19,339 6.4 % 1,976 7.0 % WA 15 4,155 1.4 % 150 0.5 % CA 11 15,735 5.2 % 1,554 5.5 % MO 9 3,882 1.3 % 733 2.6 % FL 46 15,663 5.2 % 801 2.8 % KY 17 3,473 1.2 % 167 0.6 % WI 32 15,655 5.2 % 1,611 5.7 % LA 3 3,128 1.0 % 175 0.6 % MI 35 14,760 4.9 % 1,439 5.1 % NE 6 2,959 1.0 % 509 1.8 % OH 35 14,125 4.7 % 1,369 4.8 % MD 4 2,882 1.0 % 293 1.0 % IN 30 12,830 4.2 % 1,765 6.2 % MS 8 2,736 0.9 % 334 1.2 % NC 34 12,134 4.0 % 1,245 4.4 % NM 8 2,731 0.9 % 97 0.3 % MN 20 11,501 3.8 % 1,757 6.2 % IA 4 2,704 0.9 % 622 2.2 % NY 26 10,323 3.4 % 680 2.4 % SC 13 2,466 0.8 % 308 1.1 % TN 42 10,225 3.4 % 390 1.4 % UT 3 2,328 0.8 % 280 1.0 % MA 4 9,994 3.3 % 1,009 3.5 % CT 2 1,653 0.6 % 55 0.2 % PA 16 9,785 3.2 % 1,146 4.0 % WV 8 1,642 0.5 % 36 0.1 % AL 50 8,761 2.9 % 206 0.7 % MT 7 1,544 0.5 % 43 0.2 % AZ 8 8,553 2.8 % 761 2.7 % CO 3 1,434 0.5 % 94 0.3 % AR 11 7,380 2.4 % 282 1.0 % NV 2 1,311 0.4 % 81 0.3 % GA 19 6,554 2.2 % 976 3.4 % ND 2 933 0.3 % 28 0.1 % OK 18 6,440 2.1 % 786 2.8 % DE 3 663 0.2 % 35 0.1 % KS 10 5,407 1.8 % 639 2.3 % WY 1 307 0.1 % 21 0.1 % NJ 3 4,900 1.6 % 366 1.3 % Total US 660 $ 298,134 98.6 % 28,136 99.2 % Total Canada 1 4,122 1.4 % 231 0.8 % Grand Total 661 $ 302,256 100.0 % 28,367 100.0 % 28 Lease Expirations As of March 31, 2021, the ABR weighted average remaining term of our leases was approximately 10.6 years. Less than 5% of the properties in our portfolio are subject to leases without at least one renewal option. Approximately 44.9% of our rental revenue was derived from leases that will expire after 2030, and no more than 9.0% of our rental revenue was derived from leases that expire in any single year prior to 2030. The following chart sets forth our lease expirations based upon the terms of the leases in place as of March 31, 2021. Expiration Year 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041+ Number of properties 4 3 6 11 19 34 27 35 61 86 21 44 41 31 14 71 24 33 12 41 37 Number of leases 5 4 7 11 22 26 23 29 29 42 16 26 15 16 10 8 9 29 7 7 5 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 2021 4 $ 964 0.3 % 46 0.2 % 2022 3 2,409 0.8 % 86 0.3 % 2023 6 4,841 1.6 % 515 1.8 % 2024 11 13,662 4.5 % 1,689 6.0 % 2025 19 7,833 2.6 % 682 2.4 % 2026 34 18,586 6.1 % 1,404 4.9 % 2027 27 22,917 7.6 % 2,010 7.1 % 2028 35 27,171 9.0 % 2,736 9.6 % 2029 61 19,357 6.4 % 2,538 8.9 % 2030 86 49,088 16.2 % 4,927 17.4 % 2031 21 7,145 2.4 % 725 2.6 % 2032 44 26,225 8.7 % 3,014 10.6 % 2033 41 16,385 5.4 % 1,693 6.0 % 2034 31 5,479 1.8 % 361 1.3 % 2035 14 10,498 3.5 % 1,471 5.2 % 2036 71 16,914 5.6 % 969 3.4 % 2037 24 17,256 5.7 % 1,367 4.8 % 2038 33 6,805 2.3 % 306 1.1 % 2039 12 8,988 3.0 % 933 3.3 % 2040 41 6,887 2.3 % 347 1.2 % Thereafter 37 12,846 4.2 % 452 1.6 % Untenanted properties 6 — — 96 0.3 % Total 661 $ 302,256 100.0 % 28,367 100.0 % 29 Results of Operations The following discussion includes the results of our operations for the periods presented. We have included an analysis of the three months ended March 31, 2021, as compared to the three months ended December 31, 2020 and March 31, 2020. We have included the comparison of the immediately preceding quarter given our Internalization and initial public offering’s (“IPO”) significant impact to our results of operations and financial condition, and therefore comparability, of the prior year periods. We believe the quarter-over-quarter analysis is beneficial to investors as it compares the results of operations on a more comparable basis, and aligns with our strategic growth priorities under a different leverage and liquidity profile going forward. Three Months Ended March 31, 2021 Compared to Three Months Ended December 31, 2020 Lease Revenues, net For the Three Months Ended March 31, December 31, Increase/(Decrease) (in thousands) 2021 2020 $ % Contractual rental amounts billed for operating leases $ 73,245 $ 72,558 $ 687 0.9 % Adjustment to recognize contractual operating lease billings on a straight-line basis 4,367 4,256 111 2.6 % Variable rental amounts earned 91 455 (364 ) (80.0 )% Earned income from direct financing leases 730 756 (26 ) (3.4 )% Earned income from sales-type leases 14 5 9 >100% Operating expenses billed to tenants 4,388 4,389 (1 ) (0.0 )% Other income from real estate transactions 5 (16 ) 21 >(100)% Adjustment to revenue recognized for uncollectible rental amounts billed (142 ) (112 ) (30 ) 26.8 % Total Lease revenues, net $ 82,698 $ 82,291 $ 407 0.5 % The increase in Lease revenues, net was primarily attributable to growth in our real estate portfolio through accretive property acquisitions during the fourth quarter of 2020. During the fourth quarter of 2020, we invested $100.3 million, excluding capitalized acquisition costs, in 19 properties at a weighted average initial cash cap rate of 6.9%. Most of these acquisitions closed during the month of December, and therefore did not materially contribute to Lease revenues, net for the three months ended December 31, 2020. Operating Expenses For the Three Months Ended March 31, December 31, Increase/(Decrease) (in thousands) 2021 2020 $ % Operating expenses Depreciation and amortization $ 30,713 $ 30,182 $ 531 1.8 % Property and operating expense 4,605 4,986 (381 ) (7.6 )% General and administrative 10,633 9,232 1,401 15.2 % Provision for impairment of investment in rental properties 2,012 1,678 334 19.9 % Total operating expenses $ 47,963 $ 46,078 $ 1,885 4.1 % General and administrative The increase in general and administrative expenses mainly reflects increased severance associated with the departure of an executive officer during the three months ended March 31, 2021. 30 Provision for impairment of investment in rental properties During the three months ended March 31, 2021, we recognized $2.0 million of impairment on our investments in rental properties, compared to $1.7 million during the three months ended December 31, 2020. The following table presents the impairment charges for their respective period: For the Three Months Ended March 31, December 31, (in thousands, except number of properties) 2021 2020 Number of properties 1 1 Carrying value prior to impairment charge 2,818 $ 4,228 Fair value 806 2,550 Impairment charge $ 2,012 $ 1,678 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 March 31, December 31, Increase/(Decrease) (in thousands) 2021 2020 $ % Other income (expenses) Interest income $ 5 $ 4 $ 1 25.0 % Interest expense (16,108 ) (17,123 ) (1,015 ) (5.9 )% Cost of debt extinguishment (126 ) (3 ) 123 >100% Gain on sale of real estate 4,733 5,260 (527 ) (10.0 )% Income taxes (413 ) 141 (554 ) >(100)% Internalization expenses — (182 ) (182 ) (100.0 )% Change in fair value of earnout liability 1,124 (6,706 ) 7,830 >100% Other income (expenses) 10 15 (5 ) (33.3 )% Interest expense The decrease in interest expense reflects a decrease in our weighted average cost of borrowings combined with decreased average outstanding borrowings in the comparable period. In January 2021, we received an initial credit rating of BBB with a stable outlook from S&P Global Ratings (“S&P”), which had the effect of lowering the applicable margin on our then existing $965 million of bank loans by 25 basis points beginning in February 2021, as well as a 20 basis point decrease in the applicable margin on Revolving Credit Facility borrowings. We also repriced our 2026 Unsecured Term Loan in March 2021, reducing the applicable margin by an additional 60 basis points, and simultaneously repaid $50 million. 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 us 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 months ended March 31, 2021, reflects a decrease in our share price as compared to December 31, 2020. Net income and Net earnings per diluted share For the Three Months Ended March 31, December 31, Increase/(Decrease) (in thousands, except per share data) 2021 2020 $ % Net income $ 23,960 $ 17,619 $ 6,341 36.0 % Net earnings per diluted share 0.15 0.11 0.04 36.4 % 31 The increase in net income is primarily due to a $7.8 million increase in income from the change in fair value of our earnout liability and a $1.0 million decrease in interest expense. These factors were partially offset by a $1.4 million increase in general and administrative expenses. 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. Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 Lease Revenues, net For the Three Months Ended March 31, Increase/(Decrease) (in thousands) 2021 2020 $ % Contractual rental amounts billed for operating leases $ 73,245 $ 72,828 $ 417 0.6 % Adjustment to recognize contractual operating lease billings on a straight-line basis 4,367 1,665 2,702 >100% Variable rental amounts earned 91 3 88 >100% Earned income from direct financing leases 730 987 (257 ) (26.0 )% Earned income from sales-type leases 14 — 14 100.0 % Operating expenses billed to tenants 4,388 3,732 656 17.6 % Other income from real estate transactions 5 49 (44 ) (89.8 )% Adjustment to revenue recognized for uncollectible rental amounts billed (142 ) (1,033 ) 891 (86.3 )% Total Lease revenues, net $ 82,698 $ 78,231 $ 4,467 5.7 % The increase in Lease revenues, net, was primarily attributable to growth in our real estate portfolio through accretive property acquisitions during 2020. During the fourth quarter of 2020, we invested $100.3 million, excluding capitalized acquisition costs, in 19 properties at a weighted average initial cash cap rate of 6.9%. Most of these acquisitions closed during the month of December, and therefore did not contribute to Lease revenues, net for the three months ended March 31, 2020. Operating Expenses For the Three Months Ended March 31, Increase/(Decrease) (in thousands) 2021 2020 $ % Operating expenses Depreciation and amortization $ 30,713 $ 31,219 $ (506 ) (1.6 )% Asset management fees — 2,461 (2,461 ) (100.0 )% Property management fees — 1,275 (1,275 ) (100.0 )% Property and operating expense 4,605 4,115 490 11.9 % General and administrative 10,633 5,842 4,791 82.0 % Provision for impairment of investment in rental properties 2,012 2,133 (121 ) (5.7 )% Total operating expenses $ 47,963 $ 47,045 $ 918 2.0 % Asset management fees and Property management fees The decrease in asset management fees and property management fees was due to the completion of the Internalization in February 2020, which terminated the associated agreements with our third-party manager. 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, along with associated general and administrative expenses for the three months ended March 31, 2020. 32 Provision for impairment of investment in rental properties During the three months ended March 31, 2021, we recognized $2.0 million of impairment on our investments in rental properties, compared to $2.1 million during the three months ended March 31, 2020. The following table presents the impairment charges for their respective periods: For the Three Months Ended March 31, (in thousands, except number of properties) 2021 2020 Number of properties 1 1 Carrying value prior to impairment charge $ 2,818 $ 22,133 Fair value 806 20,000 Impairment charge $ 2,012 $ 2,133 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 March 31, Increase/(Decrease) (in thousands) 2021 2020 $ % Other income (expenses) Interest income $ 5 $ 9 $ (4 ) (44.4 )% Interest expense (16,108 ) (20,991 ) (4,883 ) (23.3 )% Cost of debt extinguishment (126 ) (22 ) 104 >100% Gain on sale of real estate 4,733 7,619 (2,886 ) (37.9 )% Income taxes (413 ) (549 ) (136 ) (24.8 )% Internalization expenses — (1,205 ) (1,205 ) (100.0 )% Change in fair value of earnout liability 1,124 (4,177 ) 5,301 >100% Other income (expenses) 10 (22 ) 32 >100% Interest expense The decrease in interest expense primarily reflects a decrease in our average outstanding borrowings, combined with a decrease in our weighted average cost of borrowings. In September 2020, we used the proceeds of our IPO to repay $456.7 million of outstanding borrowings, including accrued interest, significantly reducing our leverage profile. In January 2021, we received an initial credit rating of BBB with a stable outlook from S&P, which had the effect of lowering the applicable margin on our then existing $965 million of bank loans by 25 basis points beginning in February 2021. We also repriced and partially repaid our 2026 Unsecured Term Loan in March 2021, reducing the applicable margin and principal balance by an additional 60 basis points and $50 million, respectively. 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 March 31, 2021, we recognized gains of $4.7 million on the sale of eight properties, compared to gains of $7.6 million on the sale of 10 properties during the three months ended March 31, 2020. Internalization expenses During the three months ended March 31, 2020, we incurred $1.2 million of third-party fees and consulting expenses associated with the Internalization that closed on February 7, 2020. We did not incur these expenses during the three months ended March 31, 2021. Change in fair value of earnout liability The change in the fair value of the earnout liability during the three months ended March 31, 2021, reflects a decrease in our period end share price. 33 Net income and Net earnings per diluted share For the Three Months Ended March 31, Increase/(Decrease) (in thousands, except per share data) 2021 2020 $ % Net income $ 23,960 $ 11,848 $ 12,112 >100% Net earnings per diluted share 0.15 0.10 0.05 50.0 % The increase in net income, is primarily due to a $5.3 million increase in income from the change in fair value of our earnout liability, a $4.9 million decrease in interest expense, revenue growth of $4.5 million, and a $1.2 million decrease in internalization expenses. These factors were partially offset by a $2.9 million decrease in the gain on sale of real estate. GAAP net income includes items such as gain or loss on sale of real estate and provisions for impairment, among others, which can vary from quarter to quarter and impact period-over-period comparisons. Liquidity and Capital Resources General We acquire real estate using a combination of debt and equity capital and with cash from operations that is not otherwise distributed to our stockholders. Our focus is on maximizing the risk-adjusted return to our stockholders through an appropriate balance of debt and equity in our capital structure. We are committed to maintaining an investment grade balance sheet through active management of our leverage profile and overall liquidity position. We believe our leverage strategy has allowed us to take advantage of the lower cost of debt while simultaneously strengthening our balance sheet, as evidenced by our investment grade credit ratings of BBB from S&P and Baa3 from Moody’s Investors Service (“Moody’s”). We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, a non-GAAP financial measure, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with lenders and with rating agencies regarding our credit rating. We seek to maintain on a sustained basis a Net Debt to Annualized Adjusted EBITDAre ratio that is generally less than 6.0x. As of March 31, 2021, we had total debt outstanding of $1.5 billion, Net Debt of $1.5 billion, and a Net Debt to Annualized Adjusted EBITDAre ratio of approximately 5.25x. 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. As detailed in the contractual obligations table below, we have approximately $61.7 million of expected obligations due to be paid throughout the remainder of 2021, primarily consisting of $17.2 million of mortgage maturities, and $43.1 million of interest expense due, including the impact of our interest rate swaps. We expect our cash provided by operating activities, as discussed below, will be sufficient to pay for our current obligations including interest expense on our borrowings. We expect to either repay the maturing mortgages with available cash on hand generated from our results of operations or borrowings under our Revolving Credit Facility, or refinance with property-level borrowings. 34 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 credit facilities, and senior unsecured notes. Further, we anticipate having the ability to access the public unsecured bond market, which was historically largely unavailable to us prior to 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. Our $60 million 2022 Unsecured Term Loan has a short-term maturity date of February 2022. We expect to either repay the 2022 Unsecured Term Loan with available cash on hand, or with borrowings under our Revolving Credit Facility. With outstanding borrowings of $15 million at March 31, 2021, we have $885 million of available capacity under our Revolving Credit Facility. We expect to meet our long-term liquidity requirements primarily from borrowings under our Revolving Credit Facility, future debt and equity financings, and proceeds from limited sales of our properties. Our ability to access these capital sources may be impacted by unfavorable market conditions, particularly in the debt and equity capital markets, that are outside of our control. In addition, our success will depend on our operating performance, our borrowing restrictions, our degree of leverage, and other factors. Our acquisition growth strategy significantly depends on our ability to obtain acquisition financing on favorable terms. We seek to reduce the risk that long-term debt capital may be unavailable to us by strengthening our balance sheet by investing in real estate with creditworthy tenants and lease guarantors, and by maintaining an appropriate mix of debt and equity capitalization. We also, from time to time, obtain or assume non-recourse mortgage financing from banks and insurance companies secured by mortgages on the corresponding specific property. Mortgages, however, are not currently a strategic focus of the active management of our capital structure. Equity Capital Resources On September 21, 2020, we completed our IPO and issued 37 million shares of stock for net proceeds of $588.3 million, including shares issued subsequently pursuant to the underwriters’ partial exercise of their over-allotment option. 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. As we continue to invest in accretive real estate properties, we expect to balance our debt and equity capitalization, while maintaining a Net Debt to Annualized Adjusted EBITDAre ratio below 6.0x on a sustained basis, through the anticipated use of follow-on equity offerings and an at-the-market (“ATM”) program. As of March 31, 2021, we have successfully deployed the remaining proceeds from our IPO. Unsecured Indebtedness and Capital Markets Activities as of and for the Three Months Ended March 31, 2021 The following table sets forth our outstanding Revolving Credit Facility, unsecured term loans and Senior Notes at March 31, 2021. (in thousands, except interest rates) Outstanding Balance Interest Rate Maturity Date Revolving Credit Facility $ 15,000 daily LIBOR + 1.00% Sept. 2023 2022 Unsecured Term Loan 60,000 one-month LIBOR + 1.00% Feb. 2022 2023 Unsecured Term Loan 265,000 one-month LIBOR + 1.10% Jan. 2023 2024 Unsecured Term Loan 190,000 one-month LIBOR + 1.00% Jun. 2024 2026 Unsecured Term Loan 400,000 one-month LIBOR + 1.00% Feb. 2026 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 1,405,000 As announced on January 21, 2021, S&P assigned the Company an initial credit rating of 'BBB' with a stable outlook. As a result of this credit rating, the margin of our existing bank loans was reduced by 25 basis points beginning in February 2021, the applicable margin on borrowings under our Revolving Credit Facility was reduced by 20 basis points, and our access to a diverse set of advantageous funding sources should expand. During the quarter, Moody’s reaffirmed our ‘Baa3’ credit rating and updated their outlook from ‘stable’ to ‘positive. 35 On March 12, 2021, we amended our $450 million 2026 Unsecured Term Loan, reducing the applicable margin an additional 60 basis points based on our current credit rating. In connection with the amendment, we repaid in full the outstanding commitments for two lenders and elected to repay an additional $10 million in outstanding principal, bringing the outstanding balance to $400 million as of March 31 , 2021. On March 31, 2021, we drew $15 million on our Revolving Credit Facility to fund an acquisition. We have $885 million of remaining capacity on our Revolving Credit Facility as of March 31, 2021. Debt Covenants We are subject to various covenants and financial reporting requirements pursuant to our debt facilities, which are summarized below. As of March 31, 2021, we believe we were in compliance with all of our covenants on all outstanding borrowings. In the event of default, either through default on payments or breach of covenants, we may be restricted from paying dividends to our stockholders in excess of dividends required to maintain our REIT qualification. For each of the previous three years, we paid dividends out of our cash flows from operations in excess of the distribution amounts required to maintain our REIT qualification. 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 Derivative Instruments and Hedging Activities We are exposed to interest rate risk arising from changes in interest rates on the floating-rate borrowings under our unsecured credit facilities and a certain mortgage. Borrowings pursuant to our unsecured credit facilities and the mortgage bear interest at floating rates based on LIBOR plus an applicable margin. Accordingly, fluctuations in market interest rates may increase or decrease our interest expense, which will in turn, increase or decrease our net income and cash flow. We attempt to manage our interest rate risk by entering into interest rate swaps. As of March 31, 2021, we had 32 interest rate swaps outstanding in an aggregate notional amount of $824.7 million. Under these agreements, we receive monthly payments from the counterparties equal to the related variable interest rates multiplied by the outstanding notional amounts. In turn, we pay the counterparties each month an amount equal to a fixed interest rate multiplied by the related outstanding notional amounts. The intended net impact of these transactions is that we pay a fixed interest rate on our variable-rate borrowings. The interest rate swaps have been designated by us as cash flow hedges for accounting purposes and are reported at fair value. We assess, both at inception and on an ongoing basis, the effectiveness of our qualifying cash flow hedges. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes. Cash Flows Cash and cash equivalents and restricted cash totaled $18.4 million, $110.7 million, and $96.7 million at March 31, 2021, December 31, 2020 and March 31, 2020, respectively. The table below shows information concerning cash flows for the three months ended March 31, 2021, December 31, 2020, and March 31, 2020: For the Three Months Ended (In thousands) March 31, 2021 December 31, 2020 March 31, 2020 Net cash provided by operating activities $ 51,780 $ 46,064 $ 40,319 Net cash (used in) provided by investing activities (67,661 ) (76,443 ) 4,474 Net cash (used in) provided by financing activities (76,497 ) 32,120 31,608 Increase in cash and cash equivalents and restricted cash $ (92,378 ) $ 1,741 $ 76,401 The increase in net cash provided by operating activities during the three months ended March 31, 2021 as compared to the three months ended December 31, 2020 and March 31, 2020, was mainly due to growth in our real estate portfolio and cost savings associated with the Internalization. The change in net cash (used in) provided by investing activities during the three months ended March 31, 2021 as compared to the three months ended December 31, 2020, was mainly due to decreased acquisition volume quarter-over-quarter. The change in net cash (used in) provided by investing activities during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, was mainly due to increased acquisition volume and decreased proceeds from disposal of properties in 2021 offset by decrease in cash paid in connection with the Internalization. 36 The change in net cash (used in) provided by financing activities during the three months ended March 31, 2021 as compared to the three months ended December 31, 2020 mainly reflects a net repayment of debt in 2021 as compared to net proceeds from our IPO in 2020. During the three months ended March 31, 2021, we made a $50 million paydown on our 2026 Unsecured Term Loan using cash on hand and remaining proceeds from our IPO in 2020. During the three months ended December 31, 2020 our underwriters partially exercised their overallotment option, resulting in the issuance of an additional 3.5 million shares for net proceeds of approximately $55.9 million. The change in net cash (used in) provided by financing activities during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, mainly reflects a net repayment of debt in 2021, compared to net borrowings during the three months ended March 31, 2020. Contractual Obligations The following table provides information with respect to our contractual commitments and obligations as of March 31, 2021 (in thousands). Refer to the discussion in the Liquidity and Capital Resources section above for further discussion over our short and long-term obligations. 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 2021 $ — $ — $ — $ 17,169 $ 43,052 $ 903 $ 548 $ 61,672 2022 60,000 — — 2,907 55,574 — 690 119,171 2023 265,000 15,000 — 7,582 51,007 — 505 339,094 2024 190,000 — — 2,260 45,921 — 120 238,301 2025 — — — 20,195 42,362 — 121 62,678 Thereafter 400,000 — 475,000 56,717 82,083 — 2,290 1,016,090 Total $ 915,000 $ 15,000 $ 475,000 $ 106,830 $ 319,999 $ 903 $ 4,274 $ 1,837,006 (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 March 31, 2021. 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 March 31, 2021 and December 31, 2020, investment in rental property of $172.4 million and $173.5 million, respectively, was pledged as collateral against our mortgages. Additionally, we are a party to three separate tax protection agreements with the contributing members of three distinct UPREIT transactions and we entered into the Founding Owners’ Tax Protection Agreement in connection with the Internalization. The tax protection agreements require us to indemnify the beneficiaries in the event of a sale, exchange, transfer, or other disposal of the contributed property, and in the case of the Founding Owners’ Tax Protection Agreement, the entire Company, in a taxable transaction that would cause such beneficiaries to recognize a gain that is protected under the agreements, subject to certain exceptions. Based on values as of March 31, 2021, taxable sales of the applicable properties would trigger liability under the four agreements of approximately $22.3 million. Based on information available, we do not believe that the events resulting in damages as detailed above have occurred or are likely to occur in the foreseeable future. Accordingly, we have excluded these commitments from the contractual commitments table above. 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, the change in fair value of our earnout liability, cost of debt extinguishments, amortization of lease intangibles, amortization of debt issuance costs, amortization of net mortgage premiums, (gain) loss on interest rate swaps and other non-cash interest expense, realized gains or losses on foreign currency transactions, internalization expenses, stock-based compensation, severance, extraordinary items, and other specified non-cash items. We believe that excluding such items assists 37 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 granted short-term rent deferrals as a result of the COVID-19 pandemic, and such deferrals were probable of collection and expected to be repaid within a short term, we continued to recognize the same amount of GAAP lease revenues each period. Consistent with GAAP lease revenues, the short-term deferrals associated with COVID-19 did not impact our AFFO. We further exclude the change in fair value of our earnout liability, costs or gains recorded on the extinguishment of debt, non-cash interest expense and gains, the amortization of debt issuance costs, net mortgage premiums, and lease intangibles, realized gains and losses on foreign currency transactions, internalization expenses, stock-based compensation and severance, as these items are not indicative of ongoing operational results. We use AFFO as a measure of our performance when we formulate corporate goals. FFO is used by management, investors, and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers, primarily because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. We believe that AFFO is a useful supplemental measure for investors to consider because it will help them to better assess our operating performance without the distortions created by non-cash revenues or expenses. FFO and AFFO may not be comparable to similarly titled measures employed by other REITs, and comparisons of our FFO and AFFO with the same or similar measures disclosed by other REITs may not be meaningful. Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments to FFO that we use to calculate AFFO. In the future, the SEC, Nareit, or another regulatory body may decide to standardize the allowable adjustments across the REIT industry and in response to such standardization we may have to adjust our calculation and characterization of AFFO accordingly. The following table reconciles net income (which is the most comparable GAAP measure) to FFO and AFFO: For the Three Months Ended (in thousands, except per share data) March 31, 2021 December 31, 2020 March 31, 2020 Net income $ 23,960 $ 17,619 $ 11,848 Real property depreciation and amortization 30,690 30,161 31,210 Gain on sale of real estate (4,733 ) (5,260 ) (7,619 ) Provision for impairment on investment in rental properties 2,012 1,678 2,133 FFO $ 51,929 $ 44,198 $ 37,572 Straight-line rent adjustment (4,632 ) (5,125 ) (1,612 ) Adjustment to provision for credit losses (1 ) (6 ) (17 ) Cost of debt extinguishment 126 3 22 Amortization of debt issuance costs 914 917 888 Amortization of net mortgage premiums (35 ) (36 ) (35 ) Gain on interest rate swaps and other non-cash interest expense (41 ) (41 ) (42 ) Amortization of lease intangibles (728 ) (1,150 ) (1,138 ) Internalization expenses — 182 1,205 Stock-based compensation 1,769 1,193 — Severance 1,243 68 26 Change in fair value of earnout liability (1,124 ) 6,706 4,177 Other expenses (10 ) (15 ) 22 AFFO $ 49,410 $ 46,894 $ 41,068 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 38 performance under GAAP, and our EBITDA and EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our EBITDA and EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP. We are focused on a disciplined and targeted acquisition strategy, together with active asset management that includes selective sales of properties. We manage our leverage profile using a ratio of Net Debt to Annualized Adjusted EBITDAre, each discussed further below, which we believe is a useful measure of our ability to repay debt and a relative measure of leverage, and is used in communications with our lenders and rating agencies regarding our credit rating. As we fund new acquisitions using our unsecured Revolving Credit Facility, our leverage profile and Net Debt will be immediately impacted by current quarter acquisitions. However, the full benefit of EBITDAre from newly acquired properties will not be received in the same quarter in which the properties are acquired. Additionally, EBITDAre for the quarter includes amounts generated by properties that have been sold during the quarter. Accordingly, the variability in EBITDAre caused by the timing of our acquisitions and dispositions can temporarily distort our leverage ratios. We adjust EBITDAre (“Adjusted EBITDAre”) for the most recently completed quarter (i) to recalculate as if all acquisitions and dispositions had occurred at the beginning of the quarter, (ii) to exclude certain GAAP income and expense amounts that are either non-cash, such as cost of debt extinguishments or the change in fair value of our earnout liability, or that we believe are one time, or unusual in nature because they relate to unique circumstances or transactions that had not previously occurred and which we do not anticipate occurring in the future, and (iii) to eliminate the impact of lease termination fees and other items that are not a result of normal operations. We then annualize quarterly Adjusted EBITDAre by multiplying it by four (“Annualized Adjusted EBITDAre”). You should not unduly rely on this measure as it is based on assumptions and estimates that may prove to be inaccurate. Our actual reported EBITDAre for future periods may be significantly different from our Annualized Adjusted EBITDAre. Adjusted EBITDAre and Annualized Adjusted EBITDAre are not measurements of performance under GAAP, and our Adjusted EBITDAre and Annualized Adjusted EBITDAre may not be comparable to similarly titled measures of other companies. You should not consider our Adjusted EBITDAre and Annualized Adjusted EBITDAre as alternatives to net income or cash flows from operating activities determined in accordance with GAAP. The following table reconciles net income (which is the most comparable GAAP measure) to EBITDA and EBITDAre: For the Three Months Ended (in thousands) March 31, 2021 December 31, 2020 March 31, 2020 Net income $ 23,960 $ 17,619 $ 11,848 Depreciation and amortization 30,713 30,182 31,219 Interest expense 16,108 17,123 20,991 Income taxes 413 (141 ) 549 EBITDA $ 71,194 $ 64,783 $ 64,607 Provision for impairment of investment in rental properties 2,012 1,678 2,133 Gain on sale of real estate (4,733 ) (5,260 ) (7,619 ) EBITDAre $ 68,473 $ 61,201 $ 59,121 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 (in thousands) March 31, 2021 December 31, 2020 March 31, 2020 EBITDAre $ 68,473 $ 61,201 $ 59,121 Adjustment for current quarter acquisition activity (a) 1,365 1,703 — Adjustment for current quarter disposition activity (b) (278 ) (318 ) (285 ) Adjustment to exclude non-recurring and other expenses (c) 2,100 182 1,205 Adjustment to exclude change in fair value of earnout liability (1,124 ) 6,706 4,177 Adjustment exclude write-off of accrued rental income 442 242 3,993 Adjustment to exclude cost of debt extinguishments 126 — 22 Adjusted EBITDAre $ 71,104 $ 69,716 $ 68,233 Annualized EBITDAre $ 273,888 $ 244,805 $ 236,484 Annualized Adjusted EBITDAre $ 284,414 $ 278,867 $ 272,932 (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 include $1.2 million of severance and $0.9 million of accelerated stock-based compensation associated with the departure of executive officers in 2021, and expense directly associated with the Internalization in 2020. 39 Net Debt , Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre We define Net Debt as gross debt (total reported debt plus 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 used to repay debt, compared to our performance as measured using EBITDAre, and is used in communications with lenders and rating agencies regarding our credit rating. The following table reconciles total debt (which is the most comparable GAAP measure) to Net Debt, and presents the ratio of Net Debt to Annualized EBITDAre and Net Debt to Annualized Adjusted EBITDAre, respectively: (in thousands) March 31, 2021 December 31, 2020 March 31, 2020 Debt Revolving Credit Facility $ 15,000 $ — $ 353,300 Unsecured term notes, net 1,383,283 1,433,796 1,672,587 Mortgages and notes payable, net 106,559 107,382 110,464 Debt issuance costs 6,988 6,489 7,767 Gross Debt 1,511,830 1,547,667 2,144,118 Cash and cash equivalents (10,205 ) (100,486 ) (93,151 ) Restricted cash (8,145 ) (10,242 ) (3,561 ) Net Debt $ 1,493,480 $ 1,436,939 $ 2,047,406 Net Debt to Annualized EBITDAre 5.45x 5.87x 8.66x Net Debt to Annualized Adjusted EBITDAre 5.25x 5.15x 7.50x Critical Accounting 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 three months ended March 31, 2021, to the items that we disclosed as our critical accounting policies in our 2020 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.