What changed in this filing

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Item 1A. Risk Factors

2021-05-04 compared with 2020-11-03 · 41 added, 55 removed, 0 unchanged (100% of the section changed)

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the following risk factor, which supplements and should be read in conjunction with the information appearing under "Item 1A.

Risk Factors" in Part I, Item 1A.

Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The COVID-19 pandemic has disrupted our operations and is expected to continue to have an adverse effect on our business, results of operations, financial condition and liquidity.

In late 2019, COVID-19 was first reported in Wuhan, China, and on March 11, 2020, the World Health Organization declared COVID-19 a pandemic.

The outbreak has spread globally and has led governments and other authorities around the world, including federal, state and local authorities in the United States and elsewhere, to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place orders.

The COVID-19 pandemic has had, and other pandemics in the future could have, repercussions across global economies and financial markets.

The COVID-19 pandemic and the measures taken to limit its spread have adversely impacted regional, national and global economic activity and have contributed to significant volatility and negative pressure in financial markets.

The impact of the COVID-19 pandemic has been rapidly evolving and, as cases of COVID-19 have continued to increase and be identified, many countries, including the United States and United Kingdom, have reacted by, among other things, instituting quarantines and restricting travel.

Many national, state and local governments, including in areas where we own properties, have also reacted by instituting quarantines, restrictions on travel, shelter-in-place orders, restrictions on types of business that may continue to operate, school closures, limitations on attendance at events or other gatherings, and social distancing requirements, and additional national, state and local governments may implement similar restrictions.

As a result, the COVID-19 pandemic and the measures taken to limit its spread are negatively impacting the global, national and regional economies generally and many industries, directly or indirectly, and those impacts are likely to continue and may increase in severity, including potentially triggering a prolonged period of negative or limited economic growth.

Factors that have contributed or may contribute to the adverse impact of the COVID-19 pandemic and the measures taken to limit its spread on the business, results of operations, financial condition and liquidity of us and our tenants include, without limitation, the following:

• A complete or partial closure of, or other operational limitations or issues at, properties operated by our tenants resulting from government action (including quarantine, shelter-in-place or similar orders requiring that people remain in their homes) or tenant action;

• Reduced economic activity, the deterioration in our or our tenants’ ability to operate in affected areas and any delays in the supply of products or services to our tenants may impact certain of our tenants’ businesses, results of operations, financial condition and liquidity and may cause certain of our tenants to be unable to meet their obligations to us in full, or at all, and to seek, whether through negotiation, restructuring or bankruptcy, reductions or deferrals in their rent payments and other obligations to us or early termination of their leases;

• We may experience difficulties in leasing, selling or redeveloping vacant properties or renewing expiring or terminated leases on terms we consider acceptable, or at all;

• We may experience difficulty accessing the bank lending, capital markets and other financial markets on attractive terms, or at all, and a severe disruption or instability in the national or global financial markets or deterioration in credit and financing conditions may adversely affect our cost of capital, our access to capital to acquire additional properties necessary to grow our business and to fund our business operations, our ability to pay dividends on our common stock, our ability to pay the principal of and interest on our indebtedness and our other liabilities on a timely basis, and our tenants’ ability to fund their business operations and meet their obligations to us and others;

• The financial impact of the COVID-19 pandemic, could negatively impact our credit ratings, the interest rates on our borrowings, and, if the COVID-19 pandemic continues for an extended period of time, our future compliance with financial covenants under our credit facility and other debt instruments, which could result in a default and potentially an acceleration of indebtedness, any of which could negatively impact our ability to make additional borrowings under our revolving credit facility, to sell commercial paper notes under our commercial paper program or incur other indebtedness, and pay dividends on our common stock and to pay the principal of and interest on our indebtedness and our other obligations when due;

• The impact of the COVID-19 pandemic on the market value of our properties may require that we incur impairment charges, asset write-downs or similar charges;

• The impact on the ability of our employees, including members of our management team or board of directors, to fulfill their duties to us as a result of the COVID-19 pandemic, either as a result of measures taken to limit its spread or as a result of infection;

• A general decline in business activity and demand for real estate transactions could adversely affect our ability to grow our portfolio of properties.

The extent to which the COVID-19 pandemic continues to impact our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or limit its impact, and the direct and indirect economic effects of the pandemic and containment measures.

To date, the COVID-19 pandemic and the measures taken to limit its spread have adversely impacted and may continue to adversely impact, among other things, the ability of a number of our tenants’ to generate adequate, or in certain cases, any revenue from their businesses, the ability or willingness of many of our tenants to pay rent in full, or at all, or on a timely basis, and our ability to collect rent from our tenants.

It may also adversely impact our ability to enforce remedies for the failure to pay rent, our occupancy levels, our ability to acquire properties or complete construction projects, and may otherwise negatively affect our business.

In addition, most of our tenants operate retail businesses that depend on customer traffic.

As a result, conditions that lead to a decline in customer traffic (including quarantine, shelter-in-place or similar orders requiring that people remain in their homes or orders requiring business closures) have had and so long as those conditions continue to exist will continue to have an adverse effect on the business, results of operations, financial condition and liquidity of a number of our tenants, and their willingness or ability to pay rent, to renew expiring leases or to enter into new leases on terms favorable to us, or at all.

Certain industries in which our tenants operate appear to have been disproportionately adversely impacted by the COVID-19 pandemic and the measures taken to mitigate its spread.

These adverse impacts have reduced the amount of rent we have been able to collect from our tenants in those industries and may further decrease the likelihood of us collecting such rent in the future.

For example, in October 2020, two major theater operators publicly announced financial difficulties from the COVID-19 pandemic, including sustained operating losses, the depletion of liquidity resources and the closure of locations.

In response to this information, we have recorded reserves as a reduction of rental revenue on certain theater leases related to those tenants on an accrual basis and have recorded provisions for impairment on certain of our assets with respect to properties in which those theater operators are tenants to reduce the carrying value of those assets to fair value.

Our ability to collect rent from these tenants, from other tenants in the theater industry, or from other tenants who face similar hardships may be further adversely impacted as the COVID-19 pandemic and its adverse impacts to those tenants continue.

In addition, if any of these tenants declare bankruptcy or enter into similar corporate restructuring arrangements, they may seek

to reject or renegotiate our existing leases, which could adversely affect our ability to collect rent that is owed or to collect future rent on those properties at anticipated rates, or at all, or to re-lease those properties on favorable terms.

As of September 30, 2020, our exposure to the theater industry was 5.7% of total portfolio annualized contractual rental revenue.

As a result of the foregoing, we cannot predict the number of tenants that will not pay rent in the future, nor can we predict whether tenants who have paid rent in the past will continue to do so or whether tenants who have deferred rent will pay such rent in the future.

As the COVID-19 pandemic continues, tenants may cease to pay their rent obligations to us in full or at all, and tenants may elect not to renew their leases, seek to terminate their leases, seek relief from their leases (including through negotiation, restructuring or bankruptcy), or decline to renew expiring leases or enter into new leases, all of which may adversely impact our rental revenue and occupancy rates, generate additional expenses, result in impairment charges or other write-downs of assets, and adversely impact our results of operations, financial condition and liquidity.

In addition, as we believe to be the case with many retail landlords, we have received many short-term rent relief requests, most often in the form of rent deferral requests, or requests for further discussion from tenants.

Collections and rent relief requests to-date may not be indicative of collections or requests in any future period.

Likewise, the deterioration of global economic conditions as a result of the pandemic may ultimately lead to a further decrease in occupancy levels and rental rates across our portfolio as tenants reduce or defer their spending, institute restructuring plans or file for bankruptcy.

Some of our major tenants have experienced temporary closures of some or all of their properties or have substantially reduced their operations in response to the COVID-19 pandemic, and additional tenants may do so in the future.

In addition, the measures taken to prevent the spread of COVID-19 (including quarantine, shelter-in-place or similar orders requiring that people remain in their homes) have led and may lead to further closures, or other operational issues at our properties, or delays in acquisition activities, construction projects, and other corporate actions, all of which may materially adversely impact our operations.

In addition, in light of the uncertain and rapidly evolving situation relating to the COVID-19 pandemic, we have taken certain precautionary measures within our organization intended to help reduce the risk of the virus to our employees, our tenants, and the communities in which we operate, including the following:

• We have instructed all of our employees to work remotely;

• We have suspended all non-essential travel worldwide for our employees;

• We have suspended employee attendance at industry events and in-person work-related meetings.

While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and we may elect to take additional measures as the information available to us continues to develop.

These actions, and any future actions we may take in response to the COVID-19 pandemic, could further negatively impact our business, financial condition, results of operations and liquidity.

For the foregoing reasons, we expect that the impact of the COVID-19 pandemic and related containment measures, including the impact on regional, national and global economies, will likely adversely affect our business, results of operations, financial condition and liquidity, and, given unpredictability of the scope, severity and duration of the pandemic, such impacts may be material.

To the extent the COVID-19 pandemic and related containment measures continue to adversely affect regional, national and global economic conditions and financial markets, as well as the business, results of operations, financial conditions and liquidity of us and our tenants, it may also have the effect of heightening many of the risks described in this ‘‘Risk Factors’’ section and elsewhere in this Quarterly Report on Form 10-Q and many of the risks described under the caption ‘‘Risk Factors’’ and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2019 and our subsequent quarterly reports on Form 10-Q, including the risks resulting from our significant indebtedness;

our need to generate sufficient cash flows to service our indebtedness, to pay dividends on our common stock and provide for our other cash needs;

our ongoing need for external financing;

our ability to access borrowings under our credit facility and to sell notes under our commercial paper program;

our ability to comply with the covenants contained in the agreements that govern our indebtedness;

our dependency on key personnel;

and the impact of negative market conditions or adverse events on our tenants.

In addition, in light of the COVID-19 pandemic and the measures taken to limit its spread, our historical information regarding our business, properties, results of operations, financial condition or liquidity may not be representative of the future results of operations, financial condition, liquidity or other financial or operating results of us, our properties or our business.

You should carefully consider the risks described below and those risks described in "Item 1A, Risk Factors" in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020, as our business, financial condition and results of operations could be adversely affected by any of the risks and uncertainties described therein and herein.

Risks Related to the Proposed Mergers

The announcement and pendency of the Mergers may have an adverse effect on our business, operating results and price of our common stock.

We are subject to risks in connection with the announcement and pendency of the Mergers, including, but not limited to, the following:

• Market reaction to the announcement and pendency of the Mergers;

• Changes in our business, operating results, market price of our common stock and prospects generally;

• Market assessments of the likelihood that the Mergers will be consummated;

• The amount of consideration offered per share is based on a fixed exchange ratio, and will not be adjusted to account for changes in our or VEREIT’s respective business, assets, liabilities, prospects, outlook, financial condition or results of operations, or any other changes, during the pendency of the Mergers, including any change in the market price of, analyst estimates of, or projections relating to, our common stock or VEREIT’s common stock;

• Potential adverse effects on our relationships with our current customers, suppliers and other business partners, or those with which we are seeking to establish business relationships, due to uncertainties about the Mergers;

• We have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Mergers, including with respect to the potential spin-off transaction, and many of these fees and costs are payable by us regardless of whether the Mergers are consummated;

• We may incur unexpected costs, liabilities or delays in connection with or with respect to the Mergers;

• Potential adverse effects to our ability to raise capital during the pendency of the Mergers, or the impact of the Mergers on our or VEREIT’s existing or future indebtedness;

• Potential adverse effects on our ability to attract, recruit, retain and motivate current and prospective employees who may be uncertain about their future roles and relationships with us following the completion of the Mergers, and the possibility that our employees could lose productivity as a result of uncertainty regarding their employment following the Mergers;

• The pendency and outcome of any legal proceedings that may be instituted against us, our directors, executive officers and others relating to the transactions contemplated by the Merger Agreement;

• The inherent risks, costs and uncertainties associated with integrating the businesses successfully and risks of not achieving all or any of the anticipated benefits of the Mergers, or the risk that the anticipated benefits of the Mergers may not be fully realized or take longer to realize than expected;

• Competitive pressures in the markets in which we and VEREIT operate;

• Potential restrictions on the conduct of our business prior to the completion of the Mergers pursuant to the terms of the Merger Agreement;

• The inability for us to consummate the proposed spin-off transaction on the anticipated terms or within the anticipated timing, if at all, and our ability or the ability of our stockholders to realize the anticipated benefits of the Mergers;

• The occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement;

• The possibility of disruption to our business, including increased costs and diversion of management time and resources that could otherwise have been devoted to other opportunities that may have been beneficial to us.

The failure to complete the Mergers may adversely affect our business and the price of our common stock.

The closing of the Mergers is subject to certain conditions, including:

(1) adoption and approval by VEREIT’s stockholders of the Merger Agreement and approval by our shareholders of the issuance of shares of our common stock pursuant to the Merger Agreement;

(2) the effectiveness of the registration statement on Form S-4 to be filed with the SEC by us in connection with the transactions contemplated by the Merger Agreement;

(3) approval for listing on the New York Stock Exchange of the shares of our common stock to be issued in the Mergers or reserved for issuance in connection therewith;

(4) no injunction or law prohibiting the Mergers;

(5) accuracy of each party’s representations, subject in most cases to materiality or material adverse effect qualifications;

(6) material compliance with each party’s covenants;

(7) receipt by each of VEREIT and us of an opinion to the effect that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, or the Code, and (8) receipt by each of VEREIT and us of an opinion that the other party qualifies as a REIT under the Code.

In addition, we will not be obligated to consummate the Mergers before January 29, 2022 unless the Spin-Off is ready, in all respects, to be consummated contemporaneously with the closing of the Mergers.

If this condition is not satisfied or waived by us by January 29, 2022, and all other conditions to closing have been satisfied, the parties will be obligated to close the Mergers, regardless of whether the Spin-Off is ready to be consummated.

The Merger Agreement also contains certain customary termination rights for both parties, including under certain circumstances, we will be required to pay a termination fee to VEREIT of the lesser of $838.0 million or the maximum amount that could be paid to VEREIT without causing it to fail to meet the REIT requirements for such year.

The Merger Agreement also provides that, if the Merger Agreement is terminated because our stockholders or the stockholders of VEREIT fail to approve the transactions contemplated by the Merger Agreement, the party whose stockholders did not approve the transaction must pay the other party an expense reimbursement of the lesser of $25.0 million or the maximum amount that can be paid to the other party without causing it to fail to meet the REIT requirements for such year.

There can be no assurance that the conditions to the completion of the Mergers will be satisfied, that the Merger Agreement will not be terminated, or that the Mergers will be completed on the proposed terms, within the expected timeframe or at all.

If the Mergers are not completed, we may be subject to negative publicity or be negatively perceived by the investment or business communities, we may be obligated to pay a termination fee or reimburse expenses to VEREIT, and the price of our common stock could fall to the extent that price reflects an assumption that the Mergers will be completed.

In addition, we may be required to consummate the Mergers before the Spin-Off is ready to be consummated, which may adversely impact the anticipated benefits of the transactions.

Furthermore, if the Mergers are not completed, we may suffer other consequences that could adversely affect our business and results of our operations, including potential reputational harm, litigation, or other adverse impacts.

Potential litigation instituted against us, VEREIT or our respective directors challenging the proposed Mergers may prevent the Mergers from becoming effective within the expected timeframe or at all.

Potential litigation related to the Mergers may result in injunctive or other relief prohibiting, delaying or otherwise adversely affecting the parties’ ability to complete the Mergers.

Such relief may prevent the Mergers from becoming effective within the expected timeframe or at all.

In addition, defending against such claims may be expensive and divert management’s attention and resources, which could adversely affect the respective businesses of us and VEREIT.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors