The following Management’s Discussion and Analysis of Financial Condition and
Results of Operations is intended to help the reader understand our operations
and our present business environment from the perspective of management. The
following discussion and analysis should be read in conjunction with the
“Cautionary Note Regarding Forward-Looking Statements”; the sections in Part I
entitled “Item 1A. Risk Factors”; and the consolidated financial statements and
related notes in “Item 8. Financial Statements and Supplementary Data”. We use
certain non-GAAP measures that are more fully described below under the caption
“-Supplemental Non-GAAP Measures,” which we believe are appropriate supplemental
non-GAAP measures of the performance of REITs used by our management, as well as
REIT analysts.
This section of this Form 10-K generally discusses 2022 and 2021 items and
year-to-year comparisons between 2022 and 2021. Discussions of 2021 items and
year-to-year comparisons between 2021 and 2020 that are not included in this
Form 10-K can be found in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual
Report on Form 10-K for the fiscal year ended
General
Real Estate Investment Trust
We are a net lease REIT specializing in the acquisition, financing and
development of convenience, automotive and other single tenant retail real
estate. Our portfolio is comprised of convenience stores, car wash properties,
automotive service centers (gasoline and repair, oil and maintenance, tire and
battery, and collision), automotive parts retailers, and certain other
freestanding retail properties, including drive-thru quick service restaurants.
As of
properties owned by us and 42 properties that we leased from third-party
landlords. As a REIT, we are not subject to federal corporate income tax on the
taxable income we distribute to our stockholders. In order to continue to
qualify for taxation as a REIT, we are required, among other things, to
distribute at least 90% of our ordinary taxable income to our stockholders each
year.
Our Properties
Our 1,039 properties are located in 38 states and
concentration in the Northeast and Mid-Atlantic regions that we believe is
unique and not readily available for purchase or lease from other owners or
landlords. Our typical property consists of approximately one acre of land in a
larger metropolitan area and is used as a convenience store, express tunnel car
wash, automotive service center, automotive parts retailer, or certain other
freestanding retailers, including drive-thru quick service restaurants. Many of
our properties are located at highly trafficked urban intersections or
conveniently close to highway entrances or exit ramps.
As of
triple-net leases, including 866 properties leased under 37 separate unitary or
master triple-net leases, and 168 properties leased under single unit triple-net
leases. These leases generally provide for an initial term of 15 or 20 years,
with options for successive renewal terms of up to 20 years, and periodic rent
escalations. As of
excluding renewal options, was 8.8 years.
Substantially all of our properties are leased to convenience store operators,
petroleum distributors, car wash operators and other automotive-related and
retail tenants. Our tenants either operate their business at our properties
directly or, in the case of certain convenience stores and gasoline and repair
stations, sublet our properties and supply fuel to third parties that operate
the businesses. For additional information regarding risks related to our
tenants’ dependence on the performance of the industry, see “Item 1A. Risk
Factors – Significant number of our tenants depend on the same industry for
their revenues” in this Form 10-K.
Our triple-net lease tenants are responsible for the payment of all taxes,
maintenance, repairs, insurance and other operating expenses relating to our
properties, and are also responsible for environmental contamination occurring
during the terms of their leases and in certain cases also for environmental
contamination that existed before their leases commenced. For additional
information regarding our environmental obligations, see Note 5 in “Item 8.
Financial Statements and Supplementary Data” in this Form 10-K.
As of
properties as new convenience stores or for alternative single tenant retail
uses, and two of our properties were vacant.
Investment Strategy and Activity
As part of our strategy to grow and diversify our portfolio, we regularly review
acquisition and financing opportunities to invest in additional convenience,
automotive and other single tenant retail real estate. We primarily pursue sale
leaseback transactions with existing and prospective tenants and will pursue
other transactions, including forward commitments to acquire new-to-industry
construction and the acquisition of assets with in-place leases, that result in
us owning fee simple interests in our properties. Our investment activities may
also include purchase money financing with respect to properties we sell, real
property loans relating to our leasehold properties and construction loans. Our
investment strategy seeks to generate current income and benefit from long-term
appreciation in the underlying value of our real estate. To achieve that goal,
we seek to invest in well-located, freestanding properties
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that support automobility and provide convenience and service to consumers in
major markets across the country. A key element of our investment strategy is to
invest in properties that will enhance our property type, tenant and geographic
diversification.
During the year ended
properties, including the acquisition of fee simple interests in 40 properties
for an aggregate purchase price of
included nine convenience stores, 16 car wash properties, 14 automotive services
centers and one drive-thru quick service restaurant. We also advanced
construction loans in the amount of
for the development of 12 new-to-industry convenience stores and car wash
properties.
During the year ended
properties, including the acquisition of fee simple interests in 97 properties
for an aggregate purchase price of
included 25 convenience stores, 17 car wash properties, 54 automotive services
centers and one drive-thru quick service restaurant. We also advanced
construction loans in the amount of
for the development of three new-to-industry convenience stores.
For additional information regarding our property acquisitions, see Note 12 in
“Item 8. Financial Statements and Supplementary Data” in this Form 10-K.
Redevelopment Strategy and Activity
We believe that certain of our properties, primarily those currently being used
as gas and repair businesses, are well-suited to be redeveloped as new
convenience stores or other single tenant retail uses, such as automotive parts,
quick service restaurants, bank branches and specialty retail. We believe that
the redeveloped properties can be leased or sold at higher values than their
current use.
During the years ended
five completed redevelopment projects, respectively, that were placed back into
service in our net lease portfolio. Since the inception of our redevelopment
program in 2015, we have completed 26 redevelopment projects.
For the year ended
of construction-in-progress costs related to our redevelopment activities and
transferred
improvements on our consolidated balance sheet. For the year ended
2021
costs related to our redevelopment activities and transferred
construction-in-progress to buildings and improvements on our consolidated
balance sheet.
As of
others in various stages of feasibility planning for potential recapture from
our net lease portfolio, including one property for which we have signed a new
lease and which will be transferred to redevelopment when the appropriate
entitlements, permits and approvals have been secured.
Supplemental Non-GAAP Measures
We manage our business to enhance the value of our real estate portfolio and, as
a REIT, place particular emphasis on minimizing risk, to the extent feasible,
and generating cash sufficient to make required distributions to stockholders of
at least 90% of our ordinary taxable income each year. In addition to
measurements defined by GAAP, we also focus on Funds From Operations (“FFO”) and
Adjusted Funds From Operations (“AFFO”) to measure our performance. As
previously disclosed, beginning with our results for the quarter and year ended
stock-based compensation and amortization of debt issuance costs. We believe
that conforming to this market practice for calculating AFFO improves the
comparability of this measure of performance to other net lease REITs.
FFO and AFFO are generally considered by analysts and investors to be
appropriate supplemental non-GAAP measures of the performance of REITs. FFO and
AFFO are not in accordance with, or a substitute for, measures prepared in
accordance with GAAP. In addition, FFO and AFFO are not based on any
comprehensive set of accounting rules or principles. Neither FFO nor AFFO
represent cash generated from operating activities calculated in accordance with
GAAP and therefore these measures should not be considered an alternative for
GAAP net earnings or as a measure of liquidity. These measures should only be
used to evaluate our performance in conjunction with corresponding GAAP
measures.
FFO is defined by the
(“NAREIT”) as GAAP net earnings before (i) depreciation and amortization of real
estate assets, (ii) gains or losses on dispositions of real estate assets, (iii)
impairment charges, and (iv) the cumulative effect of accounting changes.
We define AFFO as FFO excluding (i) certain revenue recognition adjustments
(defined below), (ii) certain environmental adjustments (defined below), (iii)
stock-based compensation, (iv) amortization of debt issuance costs and (v) other
non-cash and/or unusual items that are not reflective of our core operating
performance.
Other REITs may use definitions of FFO and/or AFFO that are different than ours
and, accordingly, may not be comparable.
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We believe that FFO and AFFO are helpful to analysts and investors in measuring
our performance because both FFO and AFFO exclude various items included in GAAP
net earnings that do not relate to, or are not indicative of, the core operating
performance of our portfolio. Specifically, FFO excludes items such as
depreciation and amortization of real estate assets, gains or losses on
dispositions of real estate assets, and impairment charges. With respect to
AFFO, we further exclude the impact of (i) deferred rental revenue
(straight-line rent), the net amortization of above-market and below-market
leases, adjustments recorded for the recognition of rental income from direct
financing leases, and the amortization of deferred lease incentives
(collectively, “Revenue Recognition Adjustments”), (ii) environmental accretion
expenses, environmental litigation accruals, insurance reimbursements, legal
settlements and judgments, and changes in environmental remediation estimates
(collectively, “Environmental Adjustments”), (iii) stock-based compensation
expense, (iv) amortization of debt issuance costs and (v) other items, which may
include allowances for credit losses on notes and mortgages receivable and
direct financing leases, losses on extinguishment of debt, retirement and
severance costs, and other items that do not impact our recurring cash flow and
which are not indicative of our core operating performance.
We pay particular attention to AFFO which we believe provides the most useful
depiction of the core operating performance of its portfolio. By providing AFFO,
we believe we are presenting information that assists analysts and investors in
their assessment of our core operating performance, as well as the
sustainability of our core operating performance with the sustainability of the
core operating performance of other real estate companies.
A reconciliation of net earnings to FFO and AFFO is as follows (in thousands,
except per share amounts):
Year ended December 31,
2022 2021 2020
Net earnings $ 90,043 $ 62,860 $ 69,388
Depreciation and amortization of real estate
assets 39,902 35,518 30,191
Gains on dispositions of real estate (16,423 ) (16,718 ) (4,548 )
Impairments 3,545 4,404 4,258
Funds from operations (FFO) 117,067 86,064 99,289
Revenue recognition adjustments
Deferred rental revenue (straight-line rent) (3,458 ) (2,778 ) (2,903 )
Amortization of above and below market
leases, net (1,184 ) (1,221 ) (1,438 )
Amortization of investments in direct
financing leases 5,392 4,844 4,210
Amortization of lease incentives 1,198 1,119 1,026
Total revenue recognition adjustments 1,948 1,964 895
Environmental Adjustments
Accretion expense 1,259 1,705 1,841
Changes in environmental estimates (23,837 ) (1,768 ) (3,135 )
Environmental litigation accruals 279 1,909 85
Insurance reimbursements (85 ) (92 ) (142 )
Legal settlements and judgments - (493 ) (21,300 )
Total environmental adjustments (22,384 ) 1,261 (22,651 )
Other Adjustments
Stock-based compensation expense 4,775 3,997 3,130
Amortization of debt issuance costs 946 1,013 1,053
Allowance for credit loss on notes and
mortgages receivable
and direct financing leases 50 (132 ) 368
Loss on extinguishment of debt - - 1,233
Retirement and severance costs 85 800 -
Total other adjustments 5,856 5,678 5,784
Adjusted funds from operations (AFFO) $ 102,487 $ 94,967 $ 83,317
Basic per share amounts:
Net earnings $ 1.88 $ 1.37 $ 1.62
FFO (1) 2.45 1.88 2.32
AFFO (1) 2.14 2.08 1.94
Diluted per share amounts:
Net earnings $ 1.88 $ 1.37 $ 1.62
FFO (1) 2.44 1.88 2.31
AFFO (1) 2.14 2.08 1.94
Weighted average common shares outstanding:
Basic 46,730 44,782 42,040
Diluted 46,838 44,819 42,070
34
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(1)
Dividends paid and undistributed earnings allocated, if any, to unvested
restricted stockholders are deducted from FFO and AFFO for the computation of
the per share amounts. The following amounts were deducted:
Year ended December 31,
2022 2021 2020
FFO $ 2,734 $ 1,771 $ 1,939
AFFO 2,394 1,915 1,627
Results of Operations
Year ended
The following table presents select data and comparative results from the
Company’s consolidated statements of operations for the year ended
2022
Year ended December 31,
2022 2021 $ Change
Revenues:
Revenues from rental properties$ 163,889 $ 153,886 $ 10,003 Interest on notes and mortgages receivable 1,699 1,522 177 Operating expenses: Property costs 21,553 22,048 (495 ) Impairments 3,545 4,404 (859 ) Environmental (20,902 ) 3,548 (24,450 ) General and administrative 20,621 20,151 470 Depreciation and amortization 39,902 35,518 4,384 Other items: Gains on dispositions of real estate 16,423 16,718 (295 ) Interest expense 27,662 24,672 2,990
Revenues from
The following table presents the results for revenues from rental properties for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 (in thousands): Year ended December 31, 2022 2021 $ Change Rental income$ 149,098 $ 138,691 $ 10,407 Revenue recognition adjustments (1,948 ) (1,964 ) 16 Tenant reimbursement income 16,739 17,159 (420 )
Total revenues from rental properties 163,889 153,886 10,003
Rental income includes base rental income and additional rental income, if any,
based on the aggregate volume of fuel sold at certain properties. The increase
in rental income was primarily due to additional base rental income from
properties acquired during the years ended
as rent commencements from completed redevelopments and contractual rent
increases for certain in-place leases, partially offset by dispositions of real
estate during the same period.
In accordance with GAAP, we recognize revenues from rental properties in amounts
which vary from the amount of rent contractually due during the periods
presented. As a result, revenues from rental properties include revenue
recognition adjustments comprised of (i) non-cash adjustments recorded for
deferred rental revenue due to the recognition of rental income on a
straight-line basis over the current lease term, (ii) the net amortization of
above-market and below-market leases, (iii) recognition of rental income under
direct financing leases using the effective interest rate method which produces
a constant periodic rate of return on the net investments in the leased
properties, and (iv) the amortization of deferred lease incentives.
Tenant reimbursements consist of real estate taxes and other municipal charges
paid by us which are reimbursable by our tenants pursuant to the terms of
triple-net lease agreements.
Interest on Notes and Mortgages Receivable
The increase in interest on notes and mortgages receivable was primarily due to
an increase in construction loan advances for the development of new-to-industry
properties during the years ended
by collections of notes and mortgages receivable during the same period.
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Property Costs
Property costs are comprised of (i) property operating expenses, including rent
expense, reimbursable and non-reimbursable real estate taxes and municipal
charges, certain state and local taxes, and maintenance expenses, and (ii)
leasing and redevelopment expenses, including professional fees, demolition
costs, and redevelopment project cost write-offs, if any.
The following table presents the results for property costs for the year ended
thousands):
Year ended December 31,
2022 2021 $ Change
Property operating expenses
Leasing and redevelopment expenses
710 440 270 Total property costs 21,553 22,048 (495 )
The decrease in property costs was primarily due to a decrease in property
expenses driven by lower rent expense and reimbursable and non-reimbursable real
estate taxes, partially offset by an increase in state and local taxes, as well
as an increase in leasing and redevelopment expenses driven by an increase in
demolition costs for redevelopment projects.
Impairment Charges
Impairment charges are recorded when the carrying value of a property is reduced
to fair value. Impairment charges for the years ended
were attributable to (i) the addition of asset retirement costs to certain
properties due to changes in estimates associated with our environmental
liabilities, which increased the carrying values of these properties in excess
of their fair values, (ii) reductions in estimated undiscounted cash flows
expected to be received during the assumed holding period for certain of our
properties, and (iii) reductions in estimated sales prices from third-party
offers based on signed contracts, letters of intent or indicative bids for
certain of our properties.
Environmental Expenses
The decrease in environmental expenses for the year ended
primarily due to a reduction in estimates related to unknown environmental
liabilities. Specifically, during the year ended
that there was no material continued risk of having to satisfy contractual
obligations relating to preexisting unknown environmental contamination at
certain properties. Accordingly, we removed
liabilities which had previously been accrued for these properties. This
resulted in a net credit of
expense for the year ended
Environmental expenses vary from period to period and, accordingly, undue
reliance should not be placed on the magnitude or the direction of change in
reported environmental expenses for one period, as compared to prior periods.
General and Administrative Expenses
The increase in general and administrative expenses was primarily due to a
million
in stock-based compensation, partially offset by a
non-recurring employee-related expenses and a
other professional fees.
Depreciation and Amortization Expenses
The increase in depreciation and amortization expense was primarily due to
additional depreciation and amortization from properties acquired during the
years ended
depreciation charges related to asset retirement costs, the effect of certain
assets becoming fully depreciated, lease terminations and dispositions of real
estate during the same period.
Gains on Disposition of Real Estate
The gains on dispositions of real estate were primarily the result of the sale
of 24 and 16 properties during the years ended
respectively.
Interest Expense
The increase in interest expense was due to higher average borrowings and higher
average interest rates for the year ended
year ended
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Liquidity and Capital Resources
General
Our primary uses of liquidity include payments of operating expenses, interest
on our outstanding debt and environmental remediation costs, distributions to
shareholders, and future acquisitions and redevelopment projects. We have not
historically incurred significant capital expenditures other than those related
to acquisitions. For a discussion of our capital expenditures, see “-Property
Acquisitions and Capital Expenditures.”
We expect to meet our short-term liquidity requirements through cash flow from
operations, funds available under our Revolving Facility, proceeds from new
senior unsecured notes that we closed in
until
forward agreements under our ATM Program, and available cash and cash
equivalents.
As of
Revolving Facility, and our total cash and cash equivalents were
In
unsecured notes, including (i)
and maturing in
closing were used to repay all amounts outstanding on the Revolving Facility and
for general corporate purposes, including to fund investment activity. Proceeds
from the delayed funding notes were used to prepay
unsecured notes maturing in
including to fund investment activity.
During the year ended
to sell an aggregate of 3.7 million common shares for anticipated gross proceeds
of
We anticipate meeting our longer-term capital needs through cash flow from
operations, funds available under our Revolving Facility, available cash and
cash equivalents, proceeds from future real estate asset sales, and the future
issuance of shares of common stock or debt securities.
Our cash flow activities for the years ended
summarized as follows (in thousands):
Year ended December 31,
2022 2021 $ Change
Net cash flow provided by operating activities
Net cash flow used in investing activities
(139,056 ) (169,732 ) 30,676
Net cash flow provided by financing activities 30,758 52,321 (21,563 )
Operating Activities
The change in net cash flow provided by operating activities for the years ended
expenses as discussed in “Results of Operations” above and the other changes in
assets and liabilities as presented on our consolidated statements of cash
flows.
Investing Activities
The change in net cash flow used in investing activities for the year ended
property acquisitions, a
mortgages receivable, and an increase of
mortgages receivable.
Financing Activities
The change in net cash flow provided by financing activities for the year ended
common stock of
partially offset by an increase in net borrowings of
Credit Agreement
The Second Restated Credit Agreement provides for an unsecured revolving credit
facility (the “Revolving Facility”) in an aggregate principal amount of
and includes an accordion feature to increase the revolving commitments or add
one or more tranches of term loans up to an additional aggregate amount not to
exceed
existing lenders agreeing to provide commitments for such increased amount and
that no default or event of default shall have occurred and be continuing under
the terms of the Revolving Facility.
The Revolving Facility matures
extensions (for a total of 12 months) exercisable at our option. Our exercise of
an extension option is subject to the absence of any default under the Second
Restated Credit Agreement
37
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and our compliance with certain conditions, including the payment of extension
fees to the Lenders under the Revolving Facility and that no default or event of
default shall have occurred and be continuing under the terms of the Revolving
Facility.
In
Agreement to transition the applicable interest rates and default rate
thereunder from LIBOR-based rates to SOFR-based rates. Borrowings under the
Revolving Facility bear interest at a rate equal to (i) the sum of a SOFR rate
plus a SOFR adjustment of 0.10% plus a margin of 1.30% to 1.90% or (ii) the sum
of a base rate plus a margin of 0.30% to 0.90% based on our consolidated total
indebtedness to total asset value ratio at the end of each quarterly reporting
period.
The per annum rate of the unused line fee on the undrawn funds under the
Revolving Facility is 0.15% to 0.25% based on our daily unused portion of the
available Revolving Facility.
The Second Restated Credit Agreement contains customary financial covenants,
including covenants with respect to total leverage, secured leverage and
unsecured leverage ratios, fixed charge and interest coverage ratios, and
minimum tangible net worth, as well as limitations on restricted payments, which
may limit our ability to incur additional debt or pay dividends. The Second
Restated Credit Agreement contains customary events of default, including cross
default provisions with respect to our senior unsecured notes. Any event of
default, if not cured or waived in a timely manner, could result in the
acceleration of our indebtedness under the Second Restated Credit Agreement and
could also give rise to an event of default and the acceleration of our senior
unsecured notes.
As of
the Second Restated Credit Agreement.
Senior Unsecured Notes
In
guarantee agreement with
of its affiliates (collectively, “Prudential”) (the “Sixth Amended and Restated
Prudential Agreement”) pursuant to which, in
million
“Series Q Notes”) to Prudential and used the proceeds to repay the
of 5.35% Series B Guaranteed Senior Notes due
Notes”) outstanding under our fifth amended and restated note purchase and
guarantee agreement with Prudential (the “Fifth Amended and Restated Prudential
Agreement”). The other senior unsecured notes outstanding under the Fifth
Amended and Restated Prudential Agreement, including (i)
Series C Guaranteed Senior Notes due
(ii)
(the “Series D Notes”), (iii)
Notes due
3.43% Series I Guaranteed Senior Notes due
Notes”), remain outstanding under the Sixth Amended and Restated Prudential
Agreement.
In
and guarantee agreement with
of its affiliates (collectively, “AIG”) (the “Second Amended and Restated AIG
Agreement”) pursuant to which we issued
Guaranteed Senior Notes due
other senior unsecured notes outstanding under our first amended and restated
note purchase and guarantee agreement with AIG (the “First Amended and Restated
AIG Agreement”), including (i)
Notes due
3.43% Series J Guaranteed Senior Notes due
Notes”), remain outstanding under the Second Amended and Restated AIG Agreement.
In
and guarantee agreement with
certain of its affiliates (collectively, “MassMutual”) (the “Second Amended and
Restated MassMutual Agreement”) pursuant to which we issued
3.45% Series M Guaranteed Senior Notes due
Notes”) and, in
Notes due
senior unsecured notes outstanding under our first amended and restated note
purchase and guarantee agreement with MassMutual (the “First Amended and
Restated MassMutual Agreement”), including (i)
Guaranteed Senior Notes due
(the “Series K Notes”), remain outstanding under the Second Amended and Restated
MassMutual Agreement.
In
New York Life Insurance Company and certain of its affiliates (collectively,
“New York Life”) (the “New York Life Agreement”) pursuant to which we issued
(the “Series N Notes”) and, in
Guaranteed Senior Notes due
Life
On
MetLife and certain of its affiliates (collectively, “MetLife”) (the “MetLife
Agreement”) pursuant to which we issued
Guaranteed Senior Notes due
38
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The funded and outstanding Series B Notes, Series C Notes, Series D Notes,
Series E Notes, Series F Note, Series G Notes, Series H Notes, Series I Notes,
Series J Notes, Series K Notes, Series L Notes, Series M Notes and Series N
Notes are collectively referred to the “senior unsecured notes”.
As of
our senior unsecured notes.
For additional information regarding our senior secured notes, see Note 4 in
“Item 8. Financial Statements and Supplementary Data” in this Form 10-K.
Debt Maturities
The amounts outstanding under the Second Restated Credit Agreement and our
senior unsecured notes, exclusive of extension options, are as follows (in
thousands):
Year ended December 31,
Maturity Interest
Date Rate 2022 2021
Revolving Facility October 2025 5.60% $ 70,000 $ 60,000
Series B Notes (a) June 2023 5.35% 75,000 75,000
Series C Notes February 2025 4.75% 50,000 50,000
Series D-E Notes June 2028 5.47% 100,000 100,000
Series F-G Notes September 2029 3.52% 125,000 125,000
Series I-K Notes November 2030 3.43% 175,000 175,000
Series L-N Notes February 2032 3.45% 100,000 -
Total debt 695,000 585,000
Unamortized debt issuance costs,
net (b) (3,545 ) (3,880 )
Total debt, net $ 691,455 $ 581,120
(a)
Pursuant to the Sixth Amended and Restated Prudential Agreement, we issued
2023
Series B Notes due
(b)
Unamortized debt issuance costs, related to the Revolving Facility, at
31, 2022
expenses and other assets on our consolidated balance sheets.
ATM Program
In
“2018 ATM Program”), pursuant to which we were able to issue and sell shares of
our common stock with an aggregate sales price of up to
consortium of banks acting as agents. The 2018 ATM Program was terminated in
In
“ATM Program”), pursuant to which we are able to issue and sell shares of our
common stock with an aggregate sales price of up to
consortium of banks acting as our sales agents or acting as forward sellers on
behalf of any forward purchasers pursuant to a forward sale agreement. Sales of
the shares of common stock may be made, as needed, from time to time in
at-the-market offerings as defined in Rule 415 of the Securities Act, including
by means of ordinary brokers’ transactions on the
otherwise at market prices prevailing at the time of sale, at prices related to
prevailing market prices or as otherwise agreed to with the applicable agent.
The use of a forward sale agreement allows us to lock in a share price on the
sale of shares at the time the forward sales agreement becomes effective but
defer receiving the proceeds from the sale of shares until a later date. To
account for the forward sale agreements, we considered the accounting guidance
governing financial instruments and derivatives. To date, we have concluded that
our forward sale agreements are not liabilities as they do not embody
obligations to repurchase our shares nor do they embody obligations to issue a
variable number of shares for which the monetary value are predominantly fixed,
varying with something other than the fair value of the shares, or varying
inversely in relation to our shares.
We also evaluated whether the agreements meet the derivatives and hedging
guidance scope exception to be accounted for as equity instruments. We concluded
that the agreements are classifiable as equity contracts based on the following
assessments: (i) none of the agreements’ exercise contingencies are based on
observable markets or indices besides those related to the market for the
Company’s own stock price and operations; and (ii) none of the settlement
provisions precluded the agreements from being indexed to its own stock.
We consider the potential dilution resulting from the forward sale agreements on
the earnings per share calculations and use the treasury stock method to
determine the dilution resulting from the forward sale agreements during the
period of time prior to settlement.
39
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ATM Direct Issuances
During the year ended
under the ATM Program.
During the year ended
of common stock and received net proceeds of
and the 2018 ATM Program.
Future sales, if any, will depend on a variety of factors to be determined by us
from time to time, including among others, market conditions, the trading price
of our common stock, determinations by us of the appropriate sources of funding
for us and potential uses of funding available to us.
ATM Forward Agreements
During the year ended
to sell an aggregate of 3.7 million shares of common stock at an average gross
offering price of
We expect to settle the forward sale agreements in full within 12 months of the
respective agreement dates via physical delivery of the outstanding shares of
common stock in exchange for cash proceeds, although we may elect cash
settlement or net share settlement for all or a portion of our obligations under
the forward sale agreements, subject to certain conditions.
During the year ended
agreements under the ATM Program.
Dividends
We elected to be treated as a REIT under the federal income tax laws with the
year beginning
among other requirements such as those related to the composition of our assets
and gross income, distribute annually to our stockholders at least 90% of our
taxable income, including taxable income that is accrued by us without a
corresponding receipt of cash.
It is also possible that instead of distributing 100% of our taxable income on
an annual basis, we may decide to retain a portion of our taxable income and to
pay taxes on such amounts as permitted by the Internal Revenue Service. Payment
of dividends is subject to market conditions, our financial condition, including
but not limited to, our continued compliance with the provisions of the Second
Restated Credit Agreement, our senior unsecured notes and other factors, and
therefore is not assured. In particular, the Second Restated Credit Agreement
and our senior unsecured notes prohibit the payment of dividends during certain
events of default.
Regular quarterly dividends paid to our stockholders aggregated
2020, respectively. There can be no assurance that we will continue to pay
dividends at historical rates.
Contractual Obligations
Our significant contractual obligations and commitments, excluding extension
options and unamortized debt issuance costs, as of
comprised of borrowings under the Second Restated Credit Agreement, our senior
unsecured notes, operating and finance lease payments due to landlords,
estimated environmental remediation expenditures and our funding commitments for
capital improvements at certain properties.
Generally, leases with our tenants are triple-net leases with the tenant
responsible for the operations conducted at our properties and for the payment
of taxes, maintenance, repair, insurance, environmental remediation and other
operating expenses.
We have no significant contractual obligations that are not fully recorded on
our consolidated balance sheets or fully disclosed in the notes to our
consolidated financial statements. We have no off-balance sheet arrangements as
defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the Exchange Act.
Critical Accounting Policies and Estimates
The consolidated financial statements included in this Form 10-K have been
prepared in conformity with accounting principles generally accepted in
United States of America
in accordance with GAAP requires us to make estimates, judgments and assumptions
that affect the amounts reported in our consolidated financial statements.
Although we have made estimates, judgments and assumptions regarding future
uncertainties relating to the information included in our consolidated financial
statements, giving due consideration to the accounting policies selected and
materiality, actual results could differ from these estimates, judgments and
assumptions and such differences could be material.
Estimates, judgments and assumptions underlying the accompanying consolidated
financial statements include, but are not limited to, real estate, receivables,
deferred rent receivable, direct financing leases, depreciation and
amortization, impairment of long-lived assets, environmental remediation
obligations, litigation, accrued liabilities, income taxes and the allocation of
the purchase price of properties acquired to the assets acquired and liabilities
assumed. The information included in our consolidated financial statements that
is based on estimates, judgments and assumptions is subject to significant
change and is adjusted as circumstances change and as the uncertainties become
more clearly defined.
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Our accounting policies are described in Note 1 in “Item 8. Financial Statements
and Supplementary Data”. The
Cautionary Advice Regarding Disclosure About Critical Accounting Policies (“FRR
60”), suggests that companies provide additional disclosure on those accounting
policies considered most critical. FRR 60 considers an accounting policy to be
critical if it is important to our financial condition and results of operations
and requires significant judgment and estimates on the part of management in its
application. We believe that our most critical accounting policies relate to
revenue recognition and deferred rent receivable, direct financing leases,
impairment of long-lived assets, environmental remediation obligations,
litigation, income taxes, and the allocation of the purchase price of properties
acquired to the assets acquired and liabilities assumed as described below.
Revenue Recognition and Deferred Rent Receivable
We earn revenue primarily from operating leases with our tenants. We recognize
income under leases with our tenants, on the straight-line method, which
effectively recognizes contractual lease payments evenly over the current term
of the leases. The present value of the difference between the fair market rent
and the contractual rent for in-place leases at the time properties are acquired
is amortized into revenue from rental properties over the remaining lives of the
in-place leases. A critical assumption in applying the straight-line accounting
method is that the tenant will make all contractual lease payments during the
current lease term and that the net deferred rent receivable balance will be
collected when the payment is due, in accordance with the annual rent
escalations provided for in the leases. We may be required to reserve, or
provide reserves for a portion of, the recorded deferred rent receivable if it
becomes apparent that the tenant may not make all of its contractual lease
payments when due during the current term of the lease.
The present value of the difference between the fair market rent and the
contractual rent for above-market and below-market leases at the time properties
are acquired is amortized into revenues from rental properties over the
remaining terms of the in-place leases. Lease termination fees are recognized as
other income when earned upon the termination of a tenant’s lease and
relinquishment of space in which we have no further obligation to the tenant.
The sales of nonfinancial assets, such as real estate, are to be recognized when
control of the asset transfers to the buyer, which will occur when the buyer has
the ability to direct the use of or obtain substantially all of the remaining
benefits from the asset. This generally occurs when the transaction closes and
consideration is exchanged for control of the property.
Direct Financing Leases
Income under direct financing leases is included in revenues from rental
properties and is recognized over the lease terms using the effective interest
rate method which produces a constant periodic rate of return on the net
investments in the leased properties. The investments in direct financing leases
represents the investments in leased assets accounted for as direct financing
leases. The investments in direct financing leases are increased for interest
income earned and amortized over the life of the leases and reduced by the
receipt of lease payments.
Impairment of Long-Lived Assets
Real estate assets represent “long-lived” assets for accounting purposes. We
review the recorded value of long-lived assets for impairment in value whenever
any events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. We may become aware of indicators of potentially
impaired assets upon tenant or landlord lease renewals, upon receipt of notices
of potential governmental takings and zoning issues, or upon other events that
occur in the normal course of business that would cause us to review the
operating results of the property. We believe our real estate assets are not
carried at amounts in excess of their estimated net realizable fair value
amounts.
Environmental Remediation Obligations
We provide for the estimated fair value of future environmental remediation
obligations when it is probable that a liability has been incurred and a
reasonable estimate of fair value can be made. See “Environmental Matters” below
for additional information. Environmental liabilities net of related recoveries
are measured based on their expected future cash flows which have been adjusted
for inflation and discounted to present value. Since environmental exposures are
difficult to assess and estimate and knowledge about these liabilities is not
known upon the occurrence of a single event, but rather is gained over a
continuum of events, we believe that it is appropriate that our accrual
estimates are adjusted as the remediation treatment progresses, as circumstances
change and as environmental contingencies become more clearly defined and
reasonably estimable. A critical assumption in accruing for these liabilities is
that the state environmental laws and regulations will be administered and
enforced in the future in a manner that is consistent with past practices.
Environmental liabilities are estimated net of recoveries of environmental costs
from state UST remediation funds, with respect to past and future spending based
on estimated recovery rates developed from our experience with the funds when
such recoveries are considered probable. A critical assumption in accruing for
these recoveries is that the state UST fund programs will be administered and
funded in the future in a manner that is consistent with past practices and that
future environmental spending will be eligible for reimbursement at historical
rates under these programs. We accrue environmental liabilities based on our
share of responsibility as defined in our lease contracts with our tenants and
under various other agreements with others or if circumstances
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indicate that our counterparty may not have the financial resources to pay its
share of the costs. It is possible that our assumptions regarding the ultimate
allocation method and share of responsibility that we used to allocate
environmental liabilities may change, which may result in material adjustments
to the amounts recorded for environmental litigation accruals and environmental
remediation liabilities. We may ultimately be responsible to pay for
environmental liabilities as the property owner if our tenants or other
counterparties fail to pay them. In certain environmental matters the effect on
future financial results is not subject to reasonable estimation because
considerable uncertainty exists both in terms of the probability of loss and the
estimate of such loss. The ultimate liabilities resulting from such lawsuits and
claims, if any, may be material to our results of operations in the period in
which they are recognized.
Litigation
Legal fees related to litigation are expensed as legal services are performed.
We provide for litigation accruals, including certain litigation related to
environmental matters (see “Environmental Litigation” below for additional
information), when it is probable that a liability has been incurred and a
reasonable estimate of the liability can be made. If the estimate of the
liability can only be identified as a range, and no amount within the range is a
better estimate than any other amount, the minimum of the range is accrued for
the liability.
Income Taxes
Our financial results generally do not reflect provisions for current or
deferred federal income taxes because we elected to be treated as a REIT under
the federal income tax laws effective
operate in a manner that will allow us to continue to be treated as a REIT and,
as a result, we do not expect to pay substantial corporate-level federal income
taxes. Many of the REIT requirements, however, are highly technical and complex.
If we were to fail to meet the requirements, we may be subject to federal income
tax, excise taxes, penalties and interest or we may have to pay a deficiency
dividend to eliminate any earnings and profits that were not distributed.
Certain states do not follow the federal REIT rules and we have included
provisions for these taxes in property costs.
Allocation of the Purchase Price of Properties Acquired
Upon acquisition of real estate and leasehold interests, we estimate the fair
value of acquired tangible assets (consisting of land, buildings and
improvements) “as if vacant” and identified intangible assets and liabilities
(consisting of leasehold interests, above-market and below-market leases,
in-place leases and tenant relationships) and assumed debt. Based on these
estimates, we allocate the purchase price to the applicable assets and
liabilities. Assumptions used are property and geographic specific and may
include, among other things, capitalization rates, market rental rates and
EBITDA to rent coverage ratios.
Environmental Matters
General
We are subject to numerous federal, state and local laws and regulations,
including matters relating to the protection of the environment such as the
remediation of known contamination and the retirement and decommissioning or
removal of long-lived assets including buildings containing hazardous materials,
USTs and other equipment. Environmental costs are principally attributable to
remediation costs which are incurred for, among other things, removing USTs,
excavation of contaminated soil and water, installing, operating, maintaining
and decommissioning remediation systems, monitoring contamination and
governmental agency compliance reporting required in connection with
contaminated properties.
We enter into leases and various other agreements which contractually allocate
responsibility between the parties for known and unknown environmental
liabilities at or relating to the subject properties. Under applicable law, we
are contingently liable for these environmental obligations in the event that
our tenant does not satisfy them, and we are required to accrue for
environmental liabilities that we believe are allocable to others under our
leases if we determine that it is probable that our tenant will not meet its
environmental obligations. It is possible that our assumptions regarding the
ultimate allocation method and share of responsibility that we used to allocate
environmental liabilities may change, which may result in material adjustments
to the amounts recorded for environmental litigation accruals and environmental
remediation liabilities. We assess whether to accrue for environmental
liabilities based upon relevant factors including our tenants’ histories of
paying for such obligations, our assessment of their financial capability, and
their intent to pay for such obligations. However, there can be no assurance
that our assessments are correct or that our tenants who have paid their
obligations in the past will continue to do so. We may ultimately be responsible
to pay for environmental liabilities as the property owner if our tenant fails
to pay them.
The estimated future costs for known environmental remediation requirements are
accrued when it is probable that a liability has been incurred and a reasonable
estimate of fair value can be made. The accrued liability is the aggregate of
our estimate of the fair value of cost for each component of the liability, net
of estimated recoveries from state UST remediation funds considering estimated
recovery rates developed from prior experience with the funds.
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For substantially all of our triple-net leases, our tenants are contractually
responsible for compliance with environmental laws and regulations, removal of
USTs at the end of their lease term (the cost of which is mainly the
responsibility of our tenant but in certain cases partially paid for by us) and
remediation of any environmental contamination that arises during the term of
their tenancy. In addition, for substantially all of our triple-net leases, our
tenants are contractually responsible for known environmental contamination that
existed at the commencement of the lease and for preexisting unknown
environmental contamination that is discovered during the term of the lease.
For the subset of our triple-net leases which cover properties previously leased
to Marketing (substantially all of which commenced in 2012), the allocation of
responsibility differs from our other triple-net leases as it relates to
preexisting known and unknown contamination. Under the terms of our leases
covering properties previously leased to Marketing, we agreed to be responsible
for environmental contamination that was known at the time the lease commenced,
and for unknown environmental contamination which existed prior to commencement
of the lease and which is discovered (other than as a result of a voluntary site
investigation) during the first 10 years of the lease term (or a shorter period
for a minority of such leases) (a “Lookback Period”). Similarly, for certain
properties previously leased to Marketing which we have sold, we have agreed to
be responsible for environmental contamination that was known at the time of the
sale and for unknown environmental contamination which existed prior to the sale
and which is discovered (other than as a result of a voluntary site
investigation) within 5 years of the closing (also, a “Lookback Period”).
Substantially all of these Lookback Periods have now expired, therefore
responsibility for all newly discovered contamination at these properties, even
if it relates to periods prior to commencement of the lease or sale, is the
contractual responsibility of our tenant or buyer as the case may be.
In the course of UST removals and replacements at certain properties previously
leased to Marketing where we retained responsibility for preexisting unknown
environmental contamination until expiration of the applicable Lookback Period,
environmental contamination has been and continues to be discovered. As a
result, we developed an estimate of fair value for the prospective future
environmental liability resulting from preexisting unknown environmental
contamination and accrued for these estimated costs. These estimates are based
primarily upon quantifiable trends which we believe allow us to make reasonable
estimates of fair value for the future costs of environmental remediation
resulting from the anticipated removal and replacement of USTs. Our accrual of
this liability represents our estimate of the fair value of the cost for each
component of the liability, net of estimated recoveries from state UST
remediation funds considering estimated recovery rates developed from prior
experience. In arriving at our accrual, we analyzed the ages and expected useful
lives of USTs at properties where we would be responsible for preexisting
unknown environmental contamination and we projected a cost to closure for
remediation of such contamination.
During the twelve months ended
of the properties we previously leased to Marketing expired. Based on the
expiration of the Lookback Periods, together with other factors which have
significantly mitigated our potential liability for preexisting environmental
obligations, including the absence of any contractual obligations relating to
properties which have been sold, quantifiable trends associated with types and
ages of USTs at issue, expectations regarding future UST replacements, and
historical trends and expectations regarding discovery of preexisting unknown
environmental contamination and/or attempted pursuit of the Company therefor, we
concluded that there is no material continued risk of having to satisfy
contractual obligations relating to preexisting unknown environmental
contamination at certain properties. Accordingly, we removed
unknown reserve liabilities which had previously been accrued for these
properties. This resulted in a net credit of
environmental expense for the twelve months ended
We continue to anticipate that our tenants under leases where the Lookback
Periods have expired will replace USTs in the years ahead as these USTs near the
end of their expected useful lives. At many of these properties the USTs in use
are fabricated with older generation materials and technologies and we believe
it is prudent to expect that upon their removal preexisting unknown
environmental contamination will be identified. Although contractually these
tenants are now responsible for preexisting unknown environmental contamination
that is discovered during UST replacements, because the applicable Lookback
Periods have expired before the end of the initial term of these leases,
together with other relevant factors, we believe there remains continued risk
that we will be responsible for remediation of preexisting environmental
contamination associated with future UST removals at certain properties.
Accordingly, we believe it is appropriate at this time to maintain
of unknown reserve liabilities for certain properties with respect to which the
Lookback Periods have expired as of
We measure our environmental remediation liabilities at fair value based on
expected future net cash flows, adjusted for inflation (using a range of 2.0% to
2.75%), and then discount them to present value (using a range of 4.0% to 7.0%).
We adjust our environmental remediation liabilities quarterly to reflect changes
in projected expenditures, changes in present value due to the passage of time
and reductions in estimated liabilities as a result of actual expenditures
incurred during each quarter. As of
accrual consisted of (a)
estimable environmental remediation liability, including obligations to remove
USTs for which we are responsible, net of estimated recoveries and (b)
million
contamination. As of
for our prospective environmental remediation obligations. This accrual
consisted of (a)
environmental remediation liability, including obligations to remove USTs for
which we are responsible, net of estimated recoveries and (b)
future environmental liabilities related to preexisting unknown contamination.
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Environmental liabilities are accreted for the change in present value due to
the passage of time and, accordingly,
million
2022
In addition, during the years ended
recorded credits to environmental expenses aggregating
million
costs exceeded the depreciated carrying value of previously capitalized asset
retirement costs. Environmental expenses also include project management fees,
legal fees and environmental litigation accruals.
During the years ended
values of certain of our properties by
respectively, due to changes in estimated environmental remediation costs. The
recognition and subsequent changes in estimates in environmental liabilities and
the increase or decrease in carrying values of the properties are non-cash
transactions which do not appear on our consolidated statements of cash flows.
Capitalized asset retirement costs are being depreciated over the estimated
remaining life of the UST, a 10-year period if the increase in carrying value is
related to environmental remediation obligations or such shorter period if
circumstances warrant, such as the remaining lease term for properties we lease
from others. Depreciation and amortization expense related to capitalized asset
retirement costs in our consolidated statements of operations for the years
ended
million
(consisting of
of reserves for future environmental liabilities) as of
and
capitalized asset retirement costs.
For additional information regarding risks related to our potential
environmental exposure, see “Item 1A. Risk Factors – We incur significant
operating costs and, from time to time, may have significant liability accruals
as a result of environmental laws and regulations, which costs and accruals
could significantly increase, and reduce our profitability or have a material
adverse effect on our business, financial condition, results of operations,
liquidity, ability to pay dividends or stock price” in this Form 10-K.
In
covering substantially all of our properties at that time for discovery of
preexisting unknown environmental liabilities and for new environmental events.
The policy had a
self-insured retentions and other conditions and limitations. This policy
expired in
subject to coverage. In
liability insurance policy to cover a subset of our properties which we believe
present the greatest risk for discovery of preexisting unknown environmental
liabilities and for new environmental events. The policy has a
aggregate limit and is subject to various self-insured retentions and other
conditions and limitations. Our intention in purchasing this policy was to
obtain protection for certain properties which we believe have the greatest risk
of significant environmental events.
In light of the uncertainties associated with environmental expenditure
contingencies, we are unable to estimate ranges in excess of the amount accrued
with any certainty; however, we believe that it is possible that the fair value
of future actual net expenditures could be substantially higher than amounts
currently recorded by us. Adjustments to accrued liabilities for environmental
remediation obligations will be reflected in our consolidated financial
statements as they become probable and a reasonable estimate of fair value can
be made.
Environmental Litigation
We are subject to various legal proceedings and claims which arise in the
ordinary course of our business. As of
accrued
matters which we believe were appropriate based on information then currently
available. It is possible that our assumptions regarding the ultimate allocation
method and share of responsibility that we used to allocate environmental
liabilities may change, which may result in our providing an accrual, or
adjustments to the amounts recorded, for environmental litigation accruals.
Matters related to our former
River
particular, could cause a material adverse effect on our business, financial
condition, results of operations, liquidity, ability to pay dividends or stock
price. For additional information with respect to these and other pending
environmental lawsuits and claims, see “Item 3. Legal Proceedings” and Note 3 in
“Item 8. Financial Statements and Supplementary Data” in this Form 10-K.
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