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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2024, or

Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 001-39529

BROADSTONE NET LEASE, INC.

(Exact name of registrant as specified in its charter)

Maryland

26-1516177

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

207 High Point Drive

Suite 300

Victor, New York

14564

(Address of principal executive offices)

(Zip Code)

 

(585) 287-6500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.00025 par value

 

BNL

 

The New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

There were 188,430,015 shares of the Registrants’ Common Stock, $0.00025 par value per share, outstanding as of April 29, 2024.

 

 


 

BROADSTONE NET LEASE, INC.

TABLE OF CONTENTS

 

Page

Part I - FINANCIAL INFORMATION

1

Item 1.

Financial Statements

1

 

Condensed Consolidated Balance Sheets (Unaudited)

1

 

Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)

2

 

Condensed Consolidated Statements of Equity (Unaudited)

3

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

4

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

Cautionary Note Regarding Forward-Looking Statements

19

 

Regulation FD Disclosures

19

 

Explanatory Note and Certain Defined Terms

20

 

Overview

20

 

Real Estate Portfolio Information

21

 

Results of Operations

27

 

Liquidity and Capital Resources

31

 

Derivative Instruments and Hedging Activities

34

 

Cash Flows

34

 

Non-GAAP Measures

35

 

Critical Accounting Policies and Estimates

39

 

Impact of Recent Accounting Pronouncements

39

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

Item 4.

Controls and Procedures

40

Part II - OTHER INFORMATION

41

Item 1.

Legal Proceedings

41

Item 1A.

Risk Factors

41

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 3.

Defaults upon Senior Securities

41

Item 4.

Mine Safety Disclosures

41

Item 5.

Other Information

41

Item 6.

Exhibits

42

 

 


 

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except per share amounts)

 

 

 

March 31,
2024

 

 

December 31,
2023

 

Assets

 

 

 

 

 

 

Accounted for using the operating method:

 

 

 

 

 

 

Land

 

$

724,199

 

 

$

748,529

 

Land improvements

 

 

316,170

 

 

 

328,746

 

Buildings and improvements

 

 

3,591,260

 

 

 

3,803,156

 

Equipment

 

 

8,247

 

 

 

8,265

 

Total accounted for using the operating method

 

 

4,639,876

 

 

 

4,888,696

 

Less accumulated depreciation

 

 

(606,225

)

 

 

(626,597

)

Accounted for using the operating method, net

 

 

4,033,651

 

 

 

4,262,099

 

Accounted for using the direct financing method

 

 

26,522

 

 

 

26,643

 

Accounted for using the sales-type method

 

 

571

 

 

 

572

 

Property under development

 

 

133,064

 

 

 

94,964

 

Investment in rental property, net

 

 

4,193,808

 

 

 

4,384,278

 

Cash and cash equivalents

 

 

221,740

 

 

 

19,494

 

Accrued rental income

 

 

149,203

 

 

 

152,724

 

Tenant and other receivables, net

 

 

836

 

 

 

1,487

 

Prepaid expenses and other assets

 

 

33,149

 

 

 

36,661

 

Interest rate swap, assets

 

 

57,900

 

 

 

46,096

 

Goodwill

 

 

339,769

 

 

 

339,769

 

Intangible lease assets, net

 

 

273,250

 

 

 

288,226

 

Total assets

 

$

5,269,655

 

 

$

5,268,735

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

Unsecured revolving credit facility

 

$

73,820

 

 

$

90,434

 

Mortgages, net

 

 

78,517

 

 

 

79,068

 

Unsecured term loans, net

 

 

896,260

 

 

 

895,947

 

Senior unsecured notes, net

 

 

845,498

 

 

 

845,309

 

Accounts payable and other liabilities

 

 

40,655

 

 

 

47,534

 

Dividends payable

 

 

56,871

 

 

 

56,869

 

Accrued interest payable

 

 

9,377

 

 

 

5,702

 

Intangible lease liabilities, net

 

 

50,953

 

 

 

53,531

 

Total liabilities

 

 

2,051,951

 

 

 

2,074,394

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Broadstone Net Lease, Inc. equity:

 

 

 

 

 

 

Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued or outstanding

 

 

 

 

 

 

Common stock, $0.00025 par value; 500,000 shares authorized, 188,435 and 187,614 shares issued
   and outstanding at March 31, 2024 and December 31, 2023, respectively

 

 

47

 

 

 

47

 

Additional paid-in capital

 

 

3,446,910

 

 

 

3,440,639

 

Cumulative distributions in excess of retained earnings

 

 

(430,169

)

 

 

(440,731

)

Accumulated other comprehensive income

 

 

56,834

 

 

 

49,286

 

Total Broadstone Net Lease, Inc. equity

 

 

3,073,622

 

 

 

3,049,241

 

Non-controlling interests

 

 

144,082

 

 

 

145,100

 

Total equity

 

 

3,217,704

 

 

 

3,194,341

 

Total liabilities and equity

 

$

5,269,655

 

 

$

5,268,735

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

1


 

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income

(Unaudited)

(in thousands, except per share amounts)

 

 

 

For the Three Months Ended
March 31,

 

 

 

2024

 

 

2023

 

Revenues

 

 

 

 

 

 

Lease revenues, net

 

$

105,366

 

 

$

118,992

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

Depreciation and amortization

 

 

37,772

 

 

 

41,784

 

Property and operating expense

 

 

5,660

 

 

 

5,886

 

General and administrative

 

 

9,432

 

 

 

10,416

 

Provision for impairment of investment in rental properties

 

 

26,400

 

 

 

1,473

 

Total operating expenses

 

 

79,264

 

 

 

59,559

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

Interest income

 

 

233

 

 

 

162

 

Interest expense

 

 

(18,578

)

 

 

(21,139

)

Gain on sale of real estate

 

 

59,132

 

 

 

3,415

 

Income taxes

 

 

(408

)

 

 

(479

)

Other income (expenses)

 

 

1,696

 

 

 

(18

)

Net income

 

 

68,177

 

 

 

41,374

 

Net income attributable to non-controlling interests

 

 

(3,063

)

 

 

(2,070

)

Net income attributable to Broadstone Net Lease, Inc.

 

$

65,114

 

 

$

39,304

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

Basic

 

 

187,290

 

 

 

186,130

 

Diluted

 

 

196,417

 

 

 

196,176

 

Net earnings per share attributable to common stockholders

 

 

 

 

 

 

Basic and Diluted

 

$

0.35

 

 

$

0.21

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

Net income

 

$

68,177

 

 

$

41,374

 

Other comprehensive income

 

 

 

 

 

 

Change in fair value of interest rate swaps

 

 

11,804

 

 

 

(17,899

)

Realized loss on interest rate swaps

 

 

159

 

 

 

522

 

Comprehensive income

 

 

80,140

 

 

 

23,997

 

Comprehensive income attributable to non-controlling interests

 

 

(3,600

)

 

 

(1,200

)

Comprehensive income attributable to Broadstone Net Lease, Inc.

 

$

76,540

 

 

$

22,797

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


 

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Equity

(Unaudited)

(in thousands, except per share amounts)

 

 

Common
Stock

 

 

Additional
Paid-in
Capital

 

 

Cumulative
Distributions
in Excess of
Retained Earnings

 

 

Accumulated
Other
Comprehensive
Income

 

 

Non-
controlling
Interests

 

 

Total
Equity

 

Balance, January 1, 2024

 

$

47

 

 

$

3,440,639

 

 

$

(440,731

)

 

$

49,286

 

 

$

145,100

 

 

$

3,194,341

 

Net income

 

 

 

 

 

 

 

 

65,114

 

 

 

 

 

 

3,063

 

 

 

68,177

 

Issuance of 822 shares of common stock under equity incentive plan

 

 

 

 

 

116

 

 

 

 

 

 

 

 

 

 

 

 

116

 

Offering costs, discounts, and commissions

 

 

 

 

 

(36

)

 

 

 

 

 

 

 

 

 

 

 

(36

)

Stock-based compensation, net of 25 shares of restricted stock forfeited

 

 

 

 

 

1,475

 

 

 

 

 

 

 

 

 

 

 

 

1,475

 

Retirement of 71 shares of common stock under equity incentive plan

 

 

 

 

 

(1,040

)

 

 

 

 

 

 

 

 

 

 

 

(1,040

)

Conversion of 95 OP units to 95 shares of common stock

 

 

 

 

 

1,536

 

 

 

 

 

 

 

 

 

(1,536

)

 

 

 

Distributions declared ($0.285 per share and OP Unit)

 

 

 

 

 

 

 

 

(54,552

)

 

 

 

 

 

(2,740

)

 

 

(57,292

)

Change in fair value of interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

11,274

 

 

 

530

 

 

 

11,804

 

Realized loss on interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

152

 

 

 

7

 

 

 

159

 

Adjustment to non-controlling interests

 

 

 

 

 

4,220

 

 

 

 

 

 

(3,878

)

 

 

(342

)

 

 

 

Balance, March 31, 2024

 

$

47

 

 

$

3,446,910

 

 

$

(430,169

)

 

$

56,834

 

 

$

144,082

 

 

$

3,217,704

 

 

 

 

 

Common
Stock

 

 

Additional
Paid-in
Capital

 

 

Cumulative
Distributions
in Excess of
Retained Earnings

 

 

Accumulated
Other
Comprehensive
 Income

 

 

Non-
controlling
Interests

 

 

Total
Equity

 

Balance, January 1, 2023

 

$

47

 

 

$

3,419,395

 

 

$

(386,049

)

 

$

59,525

 

 

$

169,587

 

 

$

3,262,505

 

Net income

 

 

 

 

 

 

 

 

39,304

 

 

 

 

 

 

2,070

 

 

 

41,374

 

Issuance of 259 shares of common stock under equity incentive plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offering costs, discounts, and commissions

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

(2

)

Stock-based compensation, net of zero shares of restricted stock forfeited

 

 

 

 

 

1,879

 

 

 

 

 

 

 

 

 

 

 

 

1,879

 

Retirement of 66 shares of common stock under equity incentive plan

 

 

 

 

 

(1,175

)

 

 

 

 

 

 

 

 

 

 

 

(1,175

)

Conversion of 896 OP units to 896 shares of common stock

 

 

 

 

 

14,897

 

 

 

 

 

 

 

 

 

(14,897

)

 

 

 

Distributions declared ($0.275 per share and OP Unit)

 

 

 

 

 

 

 

 

(52,145

)

 

 

 

 

 

(2,742

)

 

 

(54,887

)

Change in fair value of interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

(17,003

)

 

 

(896

)

 

 

(17,899

)

Realized loss on interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

496

 

 

 

26

 

 

 

522

 

Adjustment to non-controlling interests

 

 

 

 

 

(460

)

 

 

 

 

 

498

 

 

 

(38

)

 

 

 

Balance, March 31, 2023

 

$

47

 

 

$

3,434,534

 

 

$

(398,890

)

 

$

43,516

 

 

$

153,110

 

 

$

3,232,317

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

For the Three Months Ended
March 31,

 

 

 

2024

 

 

2023

 

Operating activities

 

 

 

 

 

 

Net income

 

$

68,177

 

 

$

41,374

 

Adjustments to reconcile net income including non-controlling interests to net cash provided by
   operating activities:

 

 

 

 

 

 

Depreciation and amortization including intangibles associated with investment in rental property

 

 

36,754

 

 

 

39,093

 

Provision for impairment of investment in rental properties

 

 

26,400

 

 

 

1,473

 

Amortization of debt issuance costs and original issuance discount charged to interest expense

 

 

983

 

 

 

960

 

Stock-based compensation expense

 

 

1,475

 

 

 

1,879

 

Straight-line rent, direct financing and sales-type lease adjustments

 

 

(2,424

)

 

 

(6,980

)

Gain on sale of real estate

 

 

(59,132

)

 

 

(3,415

)

Other non-cash items

 

 

(1,508

)

 

 

350

 

Changes in assets and liabilities:

 

 

 

 

 

 

Tenant and other receivables

 

 

704

 

 

 

262

 

Prepaid expenses and other assets

 

 

2,841

 

 

 

215

 

Accounts payable and other liabilities

 

 

(7,078

)

 

 

(3,418

)

Accrued interest payable

 

 

3,675

 

 

 

2,583

 

Net cash provided by operating activities

 

 

70,867

 

 

 

74,376

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

Acquisition of rental property

 

 

(497

)

 

 

(5,319

)

Investment in property under development including capitalized interest of $1,241 and $0 in 2024 and 2023, respectively

 

 

(38,100

)

 

 

 

Capital expenditures and improvements

 

 

(3,132

)

 

 

(15,583

)

Proceeds from disposition of rental property, net

 

 

247,064

 

 

 

50,410

 

Change in deposits on investments in rental property

 

 

(1,050

)

 

 

125

 

Net cash provided by investing activities

 

 

204,285

 

 

 

29,633

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

Offering costs, discounts, and commissions

 

 

(231

)

 

 

(170

)

Principal payments on mortgages and unsecured term loans

 

 

(560

)

 

 

(736

)

Borrowings on unsecured revolving credit facility

 

 

65,500

 

 

 

29,000

 

Repayments on unsecured revolving credit facility

 

 

(80,500

)

 

 

(118,000

)

Cash distributions paid to stockholders

 

 

(54,448

)

 

 

(51,844

)

Cash distributions paid to non-controlling interests

 

 

(2,767

)

 

 

(2,989

)

Net cash used in financing activities

 

 

(73,006

)

 

 

(144,739

)

Net increase (decrease) in cash and cash equivalents and restricted cash

 

 

202,146

 

 

 

(40,730

)

Cash and cash equivalents and restricted cash at beginning of period

 

 

20,632

 

 

 

60,040

 

Cash and cash equivalents and restricted cash at end of period

 

$

222,778

 

 

$

19,310

 

 

 

 

 

 

 

 

Reconciliation of cash and cash equivalents and restricted cash

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$

19,494

 

 

$

21,789

 

Restricted cash at beginning of period

 

 

1,138

 

 

 

38,251

 

Cash and cash equivalents and restricted cash at beginning of period

 

$

20,632

 

 

$

60,040

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

221,740

 

 

$

15,412

 

Restricted cash at end of period

 

 

1,038

 

 

 

3,898

 

Cash and cash equivalents and restricted cash at end of period

 

$

222,778

 

 

$

19,310

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

Broadstone Net Lease, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements (Unaudited)

1. Business Description

Broadstone Net Lease, Inc. (the “Corporation”) is a Maryland corporation formed on October 18, 2007, that elected to be taxed as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2008. Broadstone Net Lease, LLC (the Corporation’s operating company, or the “OP”), is the entity through which the Corporation conducts its business and owns (either directly or through subsidiaries) all of the Corporation’s properties. The Corporation is the sole managing member of the OP. The membership units not owned by the Corporation are referred to as OP Units or non-controlling interests. As the Corporation conducts substantially all of its operations through the OP, it is structured as what is referred to as an umbrella partnership real estate investment trust (“UPREIT”). The Corporation’s common stock is listed on the New York Stock Exchange under the symbol “BNL.” The Corporation, the OP, and its consolidated subsidiaries are collectively referred to as the “Company.”

The Company is an industrial-focused, diversified net lease REIT that focuses on investing in income-producing, single-tenant net leased commercial properties, primarily in the United States. The Company leases industrial, restaurant, healthcare, retail, and office commercial properties under long-term lease agreements. At March 31, 2024, the Company owned a diversified portfolio of 759 individual commercial properties with 752 properties located in 44 U.S. states and seven properties located in four Canadian provinces.

The following table summarizes the outstanding equity and economic ownership interest of the Company:

 

 

March 31, 2024

 

 

December 31, 2023

 

(in thousands)

 

Shares of
Common Stock

 

 

OP Units

 

 

Total Diluted
Shares

 

 

Shares of
Common Stock

 

 

OP Units

 

 

Total Diluted
Shares

 

Ownership interest

 

 

188,435

 

 

 

8,833

 

 

 

197,268

 

 

 

187,614

 

 

 

8,928

 

 

 

196,542

 

Percent ownership of OP

 

 

95.5

%

 

 

4.5

%

 

 

100.0

%

 

 

95.5

%

 

 

4.5

%

 

 

100.0

%

Refer to Note 14 for further discussion regarding the calculation of weighted average shares outstanding.

5


 

2. Summary of Significant Accounting Policies

Interim Information

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and Article 10 of the Securities and Exchange Commission’s (“SEC”) Regulation S-X. Accordingly, the Company has omitted certain footnote disclosures which would substantially duplicate those contained within the audited consolidated financial statements for the year ended December 31, 2023, included in the Company’s 2023 Annual Report on Form 10-K, filed with the SEC on February 22, 2024. Therefore, the readers of this quarterly report should refer to those audited consolidated financial statements, specifically Note 2, Summary of Significant Accounting Policies, for further discussion of significant accounting policies and estimates. The Company believes all adjustments necessary for a fair presentation have been included in these interim Condensed Consolidated Financial Statements (which include only normal recurring adjustments).

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts and operations of the Company. All intercompany balances and transactions have been eliminated in consolidation.

To the extent the Corporation has a variable interest in entities that are not evaluated under the variable interest entity (“VIE”) model, the Corporation evaluates its interests using the voting interest entity model. The Corporation has complete responsibility for the day-to-day management of, authority to make decisions for, and control of the OP. Based on consolidation guidance, the Corporation has concluded that the OP is a VIE as the members in the OP do not possess kick-out rights or substantive participating rights. Accordingly, the Corporation consolidates its interest in the OP. However, because the Corporation holds the majority voting interest in the OP and certain other conditions are met, it qualifies for the exemption from providing certain disclosure requirements associated with investments in VIEs.

The portion of the OP not owned by the Corporation is presented as non-controlling interests as of and during the periods presented.

Basis of Accounting

The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP.

Use of Estimates

The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Accordingly, actual results may differ from those estimates.

Investment in Property Under Development

Land acquired for development and construction and improvement costs incurred in connection with the development of new properties are capitalized and recorded as Property under development in the accompanying Condensed Consolidated Balance Sheets until construction has been completed. Such capitalized costs include all direct and indirect costs related to planning, development, and construction, including interest, real estate taxes, and other miscellaneous costs incurred during the construction period. Once completed, the property under development is placed in service and depreciation commences. For the three months ended March 31, 2024 and 2023, the Company invested $36.9 million and $0.0 million, respectively, in properties under development, excluding capitalized costs. At March 31, 2024 and December 31, 2023, the Company had $133.1 million and $95.0 million, respectively, classified as Property under development in the Condensed Consolidated Balance Sheets, inclusive of $2.7 million and $1.5 million of capitalized interest, respectively.

6


 

Long-lived Asset Impairment

The Company reviews long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If, and when, such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the long-lived asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the long-lived asset or asset group and its eventual disposition. Such cash flows include expected future operating income, as adjusted for trends and prospects, as well as the effects of demand, competition, and other factors. An impairment loss is measured as the amount by which the carrying amount of the long-lived asset or asset group exceeds its fair value. Significant judgment is made to determine if and when impairment should be taken. The Company’s assessment of impairment as of March 31, 2024 and 2023 was based on the most current information available to the Company. Certain of the Company’s properties may have fair values less than their carrying amounts. However, based on the Company’s plans with respect to each of those properties, the Company believes that their carrying amounts are recoverable and therefore, no impairment charges were recognized other than those described below. If the operating conditions mentioned above deteriorate or if the Company’s expected holding period for assets changes, subsequent tests for impairments could result in additional impairment charges in the future.

 

Inputs used in establishing fair value for impaired real estate assets generally fall within Level 3 of the fair value hierarchy, which are characterized as requiring significant judgment as little or no current market activity may be available for validation. The main indicator used to establish the classification of the inputs is current market conditions, as derived through the use of published commercial real estate market information and information obtained from brokers and other third party sources. The Company determines the valuation of impaired assets using generally accepted valuation techniques including discounted cash flow analysis, income capitalization, analysis of recent comparable sales transactions, actual sales negotiations, and bona fide purchase offers received from third parties. Management may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of its real estate.

The following table summarizes the Company’s impairment charges:

 

 

For the Three Months Ended
March 31,

 

(in thousands, except number of properties)

 

2024

 

 

2023

 

Number of properties

 

 

12

 

 

 

1

 

Impairment charge

 

$

26,400

 

 

$

1,473

 

During the three months ended March 31, 2024, the Company recognized impairment of $26.4 million, resulting from changes in the Company’s long-term hold strategy with respect to the individual properties. The impairments were based on actual and expected sales prices of the individual properties and include a $15.2 million impairment charge on a healthcare property and an $11.2 million impairment charge on 11 healthcare properties sold as part of a portfolio with a gain of $59.1 million, excluding any impairment.

Restricted Cash

Restricted cash generally includes escrow funds the Company maintains pursuant to the terms of certain mortgages, lease agreements, and undistributed proceeds from the sale of properties under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”), and is reported within Prepaid expenses and other assets in the Condensed Consolidated Balance Sheets. Restricted cash consisted of the following:

 

 

March 31,

 

 

December 31,

 

(in thousands)

 

2024

 

 

2023

 

Escrow funds and other

 

$

1,038

 

 

$

1,138

 

1031 exchange proceeds

 

 

 

 

 

 

 

 

$

1,038

 

 

$

1,138

 

Rent Received in Advance

Rent received in advance represents tenant rent payments received prior to the contractual due date, and is included in Accounts payable and other liabilities in the Condensed Consolidated Balance Sheets. Rent received in advance consisted of the following:

(in thousands)

 

March 31,
2024

 

 

December 31,
2023

 

Rent received in advance

 

$

15,200

 

 

$

14,776

 

 

7


 

Fair Value Measurements

Recurring Fair Value Measurements

The balances of financial instruments measured at fair value on a recurring basis are as follows (see Note 9):

 

 

March 31, 2024

 

(in thousands)

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Interest rate swap, assets

 

$

57,900

 

 

$

 

 

$

57,900

 

 

$

 

 

 

 

December 31, 2023

 

(in thousands)

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Interest rate swap, assets

 

$

46,096

 

 

$

 

 

$

46,096

 

 

$

 

Long-term Debt – The fair value of the Company’s debt was estimated using Level 1, Level 2, and Level 3 inputs based on recent secondary market trades of the Company’s 2031 Senior Unsecured Public Notes (see Note 7), recent comparable financing transactions, recent market risk premiums for loans of comparable quality, applicable Secured Overnight Financing Rate (“SOFR”), Canadian Dollar Offered Rate (“CDOR”), U.S. Treasury obligation interest rates, and discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect the Company’s judgment as to the approximate current lending rates for loans or groups of loans with similar maturities and assumes that the debt is outstanding through maturity. Market information, as available, or present value techniques were utilized to estimate the amounts required to be disclosed. Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist on specific loans, it is unlikely that the estimated fair value of any such debt could be realized by immediate settlement of the obligation.

The following table summarizes the carrying amount reported in the Condensed Consolidated Balance Sheets and the Company’s estimate of the fair value of the unsecured revolving credit facility, mortgages, unsecured term loans, and senior unsecured notes which reflects the fair value of interest rate swaps:

(in thousands)

 

March 31,
2024

 

 

December 31,
2023

 

Carrying amount

 

$

1,902,432

 

 

$

1,919,607

 

Fair value

 

 

1,741,050

 

 

 

1,761,177

 

Non-recurring Fair Value Measurements

The Company’s non-recurring fair value measurements at March 31, 2024 and December 31, 2023 consisted of the fair value of impaired real estate assets that were determined using Level 3 inputs.

Right-of-Use Assets and Lease Liabilities

The Company is a lessee under non-cancelable operating leases associated with its corporate headquarters and other office spaces as well as with leases of land (“ground leases”). The Company records right-of-use assets and lease liabilities associated with these leases. The lease liability is equal to the net present value of the future payments to be made under the lease, discounted using estimates based on observable market factors. The right-of-use asset is generally equal to the lease liability plus initial direct costs associated with the leases. The Company includes in the recognition of the right-of-use asset and lease liability those renewal periods that are reasonably certain to be exercised, based on the facts and circumstances that exist at lease inception. Amounts associated with percentage rent provisions are considered variable lease costs and are not included in the initial measurement of the right-of-use asset or lease liability. The Company has made an accounting policy election, applicable to all asset types, not to separate lease from nonlease components when allocating contract consideration related to operating leases.

Right-of-use assets and lease liabilities associated with operating leases were included in the accompanying Condensed Consolidated Balance Sheets as follows:

 

 

 

 

March 31,

 

 

December 31,

 

(in thousands)

 

Financial Statement Presentation

 

2024

 

 

2023

 

Right-of-use assets

 

Prepaid expenses and other assets

 

$

7,528

 

 

$

8,476

 

Lease liabilities

 

Accounts payable and other liabilities

 

 

7,905

 

 

 

8,256

 

The Company’s right-of-use assets and lease liabilities primarily consist of a ten year lease for the Company’s corporate office space. The lease contains two five-year extension options, exercisable at the Company’s discretion, that are not reasonably certain to be exercised, and are therefore excluded from our calculation of the lease liability.

8


 

3. Acquisitions of Rental Property

The Company did not close on any acquisitions during the three months ended March 31, 2024.

The Company closed on the following acquisitions during the three months ended March 31, 2023:

(in thousands, except number of properties)

 

Number of

 

 

Real Estate

 

 

Date

 

Property Type

 

Properties

 

 

Acquisition Price

 

 

March 14, 2023

 

Retail

 

 

1

 

 

$

5,221

 

(a)

(a)
Acquisition price excludes capitalized acquisition costs of $0.1 million.

The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed. The following table summarizes the purchase price allocation for completed real estate acquisitions:

 

 

For the Three Months Ended
March 31,

 

 

(in thousands)

 

2024

 

 

2023

 

 

Land

 

$

 

 

$

781

 

 

Land improvements

 

 

 

 

 

360

 

 

Buildings and improvements

 

 

 

 

 

3,890

 

 

Acquired in-place leases (b)

 

 

 

 

 

501

 

 

Acquired below-market leases (c)

 

 

 

 

 

(166

)

 

 

 

$

 

 

$

5,366

 

 

(b)
The weighted average amortization period for acquired in-place leases is 20 years for acquisitions completed during the three months ended March 31, 2023. There were no acquisitions during the three month ended March 31, 2024.
(c)
The weighted average amortization period for acquired below-market leases is 20 years for acquisitions completed during the three months ended March 31, 2023. There were no acquisitions during the three month ended March 31, 2024.

The above acquisition was funded using a combination of available cash on hand and unsecured revolving credit facility borrowings and qualified as an asset acquisition. As such, acquisition costs were capitalized.

4. Sale of Real Estate

The Company closed on the following sales of real estate, none of which qualified as discontinued operations:

 

 

For the Three Months Ended
March 31,

 

(in thousands, except number of properties)

 

2024

 

 

2023

 

Number of properties disposed

 

 

37

 

 

 

3

 

Aggregate sale price

 

$

251,752

 

 

$

51,874

 

Aggregate carrying value

 

 

(189,373

)

 

 

(46,995

)

Additional sales expenses

 

 

(3,247

)

 

 

(1,464

)

Gain on sale of real estate

 

$

59,132

 

 

$

3,415

 

 

9


 

5. Investment in Rental Property and Lease Arrangements

The Company generally leases its investment rental property to established tenants in the industrial, restaurant, healthcare, retail, and office property types. At March 31, 2024, the Company had 759 real estate properties, 746 of which were leased under leases that have been classified as operating leases, nine that have been classified as direct financing leases, one that has been classified as a sales-type lease, and three that were vacant. Of the nine leases classified as direct financing leases, three include land portions which are accounted for as operating leases. The sales-type lease includes a land portion which is accounted for as an operating lease. Most leases have initial terms of 10 to 20 years. The Company’s leases generally provide for limited increases in rent as a result of fixed increases, increases in the Consumer Price Index (“CPI”), or increases in the tenant’s sales volume. Generally, tenants are also required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building, and maintain property and liability insurance coverage. The leases also typically provide for one or more multiple-year renewal options, at the election of the tenant, and are subject to generally the same terms and conditions as the initial lease.

Investment in Rental Property – Accounted for Using the Operating Method

Depreciation expense on investment in rental property was as follows:

 

 

For the Three Months Ended
March 31,

 

(in thousands)

 

2024

 

 

2023

 

Depreciation

 

$

29,994

 

 

$

31,157

 

Estimated lease payments to be received under non-cancelable operating leases with tenants at March 31, 2024 are as follows:

(in thousands)

 

 

 

Remainder of 2024

 

$

280,799

 

2025

 

 

387,464

 

2026

 

 

385,811

 

2027

 

 

370,847

 

2028

 

 

355,398

 

Thereafter

 

 

2,964,754

 

 

 

$

4,745,073

 

Since lease renewal periods are exercisable at the option of the tenant, the above amounts only include future lease payments due during the initial lease terms. Such amounts exclude any potential variable rent increases that are based on changes in the CPI or future variable rents which may be received under the leases based on a percentage of the tenant’s gross sales. Additionally, certain of our leases provide tenants with the option to terminate their leases in exchange for termination penalties, or that are contingent upon the occurrence of a future event. Future lease payments within the table above have not been adjusted for these termination rights.

Investment in Rental Property – Direct Financing Leases

The Company’s net investment in direct financing leases was comprised of the following:

(in thousands)

 

March 31,
2024

 

 

December 31,
2023

 

Undiscounted estimated lease payments to be received

 

$

34,362

 

 

$

35,155

 

Estimated unguaranteed residual values

 

 

14,547

 

 

 

14,547

 

Unearned revenue

 

 

(22,272

)

 

 

(22,944

)

Reserve for credit losses

 

 

(115

)

 

 

(115

)

Net investment in direct financing leases

 

$

26,522

 

 

$

26,643

 

Undiscounted estimated lease payments to be received under non-cancelable direct financing leases with tenants at March 31, 2024 are as follows:

(in thousands)

 

 

 

Remainder of 2024

 

$

2,379

 

2025

 

 

3,285

 

2026

 

 

3,357

 

2027

 

 

3,426

 

2028

 

 

3,496

 

Thereafter

 

 

18,419

 

 

 

$

34,362

 

The above rental receipts do not include future lease payments for renewal periods, potential variable CPI rent increases, or variable percentage rent payments that may become due in future periods.