Notes to Consolidated Financial Statements
September 30, 2022
1. Organization
Description of Business
Essential Properties Realty Trust, Inc. (the “Company”) is an internally managed real estate company that acquires, owns and manages primarily single-tenant properties that are net leased on a long-term basis to middle-market companies operating service-oriented or experience-based businesses. The Company generally invests in and leases freestanding, single-tenant commercial real estate facilities where a tenant services its customers and conducts activities that are essential to the generation of the tenant’s sales and profits.
The Company was organized on January 12, 2018 as a Maryland corporation. It elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes beginning with the year ended December 31, 2018, and it believes that its current organizational and operational status and intended distributions will allow it to continue to so qualify. Substantially all of the Company’s business is conducted directly and indirectly through its operating partnership, Essential Properties, L.P. (the “Operating Partnership”).
On June 25, 2018, the Company completed the initial public offering (“IPO”) of its common stock. The common stock of the Company is listed on the New York Stock Exchange under the ticker symbol “EPRT”.
COVID-19 Pandemic
For much of 2020, the COVID-19 pandemic (“COVID-19”) created significant uncertainty and economic disruption that adversely affected the Company and its tenants. The adverse impact of the pandemic moderated during 2021 and has significantly diminished during 2022. However, the continuing impact of the COVID-19 pandemic and its duration are unclear, and various factors could erode the progress that has been made against the virus to date. If conditions similar to those experienced in 2020, at the height of the pandemic, were to reoccur, they would adversely impact the Company and its tenants. The Company continues to closely monitor the impact of COVID-19 on all aspects of its business. For further information regarding the impact of COVID-19 on the Company, see Part I, Item 1A titled "Risk Factors" of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
2. Summary of Significant Accounting Policies
Basis of Accounting
The accompanying unaudited consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and subsidiaries in which the Company has a controlling financial interest. All intercompany accounts and transactions have been eliminated in consolidation. As of September 30, 2022 and December 31, 2021, the Company, directly and indirectly, held a 99.6% ownership interest in the Operating Partnership and the consolidated financial statements include the financial statements of the Operating Partnership as of these dates. See Note 7—Equity for changes in the ownership interest in the Operating Partnership.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Reportable Segments
ASC Topic 280, Segment Reporting, establishes standards for the manner in which enterprises report information about operating segments. Substantially all of the Company’s investments, at acquisition, are comprised of real estate owned that is leased to tenants on a long-term basis or real estate that secures the Company's investment in loans and direct financing lease receivables. Therefore, the Company aggregates these investments for reporting purposes and operates in one reportable segment.
Real Estate Investments
Investments in real estate are carried at cost less accumulated depreciation and impairment losses. The cost of investments in real estate reflects their purchase price or development cost. The Company evaluates each acquisition transaction to determine whether the acquired asset meets the definition of a business. Under Accounting Standards Update (“ASU”) 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business, an acquisition does not qualify as a business when there is no substantive process acquired or substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets or the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. Transaction costs related to acquisitions that are asset acquisitions are capitalized as part of the cost basis of the acquired assets, while transaction costs for acquisitions that are deemed to be acquisitions of a business are expensed as incurred. Improvements and replacements are capitalized when they extend the useful life or improve the productive capacity of the asset. Costs of repairs and maintenance are expensed as incurred.
The Company allocates the purchase price of acquired properties accounted for as asset acquisitions to tangible and identifiable intangible assets or liabilities based on their relative fair values. Tangible assets may include land, site improvements and buildings. Intangible assets may include the value of in-place leases and above- and below-market leases and other identifiable intangible assets or liabilities based on lease or property specific characteristics.
The Company incurs various costs in the leasing and development of its properties. Amounts paid to tenants that incentivize them to extend or otherwise amend an existing lease or to sign a new lease agreement are capitalized to lease incentives on the Company’s consolidated balance sheets. Tenant improvements are capitalized to building and improvements within the Company’s consolidated balance sheets. Costs incurred which are directly related to properties under development, which include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs and real estate taxes and insurance, are capitalized during the period of development as construction in progress. After the determination is made to capitalize a cost, it is allocated to the specific component of a project that benefited. Determination of when a development project commences, and capitalization begins, and when a development project has reached substantial completion, and is available for occupancy and capitalization must cease, involves a degree of judgment. The Company does not engage in speculative real estate development. The Company does, however, opportunistically agree to reimburse certain of its tenants for development costs at its properties in exchange for contractually specified rent that generally increases proportionally with its funding.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases based on the specific characteristics of each tenant’s lease. The Company estimates the cost to execute leases with terms similar to the remaining lease terms of the in-place leases, including leasing commissions, legal and other related expenses. Factors the Company considers in this analysis include an estimate of the carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses, and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from six to 12 months. The fair value of above- or below-market leases is recorded based on the net present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between the contractual amount to be paid pursuant to the in-place lease and the Company’s estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining non-cancelable term of the lease including any below-market fixed rate renewal options for below-market leases.
In making estimates of fair values for purposes of allocating purchase price, the Company uses a number of sources, including real estate valuations prepared by independent valuation firms. The Company also considers information and other factors including market conditions, the industry that the tenant operates in, characteristics of the real estate (e.g., location, size, demographics, value and comparative rental rates), tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business. Additionally, the Company considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. The Company uses the information obtained as a result of its pre-acquisition due diligence as part of its consideration of the accounting standard governing asset retirement obligations and, when necessary, will record an asset retirement obligation as part of the purchase price allocation.
Real estate investments that are intended to be sold are designated as “held for sale” on the consolidated balance sheets at the lesser of carrying amount and fair value less estimated selling costs. Real estate investments are no longer depreciated when they are classified as held for sale. If the disposal, or intended disposal, of certain real estate investments represents a strategic shift that has had or will have a major effect on the Company’s operations and financial results, the operations of such real estate investments would be presented as discontinued operations in the consolidated statements of operations for all applicable periods.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings and 15 years for site improvements. The Company recorded the following amounts of depreciation expense on its real estate investments during the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Depreciation on real estate investments | | $ | 20,178 | | | $ | 15,489 | | | $ | 58,997 | | | $ | 43,982 | |
Lease incentives are amortized on a straight-line basis as a reduction of rental income over the remaining non-cancellable terms of the respective leases. If a tenant terminates its lease, the unamortized portion of the lease incentive is charged to rental revenue. Construction in progress is not depreciated until the development has reached substantial completion. Tenant improvements are depreciated over the non-cancellable term of the related lease or their estimated useful life, whichever is shorter.
Capitalized above-market lease intangibles are amortized on a straight-line basis as a reduction of rental revenue over the remaining non-cancellable terms of the respective leases. Capitalized below-market lease intangibles are accreted on a straight-line basis as an increase to rental revenue over the remaining non-cancellable terms of the respective leases including any below-market fixed rate renewal option periods.
Capitalized above-market ground lease values are accreted as a reduction of property expenses over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property expenses over the remaining terms of the respective leases and any expected below-market renewal option periods where renewal is considered probable.
The value of in-place leases, exclusive of the value of above-market and below-market lease intangibles, is amortized to depreciation and amortization expense on a straight-line basis over the remaining periods of the respective leases.
If a tenant terminates its lease, the unamortized portion of each intangible, including in-place lease values, is charged to depreciation and amortization expense, while above- and below-market lease adjustments are recorded within rental revenue in the consolidated statements of operations.
Loans Receivable
The Company holds its loans receivable for long-term investment. Loans receivable are carried at amortized cost, including related unamortized discounts or premiums, if any, less the Company's estimated allowance for loan losses calculated in accordance with ASC 326. The Company recognizes interest income on loans receivable using the effective-interest method applied on a loan-by-loan basis. Direct costs associated with originating loans are offset against any related fees received and the balance, along with any premium or discount,
is deferred and amortized as an adjustment to interest income over the term of the related loan receivable using the effective-interest method.
Direct Financing Lease Receivables
Certain of the Company’s real estate investment transactions are accounted for as direct financing leases. The Company records the direct financing lease receivables at their net investment, determined as the aggregate minimum lease payments and the estimated non-guaranteed residual value of the leased property less unearned income and less the estimated allowance for loan losses calculated in accordance with ASC 326. The unearned income is recognized over the term of the related lease so as to produce a constant rate of return on the net investment in the asset. The Company’s investment in direct financing lease receivables is reduced over the applicable lease term to its non-guaranteed residual value by the portion of rent allocated to the direct financing lease receivables. Subsequent to the adoption of ASC 842, Leases (“ASC 842”) in January 2019, the Company's existing direct financing lease receivables have been accounted for in the same manner, unless the underlying contracts have been modified.
Impairment of Long-Lived Assets
If circumstances indicate that the carrying value of a property may not be recoverable, the Company reviews the property for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends, and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. Impairment losses, if any, are recorded directly within the Company's consolidated statement of operations.
The Company recorded the following provisions for impairment of long lived assets during the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Provision for impairment of real estate | | $ | 349 | | | $ | — | | | $ | 10,541 | | | $ | 6,120 | |
Cash and Cash Equivalents
Cash and cash equivalents includes cash in the Company’s bank accounts. The Company considers all cash balances and highly liquid investments with original maturities of three months or less to be cash and cash equivalents. The Company deposits cash with high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to an insurance limit.
As of September 30, 2022 and December 31, 2021, the Company had deposits of $136.3 million and $59.8 million, respectively, of which $136.1 million and $59.5 million, respectively, were in excess of the amount insured by the FDIC. Although the Company bears risk with respect to amounts in excess of those insured by the FDIC, it does not anticipate any losses as a result.
Restricted Cash
Restricted cash primarily consists of cash proceeds from the sale of assets held by a qualified intermediary to facilitate tax-deferred exchange transactions under Section 1031 of the Internal Revenue Code.
Forward Equity Sales
The Company has and may continue to enter into forward sale agreements for the sale and issuance of shares of its common stock, either through its 2022 ATM Program (as defined herein) or through an underwritten
public offering. These agreements may be physically settled in stock, settled in cash or net share settled at the Company’s election.
The Company evaluated its forward sale agreements and concluded they meet the conditions to be classified within stockholders’ equity. Prior to settlement, a forward sale agreement will be reflected in the diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of the Company’s common stock used in diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares of the Company’s common stock that would be issued upon full physical settlement of such forward sale agreement over the number of shares of the Company’s common stock that could be purchased by the Company in the market (based on the average market price during the period) using the proceeds receivable upon full physical settlement (based on the adjusted forward sale price at the end of the reporting period). Consequently, prior to settlement of a forward sale agreement, there will be no dilutive effect on the Company’s earnings per share except during periods when the average market price of the Company’s common stock is above the adjusted forward sale price. However, upon settlement of a forward sales agreement, if the Company elects to physically settle or net share settle such forward sale agreement, delivery of the Company’s shares will result in dilution to the Company’s earnings per share.
Deferred Financing Costs
Financing costs related to establishing the Company’s 2018 Credit Facility and Revolving Credit Facility (as defined below) were deferred and are being amortized as an increase to interest expense in the consolidated statements of operations over the term of the facility and are reported as a component of rent receivables, prepaid expenses and other assets, net on the consolidated balance sheets.
Financing costs related to the issuance of the Company’s 2024 Term Loan, 2027 Term Loan, 2028 Term Loan and 2031 Notes (each as defined below) were deferred and are being amortized as an increase to interest expense in the consolidated statements of operations over the term of the related debt instrument and are reported as a reduction of the related debt balance on the consolidated balance sheets.
Derivative Instruments
In the normal course of business, the Company uses derivative financial instruments, which may include interest rate swaps, caps, options, floors and other interest rate derivative contracts, to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows on a portion of the Company’s floating-rate debt. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. The Company records all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may also enter into derivative contracts that are intended to economically hedge certain risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designed and qualifies for hedge accounting treatment. If a derivative is designated and qualifies for cash flow hedge accounting treatment, the change in the estimated fair value of the derivative is recorded in other comprehensive income in the consolidated statements of comprehensive income to the extent that it is effective. Any ineffective portion of a change in derivative fair value is immediately recorded in earnings. If the Company elects not to apply hedge accounting treatment (or for derivatives that do not qualify as hedges), any change in the fair value of such derivative instruments would be recognized immediately as a gain or loss on derivative instruments in the consolidated statements of operations.
Fair Value Measurement
The Company estimates the fair value of financial and non-financial assets and liabilities based on the framework established in fair value accounting guidance. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The hierarchy described below prioritizes inputs to the valuation techniques used in measuring the fair value of assets and liabilities. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs to be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
•Level 1—Quoted prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date.
•Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
•Level 3—Unobservable inputs that reflect the Company’s own assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
Revenue Recognition
The Company’s rental revenue is primarily rent received from tenants. Rent from tenants is recorded in accordance with the terms of each lease on a straight-line basis over the non-cancellable initial term of the lease from the later of the date of the commencement of the lease and the date of acquisition of the property subject to the lease. Rental revenue recognition begins when the tenant controls the space and continues through the term of the related lease. Because substantially all of the leases provide for rental increases at specified intervals, the Company records a straight-line rent receivable and recognizes revenue on a straight-line basis through the expiration of the non-cancelable term of the lease. The Company considers whether the collectability of rents is reasonably assured in determining the amount of straight-line rent to record.
Generally, the Company’s leases provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions provided under the initial lease term, including rent increases. If economic incentives make it reasonably certain that an option period to extend the lease will be exercised, the Company will include these options in determining the non-cancelable term of the lease.
The Company defers rental revenue related to lease payments received from tenants in advance of their due dates. These amounts are presented within accrued liabilities and other payables on the Company’s consolidated balance sheets.
Certain properties in the Company’s investment portfolio are subject to leases that provide for contingent rent based on a percentage of the tenant’s gross sales. For these leases, the Company recognizes contingent rental revenue when the threshold upon which the contingent lease payment is based is actually reached.
The Company recorded the following amounts as contingent rent, which are included as a component of rental revenue in the Company's consolidated statements of operations, during the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Contingent rent | | $ | 210 | | | $ | 233 | | | $ | 526 | | | $ | 464 | |
Adjustment to Rental Revenue for Tenant Credit
The Company continually reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located.
If the assessment of the collectability of substantially all payments due under a lease changes from probable to not probable, any difference between the rental revenue recognized to date and the lease payments that have been collected is recognized as a current period reduction of rental revenue in the consolidated statements of operations.
The Company recorded the following adjustments as increases to or reductions of rental revenue for tenant credit during the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Adjustment to increase rental revenue for tenant credit | | $ | 36 | | | $ | — | | | $ | 451 | | | $ | 3,020 | |
Offering Costs
In connection with the completion of equity offerings, the Company incurs legal, accounting and other offering-related costs. Such costs are deducted from the gross proceeds of each equity offering when the offering is completed. As of September 30, 2022 and December 31, 2021, the Company capitalized a total of $90.2 million and $79.3 million, respectively, of such costs, which are presented as a reduction of additional paid-in capital in the Company’s consolidated balance sheets.
Income Taxes
The Company elected and qualified to be taxed as a REIT under sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year ended December 31, 2018. REITs are subject to a number of organizational and operational requirements, including a requirement that 90% of ordinary “REIT taxable income” (as determined without regard to the dividends paid deduction or net capital gains) be distributed. As a REIT, the Company will generally not be subject to U.S. federal income tax to the extent that it meets the organizational and operational requirements and its distributions equal or exceed REIT taxable income. For the period subsequent to the effective date of its REIT election, the Company continues to meet the organizational and operational requirements and expects distributions to exceed REIT taxable income. Accordingly, no provision has been made for U.S. federal income taxes. Even though the Company has elected and qualifies for taxation as a REIT, it may be subject to state and local income and franchise taxes, and to federal income and excise tax on its undistributed income. Franchise taxes and federal excise taxes on the Company’s undistributed income, if any, are included in general and administrative expenses on the accompanying consolidated statements of operations. Additionally, taxable income from non-REIT activities managed through the Company's taxable REIT subsidiary is subject to federal, state, and local taxes.
The Company analyzes its tax filing positions in all of the U.S. federal, state and local tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in such jurisdictions. The Company follows a two-step process to evaluate uncertain tax positions. Step one, recognition, occurs when an entity concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Step two, measurement, determines the amount of benefit that is more-likely-than-not to be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when the Company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. The use of a valuation allowance as a substitute for derecognition of tax positions is prohibited.
As of September 30, 2022 and December 31, 2021, the Company had no accruals recorded for uncertain tax positions. The Company’s policy is to classify interest expense and penalties relating to taxes in general and administrative expense in the consolidated statements of operations. During the three and nine months ended September 30, 2022 and 2021, the Company recorded de minimis interest or penalties relating to taxes, and there were no interest or penalties with respect to taxes accrued as of September 30, 2022 or December 31, 2021. The 2021, 2020, 2019 and 2018 taxable years remain open to examination by federal and/or state taxing jurisdictions to which the Company is subject.
Equity-Based Compensation
The Company grants shares of restricted common stock and restricted share units (“RSUs”) to its directors, executive officers and other employees that vest over specified time periods, subject to the recipient’s continued
service. The Company also grants performance-based RSUs to members of its senior management team, the final number of which is determined based on objective and subjective performance conditions and which vest over a multi-year period, subject to the recipient’s continued service. The Company accounts for the restricted common stock and RSUs in accordance with ASC 718, Compensation – Stock Compensation, which requires that such compensation be recognized in the financial statements based on its estimated grant-date fair value. The value of such awards is recognized as compensation expense in general and administrative expenses in the accompanying consolidated statements of operations over the applicable service periods.
The Company recognizes compensation expense for equity-based compensation using the straight-line method based on the terms of the individual grant. Forfeitures of equity-based compensation awards, if any, are recognized when they occur.
Variable Interest Entities
The Financial Accounting Standards Board (“FASB”) provides guidance for determining whether an entity is a variable interest entity (a “VIE”). VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. A VIE is required to be consolidated by its primary beneficiary, which is the party that (i) has the power to control the activities that most significantly impact the VIE’s economic performance; and (ii) has the obligation to absorb losses, or the right to receive benefits, of the VIE that could potentially be significant to the VIE.
The Company has concluded that the Operating Partnership is a VIE of which the Company is the primary beneficiary, as the Company has the power to direct the activities that most significantly impact the economic performance of the Operating Partnership. Substantially all of the Company’s assets and liabilities are held by the Operating Partnership. The assets and liabilities of the Operating Partnership are consolidated and reported as assets and liabilities on the Company’s consolidated balance sheets as of September 30, 2022 and December 31, 2021.
Additionally, the Company has concluded that certain entities to which it has provided mortgage loans are VIEs because the entities' equity was not sufficient to finance their activities without additional subordinated financial support. The following table presents information about the Company’s mortgage loan-related VIEs as of the dates presented:
| | | | | | | | | | | | | | |
| (dollar amounts in thousands) | | September 30,
2022 | | December 31,
2021 |
| Number of VIEs | | 25 | | 23 |
Aggregate carrying value | | $ | 198,035 | | | $ | 140,851 | |
The Company was not the primary beneficiary of any of these entities because the Company did not have the power to direct the activities that most significantly impact the entities’ economic performance as of September 30, 2022 and December 31, 2021. The Company’s maximum exposure to loss in these entities is limited to the carrying amount of its investment. The Company had no liabilities associated with these VIEs as of September 30, 2022 and December 31, 2021.
Recent Accounting Developments
In July 2021, the FASB issued ASU 2021-05, Lease (Topic 842): Lessors - Certain Leases with Variable Lease Payments ("ASU 2021-05"). The guidance in ASU 2021-05 amends the lease classification requirements for the lessors under certain leases containing variable payments to align with practice under ASC 840. The lessor should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met: 1) the lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in ASC 842-10-25-2 through 25-3; and 2) the lessor would have otherwise recognized a day-one loss. The amendments in ASU 2021-05 are effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The adoption of ASU 2021-05 did not have a material impact on the Company's consolidated financial statements.
3. Investments
The following table presents information about the number of properties or investments in the Company’s real estate investment portfolio as of each date presented:
| | | | | | | | | | | | | | |
| | September 30,
2022 | | December 31,
2021 |
Owned properties (1) | | 1,415 | | 1,315 |
Properties securing investments in mortgage loans (2) | | 146 | | 126 |
Ground lease interests (3) | | 11 | | 10 |
| Total number of investments | | 1,572 | | 1,451 |
_____________________________________
(1)Includes 8 and 11 properties which are subject to leases accounted for as direct financing leases or loans as of September 30, 2022 and December 31, 2021, respectively.
(2)Properties secure 18 and 17 mortgage loans receivable as of September 30, 2022 and December 31, 2021, respectively.
(3)Includes one building which is subject to a lease accounted for as a direct financing lease as of December 31, 2021.
The following table presents information about the gross investment value of the Company’s real estate investment portfolio as of each date presented:
| | | | | | | | | | | | | | |
| (in thousands) | | September 30,
2022 | | December 31,
2021 |
| Real estate investments, at cost | | $ | 3,600,776 | | | $ | 3,150,840 | |
| Loans and direct financing lease receivables, net | | 204,742 | | | 189,287 | |
| Real estate investments held for sale, net | | 11,907 | | | 15,434 | |
| Total gross investments | | $ | 3,817,425 | | | $ | 3,355,561 | |
Investments in 2022 and 2021
The following table presents information about the Company’s investment activity during the nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | |
| | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 |
| Ownership type | | (1) | | Fee Interest |
| Number of properties | | 124 | | 209 |
| | | | |
| Purchase price allocation | | | | |
| Land and improvements | | $ | 183,270 | | | $ | 196,161 | |
| Building and improvements | | 311,651 | | | 356,732 | |
Construction in progress (2) | | 34,967 | | | 3,313 | |
| Intangible lease assets | | 2,836 | | | 9,721 | |
| Total purchase price | | 532,724 | | | 565,927 | |
| | | | |
| Intangible lease liabilities | | — | | | (3,296) | |
| Purchase price (including acquisition costs) | | $ | 532,724 | | | $ | 562,631 | |
_____________________________________
(1)During the nine months ended September 30, 2022, the Company acquired fee interests in 123 properties and acquired one property subject to a ground lease.
(2)Represents amounts incurred at and subsequent to acquisition and includes $0.4 million and approximately $0.1 million of capitalized interest expense for the nine months ended September 30, 2022 and 2021, respectively.
During the nine months ended September 30, 2022 and 2021, the Company did not make any new investments that individually represented more than 5% of the Company’s total real estate investment portfolio.
Gross Investment Activity
During the nine months ended September 30, 2022 and 2021, the Company had the following gross investment activity:
| | | | | | | | | | | | | | |
| (Dollar amounts in thousands) | | Number of
Investment
Locations | | Dollar
Amount of
Investments |
| Gross investments, January 1, 2021 | | 1,181 | | $ | 2,528,673 | |
| Acquisitions of and additions to real estate investments | | 209 | | 573,514 | |
| Sales of investments in real estate | | (36) | | (52,948) | |
| | | | |
Provisions for impairment of real estate (1) | | | | (6,120) | |
| Investments in loans receivable | | 46 | | 87,253 | |
| Principal collections on and settlements of loans and direct financing lease receivables | | (3) | | (2,468) | |
| Other | | | | 1,184 | |
| Gross investments, September 30, 2021 | | | | 3,129,088 | |
Less: Accumulated depreciation and amortization (2) | | | | (182,567) | |
| Net investments, September 30, 2021 | | 1,397 | | $ | 2,946,521 | |
| | | | |
| Gross investments, January 1, 2022 | | 1,451 | | $ | 3,355,561 | |
| Acquisitions of and additions to real estate investments | | 124 | | 529,278 | |
| Sales of investments in real estate | | (28) | | (69,147) | |
| | | | |
Provisions for impairment of real estate (3) | | | | (10,541) | |
| Investments in loans receivable | | 60 | | 96,907 | |
| Principal collections on and settlements of loans and direct financing lease receivables | | (35) | | (81,315) | |
| Other | | | | (3,318) | |
| Gross investments, September 30, 2022 | | | | 3,817,425 | |
Less: Accumulated depreciation and amortization (2) | | | | (259,092) | |
| Net investments, September 30, 2022 | | 1,572 | | $ | 3,558,333 | |
_____________________________________
(1)During the nine months ended September 30, 2021, the Company identified and recorded provisions for impairment at two vacant properties and 16 tenanted properties.
(2)Includes $225.3 million and $155.1 million of accumulated depreciation as of September 30, 2022 and 2021, respectively.
(3)During the nine months ended September 30, 2022, the Company identified and recorded provisions for impairment at seven tenanted properties and two vacant properties.
Real Estate Investments
The Company’s investment properties are leased to tenants under long-term operating leases that typically include one or more renewal options. See Note 4—Leases for more information about the Company’s leases.
Loans and Direct Financing Lease Receivables
As of September 30, 2022 and December 31, 2021, the Company had 21 loans receivable outstanding with an aggregate carrying amount of $203.4 million and $187.8 million, respectively. The maximum amount of loss due to credit risk is our current principal balance of $203.4 million as of September 30, 2022.
The Company’s loans receivable portfolio as of September 30, 2022 and December 31, 2021 is summarized below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Principal Balance Outstanding |
| Loan Type | | Monthly Payment (1) | | Number of Secured Properties | | Effective Interest Rate | | Stated Interest Rate | | Maturity Date | | September 30,
2022 | | December 31,
2021 |
Mortgage (2)(3) | | I/O | | 2 | | 8.80% | | 8.10% | | 2039 | | $ | 12,000 | | | $ | 12,000 | |
Mortgage (3) | | P+I | | — | | 8.10% | | 8.10% | | 2059 | | — | | | 6,096 | |
Mortgage (2) | | I/O | | 2 | | 8.53% | | 7.80% | | 2039 | | 7,300 | | | 7,300 | |
Mortgage (2) | | I/O | | 69 | | 7.79% | | 7.33% | | 2034 | | 51,000 | | | 28,000 | |
Mortgage (2) | | I/O | | 1 | | 8.42% | | 7.70% | | 2040 | | 5,300 | | | 5,300 | |
Mortgage (2) | | I/O | | 3 | | 8.30% | | 8.25% | | 2022 | | 2,324 | | | 2,324 | |
Mortgage (2) | | I/O | | 1 | | 7.00% | | 7.00% | | 2023 | | 600 | | | 600 | |
Mortgage (2) | | I/O | | — | | 6.89% | | 6.75% | | 2026 | | — | | | 14,165 | |
Mortgage (2) | | I/O | | 3 | | 8.30% | | 8.25% | | 2023 | | 3,146 | | | 3,146 | |
Mortgage (2) | | I/O | | 2 | | 6.87% | | 6.40% | | 2036 | | 2,520 | | | 2,520 | |
Mortgage (2) | | I/O | | 8 | | 7.51% | | 7.00% | | 2036 | | 12,070 | | | 30,806 | |
Mortgage (2) | | I/O | | — | | 7.51% | | 7.00% | | 2036 | | — | | | 9,679 | |
Mortgage (2) | | I/O | | — | | 7.85% | | 7.50% | | 2031 | | — | | | 13,000 | |
Mortgage (2) | | I/O | | 2 | | 8.29% | | 8.25% | | 2023 | | 2,389 | | | 2,389 | |
Mortgage (2) | | I/O | | 1 | | 8.91% | | 8.00% | | 2052 | | 23,004 | | | 6,864 | |
Mortgage (2) | | I/O | | 2 | | 7.44% | | 7.10% | | 2036 | | 9,808 | | | 9,808 | |
Mortgage (2) | | I/O | | 6 | | 7.30% | | 6.80% | | 2036 | | 30,674 | | | 25,714 | |
Mortgage (2) | | I/O | | 1 | | 7.73% | | 7.20% | | 2036 | | 2,470 | | | 2,470 | |
Mortgage (2) | | I/O | | 1 | | 8.00% | | 8.00% | | 2023 | | 1,754 | | | — | |
Mortgage (2) | | I/O | | 40 | | 6.80% | | 7.00% | | 2027 | | 28,663 | | | — | |
Mortgage (2) | | I/O | | 1 | | 6.99% | | 7.20% | | 2037 | | 3,600 | | | — | |
Mortgage (2) | | I/O | | 1 | | 8.40% | | 8.25% | | 2024 | | 760 | | | — | |
| Leasehold interest | | P+I | | — | | 10.69% | | (4) | | 2039 | | — | | | 1,435 | |
| Leasehold interest | | P+I | | 1 | | 2.25% | | (5) | | 2034 | | 1,007 | | | 1,055 | |
| Leasehold interest | | P+I | | 1 | | 2.41% | | (5) | | 2034 | | 1,496 | | | 1,560 | |
| Leasehold interest | | P+I | | 1 | | 4.97% | | (5) | | 2038 | | 1,528 | | | 1,562 | |
| Net investment | | | | | | | | | | | | $ | 203,413 | | | $ | 187,793 | |
_____________________________________
(1)I/O: Interest Only; P+I: Principal and Interest
(2)Loan requires monthly payments of interest only with a balloon payment due at maturity.
(3)Loan allows for prepayments in whole or in part without penalty.
(4)This leasehold interest was accounted for as a loan receivable, as the lease for two land parcels contained an option for the lessee to repurchase the leased parcels in 2024 or 2025.
(5)These leasehold interests are accounted for as loans receivable, as the leases for each property contain an option for the relevant lessee to repurchase the leased property in the future.
Scheduled principal payments due to be received under the Company’s loans receivable as of September 30, 2022 were as follows:
| | | | | | | | |
| (in thousands) | | Future Principal Payments Due |
| October 1 - December 31, 2022 | | $ | 2,373 | |
| 2023 | | 8,096 | |
| 2024 | | 981 | |
| 2025 | | 234 | |
| 2026 | | 248 | |
| Thereafter | | 191,481 | |
| Total | | $ | 203,413 | |
As of September 30, 2022 and December 31, 2021, the Company had $2.1 million and $2.3 million, respectively, of net investments accounted for as direct financing lease receivables. The components of the investments accounted for as direct financing lease receivables were as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | September 30,
2022 | | December 31,
2021 |
| Minimum lease payments receivable | | $ | 2,892 | | | $ | 3,189 | |
| Estimated unguaranteed residual value of leased assets | | 250 | | | 270 | |
| Unearned income from leased assets | | (1,000) | | | (1,150) | |
| Net investment | | $ | 2,142 | | | $ | 2,309 | |
Scheduled future minimum non-cancelable base rental payments due to be received under the Company's direct financing lease receivables as of September 30, 2022 were as follows:
| | | | | | | | |
| (in thousands) | | Future Minimum
Base Rental
Payments |
| October 1 - December 31, 2022 | | $ | 80 | |
| 2023 | | 321 | |
| 2024 | | 283 | |
| 2025 | | 254 | |
| 2026 | | 243 | |
| Thereafter | | 1,711 | |
| Total | | $ | 2,892 | |
Allowance for Loan Losses
The Company utilizes a real estate loss estimate model (i.e., a RELEM model) which estimates losses on loans and direct financing lease receivables for purposes of calculating an allowance for loan losses in accordance with ASC 326. As of September 30, 2022 and December 31, 2021, the balance of the Company's allowance for loan losses was $0.8 million. Changes in the Company’s allowance for loan losses are presented within provision for loan losses in the Company’s consolidated statements of operations.
For the nine months ended September 30, 2022 and 2021, the changes to the Company's allowance for loan losses were as follows:
| | | | | | | | |
| (in thousands) | | Loans and Direct Financing Lease Receivables |
| Balance at January 1, 2021 | | $ | 1,018 | |
| | |
| Current period provision for expected credit losses | | (112) | |
| Write-offs charged | | — | |
| Recoveries | | — | |
| Balance at September 30, 2021 | | $ | 906 | |
| | |
| Balance at January 1, 2022 | | $ | 814 | |
| | |
| Current period provision for expected credit losses | | 138 | |
| Write-offs charged | | (137) | |
| Recoveries | | — | |
| Balance at September 30, 2022 | | $ | 815 | |
The Company considers the ratio of loan to value ("LTV") to be a significant credit quality indicator for its loans and direct financing lease portfolio. The following table presents information about the LTV of the Company's loans and direct financing lease receivables measured at amortized cost as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost Basis by Origination Year | | Total Amortized Cost Basis |
| (in thousands) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | |
| LTV <60% | | $ | 23,000 | | | $ | — | | | $ | — | | | $ | 28,000 | | | $ | — | | | $ | 1,666 | | | $ | 52,666 | |
| LTV 60%-70% | | — | | | 28,234 | | | — | | | — | | | — | | | — | | | 28,234 | |
| LTV >70% | | 44,737 | | | 48,487 | | | 10,647 | | | 20,307 | | | — | | | 477 | | | 124,656 | |
| | $ | 67,737 | | | $ | 76,722 | | | $ | 10,647 | | | $ | 48,307 | | | $ | — | | | $ | 2,143 | | | $ | 205,556 | |
Real Estate Investments Held for Sale
The Company continually evaluates its portfolio of real estate investments and may elect to dispose of investments considering criteria including, but not limited to, tenant concentration, tenant credit quality, tenant operation type (e.g., industry, sector or concept), unit-level financial performance, local market conditions and lease rates, associated indebtedness and asset location. Real estate investments held for sale are expected to be sold within twelve months.
The following table shows the activity in real estate investments held for sale and intangible lease liabilities held for sale during the nine months ended September 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollar amounts in thousands) | | Number of Properties | | Real Estate Investments | | Intangible Lease Liabilities | | Net Carrying Value |
| Held for sale balance, January 1, 2021 | | 8 | | $ | 17,058 | | | $ | — | | | $ | 17,058 | |
| Transfers to held for sale classification | | 11 | | 10,333 | | | — | | | 10,333 | |
| Sales | | (13) | | (9,517) | | | — | | | (9,517) | |
| Transfers to held and used classification | | (4) | | (13,890) | | | — | | | (13,890) | |
| Held for sale balance, September 30, 2021 | | 2 | | $ | 3,984 | | | $ | — | | | $ | 3,984 | |
| | | | | | | | |
| Held for sale balance, January 1, 2022 | | 9 | | $ | 15,434 | | | $ | — | | | $ | 15,434 | |
| Transfers to held for sale classification | | 7 | | 23,613 | | | — | | | 23,613 | |
| Sales | | (11) | | (27,140) | | | — | | | (27,140) | |
| Transfers to held and used classification | | — | | — | | | — | | | — | |
| Held for sale balance, September 30, 2022 | | 5 | | $ | 11,907 | | | $ | — | | | $ | 11,907 | |
Significant Concentrations
The Company did not have any tenants (including for this purpose, all affiliates of such tenants) whose rental revenue for the nine months ended September 30, 2022 or 2021 represented 10% or more of total rental revenue in the Company’s consolidated statements of operations.
The following table lists the state where the rental revenue from the properties in that state during the periods presented represented 10% or more of total rental revenue in the Company’s consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| State | | 2022 | | 2021 | | 2022 | | 2021 |
| Texas | | 13.9% | | 13.0% | | 13.5% | | 13.0% |
| | | | | | | | |
Intangible Assets and Liabilities
Intangible assets and liabilities consisted of the following as of the dates presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| (in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Intangible assets: | | | | | | | | | | | | |
| In-place leases | | $ | 78,248 | | | $ | 29,067 | | | $ | 49,181 | | | $ | 76,255 | | | $ | 24,540 | | | $ | 51,715 | |
| Intangible market lease assets | | 11,145 | | | 4,737 | | | 6,408 | | | 11,704 | | | 4,409 | | | 7,295 | |
| Total intangible assets | | $ | 89,393 | | | $ | 33,804 | | | $ | 55,589 | | | $ | 87,959 | | | $ | 28,949 | | | $ | 59,010 | |
| | | | | | | | | | | | |
| Intangible market lease liabilities | | $ | 15,615 | | | $ | 3,706 | | | $ | 11,909 | | | $ | 15,948 | | | $ | 3,255 | | | $ | 12,693 | |
The remaining weighted average amortization period for the Company’s intangible assets and liabilities as of September 30, 2022, by category and in total, were as follows:
| | | | | | | | |
| | Years Remaining |
| In-place leases | | 9.0 |
| Intangible market lease assets | | 11.2 |
| Total intangible assets | | 9.3 |
| | |
| Intangible market lease liabilities | | 8.6 |
The following table discloses amounts recognized within the consolidated statements of operations related to amortization of in-place leases, amortization and accretion of above- and below-market lease assets and liabilities, net and the amortization and accretion of above- and below-market ground leases for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Amortization of in-place leases (1) | | $ | 1,735 | | | $ | 1,810 | | | $ | 5,184 | | | $ | 5,828 | |
Amortization (accretion) of market lease intangibles, net (2) | | (214) | | | (115) | | | (213) | | | (48) | |
Amortization (accretion) of above- and below-market ground lease intangibles, net (3) | | (88) | | | (88) | | | (263) | | | (265) | |
_____________________________________
(1)Reflected within depreciation and amortization expense.
(2)Reflected within rental revenue.
(3)Reflected within property expenses.
The following table provides the estimated amortization of in-place lease assets to be recognized as a component of depreciation and amortization expense for the next five years and thereafter:
| | | | | | | | |
| (in thousands) | | In-Place Lease Assets |
| October 1 - December 31, 2022 | | $ | 1,652 | |
| 2023 | | 6,271 | |
| 2024 | | 5,604 | |
| 2025 | | 4,356 | |
| 2026 | | 4,051 | |
| Thereafter | | 27,247 | |
| Total | | $ | 49,181 | |
The following table provides the estimated net amortization of above- and below-market lease intangibles to be recognized as a component of rental revenue for the next five years and thereafter:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Above Market Lease Asset | | Below Market Lease Liabilities | | Net Adjustment to Rental Revenue |
| October 1 - December 31, 2022 | | $ | (179) | | | $ | 185 | | | $ | 6 | |
| 2023 | | (692) | | | 701 | | | 9 | |
| 2024 | | (659) | | | 698 | | | 39 | |
| 2025 | | (651) | | | 700 | | | 49 | |
| 2026 | | (641) | | | 704 | | | 63 | |
| Thereafter | | (3,586) | | | 8,921 | | | 5,335 | |
| Total | | $ | (6,408) | | | $ | 11,909 | | | $ | 5,501 | |
4. Leases
As Lessor
The Company’s investment properties are leased to tenants under long-term operating leases that typically include one or more tenant renewal options. The Company’s leases provide for annual base rental payments (generally payable in monthly installments) and generally provide for increases in rent based on fixed contractual terms or as a result of increases in the Consumer Price Index.
Substantially all of the Company's leases are triple-net, which means that the lessees are responsible for paying all property operating expenses, including maintenance, insurance, utilities, property taxes and, if applicable, ground rent expense; therefore, the Company is generally not responsible for repairs or other capital expenditures related to the properties while the triple-net leases are in effect and, at the end of the lease term, the lessees are responsible for returning the property to the Company in a substantially similar condition as when they took possession. Some of the Company’s leases provide that in the event the Company wishes to sell the property subject to that lease, it first must offer the lessee the right to purchase the property on the same terms and conditions as any offer which it intends to accept for the sale of the property.
Scheduled future minimum base rental payments due to be received under the remaining non-cancelable term of the operating leases in place as of September 30, 2022 were as follows:
| | | | | | | | |
(in thousands) | | Future Minimum Base Rental Receipts |
| October 1 - December 31, 2022 | | $ | 69,504 | |
| 2023 | | 280,157 | |
| 2024 | | 282,126 | |
| 2025 | | 281,990 | |
| 2026 | | 284,210 | |
Thereafter | | 3,093,923 | |
| Total | | $ | 4,291,910 | |
Since lease renewal periods are exercisable at the option of the lessee, the preceding table presents future minimum base rental payments to be received during the initial non-cancelable lease term only. In addition, the future minimum lease payments exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to performance thresholds and exclude increases in annual rent based on future changes in the Consumer Price Index, among other items.
The fixed and variable components of lease revenues for the three and nine months ended September 30, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Fixed lease revenues | | $ | 67,628 | | | $ | 54,468 | | | $ | 198,615 | | | $ | 151,544 | |
Variable lease revenues (1) | | 705 | | | 616 | | | 1,988 | | | 1,700 | |
Total lease revenues (2) | | $ | 68,333 | | | $ | 55,084 | | | $ | 200,603 | | | $ | 153,244 | |
_____________________________________
(1)Includes contingent rent based on a percentage of the tenant’s gross sales and costs paid by the Company for which it is reimbursed by its tenants.
(2)Excludes the amortization and accretion of above- and below-market lease intangible assets and liabilities and lease incentives and the Company's adjustment to rental revenue for tenant credit.
As Lessee
The Company has a number of ground leases, an office lease and other equipment leases which are classified as operating leases. As of September 30, 2022, the Company’s right of use ("ROU") assets and lease liabilities were $7.5 million and $9.2 million, respectively. As of December 31, 2021, the Company’s ROU assets and lease liabilities were $7.4 million and $9.4 million, respectively. These amounts are included in rent receivables, prepaid expenses and other assets, net and accrued liabilities and other payables on the Company's consolidated balance sheets.
The discount rate applied to measure each ROU asset and lease liability is based on the Company’s incremental borrowing rate ("IBR"). The Company considers the general economic environment and its historical borrowing activity and factors in various financing and asset specific adjustments to ensure the IBR is appropriate to the intended use of the underlying lease. As the Company did not elect to apply hindsight, lease term assumptions determined under ASC 840 were carried forward and applied in calculating the lease liabilities recorded under ASC 842. Certain of the Company’s ground leases offer renewal options which it assesses against relevant economic factors to determine whether it is reasonably certain of exercising or not exercising the option. Lease payments associated with renewal periods that the Company is reasonably certain will be exercised, if any, are included in the measurement of the corresponding lease liability and ROU asset.
The following table sets forth information related to the measurement of the Company’s lease liabilities as of the dates presented: | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| Weighted average remaining lease term (in years) | | 22.6 | | 21.5 |
| Weighted average discount rate | | 6.10% | | 6.08% |
Upon adoption of ASC 842 (see Note 2—Summary of Significant Accounting Policies), ground lease rents are no longer presented on a net basis and instead are reflected on a gross basis in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021.
The following table sets forth the details of rent expense for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Fixed rent expense - ground leases | | $ | 245 | | | $ | 239 | | | $ | 725 | | | $ | 718 | |
| Fixed rent expense - office and equipment leases | | 128 | | | 168 | | | 384 | | | 423 | |
| Variable rent expense | | — | | | — | | | — | | | — | |
| Total rent expense | | $ | 373 | | | $ | 407 | | | $ | 1,109 | | | $ | 1,141 | |
As of September 30, 2022, future lease payments due over the next five years and thereafter from the Company under the ground, office and equipment leases where the Company is directly responsible for payment and under the ground leases where the Company’s tenants are directly responsible for payment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Office and Equipment Leases | | Ground Leases to be Paid by the Company | | Ground Leases to be Paid Directly by the Company’s Tenants | | Total Future Minimum Base Rental Payments |
| October 1 - December 31, 2022 | | $ | 129 | | | $ | 39 | | | $ | 208 | | | $ | 376 | |
| 2023 | | 525 | | | 131 | | | 733 | | | 1,389 | |
| 2024 | | 531 | | | 24 | | | 688 | | | 1,243 | |
| 2025 | | 538 | | | — | | | 613 | | | 1,151 | |
| 2026 | | — | | | — | | | 618 | | | 618 | |
| Thereafter | | — | | | — | | | 15,104 | | | 15,104 | |
| Total | | $ | 1,723 | | | $ | 194 | | | $ | 17,964 | | | 19,881 | |
| Present value discount | | | | | | | | (10,644) | |
| Lease liabilities | | | | | | | | $ | 9,237 | |
The Company has adopted the short-term lease policy election and accordingly, the table above excludes future minimum base cash rental payments by the Company or its tenants on leases that have a term of less than 12 months at lease inception. The total of such future obligations is not material.
5. Long-Term Debt
The following table summarizes the Company's outstanding indebtedness as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Principal Outstanding | | Weighted Average Interest Rate (1) |
| (in thousands) | | Maturity Date | | September 30,
2022 | | December 31,
2021 | | September 30,
2022 | | December 31,
2021 |
| Unsecured term loans: | | | | | | | | | | |
| 2024 Term Loan | | April 2024 | | $ | 200,000 | | | $ | 200,000 | | | 3.3% | | 1.3% |
| 2027 Term Loan | | February 2027 | | 430,000 | | | 430,000 | | | 4.0% | | 1.6% |
| 2028 Term Loan | | January 2028 | | 250,000 | | | — | | | 3.3% | | —% |
| Senior unsecured notes | | July 2031 | | 400,000 | | | 400,000 | | | 3.0% | | 3.0% |
| Revolving Credit Facility | | February 2026 | | — | | | 144,000 | | | —% | | 1.3% |
| | | | | | | | | | |
| | | | | | | | | | |
| Total principal outstanding | | | | $ | 1,280,000 | | | $ | 1,174,000 | | | 3.4% | | 2.0% |
______________________
(1)Interest rates are presented as stated in debt agreements and do not reflect the impact of the Company's interest rate swap and lock agreements, where applicable (see Note 6—Derivative and Hedging Activities).
The following table summarizes the scheduled principal payments on the Company’s outstanding indebtedness as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2024 Term Loan | | 2027 Term Loan | | 2028 Term Loan | | Senior Unsecured Notes | | Revolving Credit Facility | | Total |
| October 1 - December 31, 2022 | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| 2023 | | — | | | — | | | — | | | — | | | — | | | — | |
| 2024 | | 200,000 | | | — | | | — | | | — | | | — | | | 200,000 | |
| 2025 | | — | | | — | | | — | | | — | | | — | | | — | |
| 2026 | | — | | | — | | | — | | | — | | | — | | | — | |
| Thereafter | | — | | | 430,000 | | | 250,000 | | | 400,000 | | | — | | | 1,080,000 | |
| Total | | $ | 200,000 | | | $ | 430,000 | | | $ | 250,000 | | | $ | 400,000 | | | $ | — | | | $ | 1,280,000 | |
The Company was in compliance with all financial covenants and was not in default of any provisions under any of its outstanding indebtedness as of September 30, 2022 or December 31, 2021.
Revolving Credit Facility, 2024 Term Loan and 2028 Term Loan
In April 2019, the Company, through the Operating Partnership, entered into an amended and restated credit agreement (the “Amended Credit Agreement”) with a group of lenders, amending and restating the terms of the Company’s previous $300.0 million revolving credit facility (the “2018 Credit Facility”) to increase the maximum aggregate initial original principal amount of the revolving loans available thereunder up to $400.0 million (the “Revolving Credit Facility”) and to permit the incurrence of an additional $200.0 million in term loans thereunder (the “2024 Term Loan”). The full amount available under the 2024 Term Loan was borrowed in May 2019.
In February 2022, the Company entered into an amendment to the Amended Credit Agreement (as so amended, the "Credit Agreement") and, pursuant to such amendment, among other things, the availability of extensions of credit under the Revolving Credit Facility was increased to $600.0 million, the accordion feature was increased to $600.0 million, the borrowing base limitation on borrowings thereunder was removed, the leverage-based margin applicable to borrowings under the Revolving Credit Facility was reduced, the LIBOR reference rate was replaced with reference to the Adjusted Term SOFR rate, consistent with market practice, and the composition and extent of lender participation under the Revolving Credit Facility was changed. During the nine months ended September 30, 2022, in connection with this amendment, the Company recorded a $0.1 million loss on debt extinguishment related to the write-off of certain deferred financing costs on the Revolving Credit Facility.
Prior to the February 2022 amendment, the Revolving Credit Facility had a term of four years beginning on April 12, 2019, with an extension option of up to six months exercisable by the Operating Partnership, subject to certain conditions, and the 2024 Term Loan was set to mature on April 12, 2024. The loans under each of the Revolving Credit Facility and the 2024 Term Loan initially bore interest at an annual rate of applicable LIBOR plus the applicable margin (which applicable margin varied between the Revolving Credit Facility and the 2024 Term Loan). The applicable LIBOR was the rate with a term equivalent to the interest period applicable to the relevant borrowing. The applicable margin was initially a spread set according to a leverage-based pricing grid.
The Revolving Credit Facility matures on February 10, 2026, with two extension options of six months each, exercisable by the Operating Partnership subject to the satisfaction of certain conditions. The 2024 Term Loan matures on April 12, 2024. The loans under each of the Revolving Credit Facility and the 2024 Term Loan initially bear interest at an annual rate of applicable Adjusted Term SOFR (as defined in the Credit Agreement) plus an applicable margin (which applicable margin varies between the Revolving Credit Facility and the 2024 Term Loan). The Adjusted Term SOFR is a rate with a term equivalent to the interest period applicable to the relevant borrowing. In addition, the Operating Partnership is required to pay a revolving facility fee throughout the term of the Revolving Credit Facility. The applicable margin and the revolving facility fee rate are initially a spread and rate, as applicable, set according to a leverage-based pricing grid. At the Operating Partnership's election, on and after receipt of an investment grade corporate credit rating from S&P, Moody's or Fitch, the applicable margin and the revolving facility fee rate will be a spread and rate, as applicable, set according to the credit ratings provided by S&P, Moody's and/or Fitch.
In July 2022, the Credit Agreement was further amended to provide for an additional $400.0 million of second tranche term loans, which may be borrowed on a delayed draw basis (the “2028 Term Loan”). Loans under the 2028 Term Loan in an aggregate principal amount of $250.0 million were drawn in July 2022, concurrently with the closing of such amendment, and the remaining $150 million was drawn in October 2022. Such amendment also amended the applicable margin grid such that the applicable pricing for all borrowings under the Credit Agreement is based on the credit rating of the Company’s long-term senior unsecured non-credit enhanced debt for borrowed money (subject to a single step-down in the applicable pricing if the Company achieves a consolidated leverage ratio that is less than 0.35 to 1:00 while maintaining a credit rating of BBB/Baa2 from S&P, Moody's and/or Fitch), and reset the accordion feature to maintain the $600.0 million availability thereunder.
Each of the Revolving Credit Facility, the 2024 Term Loan and the 2028 Term Loan is freely pre-payable at any time. Outstanding credit extensions under the Revolving Credit Facility are mandatorily payable if the amount of such credit extensions exceeds the revolving facility limit. The Operating Partnership may re-borrow amounts paid down on the Revolving Credit Facility prior to its maturity. Loans repaid under the 2024 Term Loan and 2028 Term Loan cannot be reborrowed. The Credit Agreement has an accordion feature to increase, subject to certain conditions, the maximum availability of credit (either through increased revolving commitments or additional term loans) by up to $600.0 million.
The Operating Partnership is the borrower under the Credit Agreement, and the Company and each of its subsidiaries that owns a direct or indirect interest in an eligible real property asset are guarantors under the Credit Agreement.
Under the terms of the Credit Agreement, the Company is subject to various restrictive financial and nonfinancial covenants which, among other things, require the Company to maintain certain leverage ratios, cash flow and debt service coverage ratios, secured borrowing ratios and a minimum level of tangible net worth.
The following table presents information about the Revolving Credit Facility for the periods presented:
| | | | | | | | | | | | | | |
| | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 |
| Balance on January 1, | | $ | 144,000 | | | $ | 18,000 | |
| Borrowings | | 299,000 | | | 179,000 | |
| Repayments | | (443,000) | | | (197,000) | |
| Balance on September 30, | | $ | — | | | $ | — | |
The following table presents information about interest expense related to the Revolving Credit Facility for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Interest expense | | $ | 676 | | | $ | 264 | | | $ | 2,577 | | | $ | 1,035 | |
| Amortization of deferred financing costs | | 295 | | | 291 | | | 923 | | | 874 | |
| Total | | $ | 971 | | | $ | 555 | | | $ | 3,500 | | | $ | 1,909 | |
Total deferred financing costs, net, of $4.0 million and $1.4 million related to the Revolving Credit Facility are included within rent receivables, prepaid expenses and other assets, net on the Company’s consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.
As of September 30, 2022 and December 31, 2021, the Company had $600.0 million and $256.0 million, respectively, of unused borrowing capacity under the Revolving Credit Facility.
2027 Term Loan
On November 26, 2019, the Company, through the Operating Partnership, entered into a new $430 million term loan (the “2027 Term Loan”) with a group of lenders. The 2027 Term Loan provides for term loans to be drawn up to an aggregate amount of $430 million with an initial maturity of November 26, 2026. The Company borrowed the entire $430.0 million available under the 2027 Term Loan in separate draws in December 2019 and March 2020.
In February 2022, the Company entered into an amendment to the 2027 Term Loan to, among other things, reduce the leverage-based margin applicable to borrowings, extend the maturity date of the 2027 Term Loan to February 18, 2027, replace the LIBOR reference rate with reference to the Adjusted Term SOFR rate, consistent with market practice, and change the composition and extent of lender participation under the 2027 Term Loan. During the nine months ended September 30, 2022, in connection with this amendment, the Company recorded a $2.1 million loss on debt extinguishment related to fees and the write-off of certain deferred financing costs on the 2027 Term Loan.
In August 2022, The Company entered into an amendment to the 2027 Term Loan to make certain changes to provisions relating to the rates and other matters to reflect changes in market standards.
Prior to its amendment in February 2022, borrowings under the 2027 Term Loan bore interest at an annual rate of applicable LIBOR plus the applicable margin. Following this amendment, the 2027 Term Loan bears interest at an annual rate of applicable Adjusted Term SOFR plus the applicable margin. The applicable LIBOR/Adjusted Term SOFR is the rate with a term equivalent to the interest period applicable to the relevant borrowing. The applicable margin was initially a spread set according to a leverage-based pricing grid. In May 2022, the Operating Partnership made an irrevocable election to have the applicable margin be a spread set according to the Company’s corporate credit ratings provided by S&P, Moody’s and/or Fitch.
The 2027 Term Loan is pre-payable at any time by the Operating Partnership (as borrower) without penalty. The Operating Partnership may not re-borrow amounts paid down on the 2027 Term Loan. The 2027 Term Loan has an accordion feature to increase, subject to certain conditions, the maximum availability of the facility up to an aggregate of $500 million.
The Operating Partnership is the borrower under the 2027 Term Loan, and the Company and each of its subsidiaries that owns a direct or indirect interest in an eligible real property asset are guarantors under the facility. Under the terms of the 2027 Term Loan, the Company is subject to various restrictive financial and nonfinancial covenants which, among other things, require the Company to maintain certain leverage ratios, cash flow and debt service coverage ratios, secured borrowing ratios and a minimum level of tangible net worth.
The following table presents information about aggregate interest expense related to the 2024 Term Loan, 2027 Term Loan and 2028 Term Loan:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Interest expense | | $ | 6,594 | | | $ | 2,503 | | | $ | 12,038 | | | $ | 7,378 | |
| Amortization of deferred financing costs | | 236 | | | 178 | | | 557 | | | 534 | |
| Total | | $ | 6,830 | | | $ | 2,681 | | | $ | 12,595 | | | $ | 7,912 | |
Total deferred financing costs, net, of $4.8 million and $3.0 million related to the term loan facilities are included as a component of unsecured term loans, net of deferred financing costs on the Company’s consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.
The Company fixed the interest rates on its variable-rate term loan debt through the use of interest rate swap agreements. See Note 6—Derivative and Hedging Activities for additional information.
Senior Unsecured Notes
In June 2021, through its Operating Partnership, the Company completed a public offering of $400.0 million aggregate principal amount of 2.950% Senior Notes due 2031 (the "2031 Notes"), resulting in net proceeds of $396.6 million. The 2031 Notes were issued by the Operating Partnership, and the obligations of the Operating Partnership under the 2031 Notes are fully and unconditionally guaranteed on a senior basis by the Company. The 2031 Notes were issued at 99.8% of their principal amount. In connection with the offering of the 2031 Notes, the Operating Partnership incurred $4.7 million in deferred financing costs and an offering discount of $0.8 million.
The following is a summary of the senior unsecured notes outstanding as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | Maturity Date | | Interest Payment Dates | | Stated Interest Rate | | Principal Outstanding |
| 2031 Notes | | July 15, 2031 | | January 15 and July 15 | | 2.95% | | $ | 400,000 | |
The Company's senior unsecured notes are redeemable in whole at any time or in part from time to time, at the Operating Partnership's option, at a redemption price equal to the sum of:
•100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest, if any, up to, but not including, the redemption date; and
•a make-whole premium calculated in accordance with the indenture governing the notes.
The following table presents information about interest expense related to the senior unsecured notes:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Interest expense | | $ | 2,928 | | | $ | 2,927 | | | $ | 8,783 | | | $ | 3,025 | |
| Amortization of deferred financing costs and original issue discount | | 141 | | | 141 | | | 422 | | | 152 | |
| Total | | $ | 3,069 | | | $ | 3,068 | | | $ | 9,205 | | | $ | 3,177 | |
Total deferred financing costs, net, of $4.2 million and $4.5 million related to the senior unsecured notes are included within Senior unsecured notes, net on the Company’s consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.
Secured Borrowings
In the normal course of business, the Company has transferred financial assets in various transactions with Special Purpose Entities (“SPE”) determined to be VIEs, which primarily consisted of securitization trusts established for a limited purpose (the “Master Trust Funding Program”). These SPEs were formed for the purpose of securitization transactions in which the Company transferred assets to an SPE, which then issued to investors various forms of debt obligations supported by those assets. In these securitization transactions, the Company typically received cash from the SPE as proceeds for the transferred assets and retained the rights and obligations to service the transferred assets in accordance with servicing guidelines. All debt obligations issued from the SPEs were non-recourse to the Company. The Company determined that the SPEs created in connection with its Master Trust Funding Program should be consolidated as the Company was the primary beneficiary of each of these entities.
Series 2017-1 Notes
In July 2017, the Company issued a series of notes under the Master Trust Funding Program, consisting of $232.4 million of Class A Notes and $15.7 million of Class B Notes (together, the “Series 2017-1 Notes”). The Series 2017-1 Notes were issued by three SPEs formed to hold assets and issue the secured borrowings associated with the securitization.
In February 2020, the Company voluntarily prepaid $62.3 million of the Class A Series 2017-1 Notes at par plus accrued interest pursuant to the terms of the agreements related to such securities. The Company was not subject to the payment of a make whole amount in connection with this prepayment.
In June 2021, the Company voluntarily prepaid the remaining $171.2 million of principal outstanding on the Series 2017-1 Notes and paid a make-whole premium of $2.5 million pursuant to the terms of the agreements related to such securities. The Company accounted for this prepayment as a debt extinguishment.
The following table presents information about interest expense related to the Master Trust Funding Program:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Interest expense | | $ | — | | | $ | — | | | $ | — | | | $ | 3,551 | |
| Amortization of deferred financing costs | | — | | | — | | | — | | | 312 | |
| Total | | $ | — | | | $ | — | | | $ | — | | | $ | 3,863 | |
6. Derivative and Hedging Activities
The Company does not enter into derivative financial instruments for speculative or trading purposes. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company uses interest rate swap and lock agreements as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
These derivatives are considered cash flow hedges and are recorded on a gross basis at fair value. Subsequent to the adoption of ASU 2017-12, assessments of hedge effectiveness are performed quarterly using either a qualitative or quantitative approach. The Company recognizes the entire change in the fair value in accumulated other comprehensive income (loss) and the change is reflected as derivative changes in fair value in the supplemental disclosures of non-cash financing activities in the consolidated statements of cash flows. The amounts recorded in accumulated other comprehensive income (loss) will subsequently be reclassified to interest expense as interest payments are made on the Company’s borrowings under its variable-rate term loan facilities. During the next twelve months, the Company estimates that $17.5 million will be reclassified from accumulated other comprehensive income as a decrease to interest expense. The Company does not have netting arrangements related to its derivatives.
The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations. As of September 30, 2022, there were no events of default related to the Company's derivative financial instruments.
The following table summarizes the notional amount at inception and fair value of these instruments on the Company's balance sheet as of September 30, 2022 and December 31, 2021 (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives Designated as Hedging Instruments | | Fixed Rate Paid by Company | | Effective Date | | Maturity Date | | Notional Value (2) | | Fair value of Asset/(Liability) |
| | | | | September 30, 2022 | | December 31, 2021 |
Interest Rate Swap(1) | | 1.96% | | 05/14/2019 | | 04/12/2024 | | $ | 100,000 | | | $ | 3,381 | | | $ | (2,747) | |
Interest Rate Swap(1) | | 1.95% | | 05/14/2019 | | 04/12/2024 | | 50,000 | | | 1,702 | | | (1,374) | |
Interest Rate Swap(1) | | 1.94% | | 05/14/2019 | | 04/12/2024 | | 50,000 | | | 1,695 | | | (1,377) | |
Interest Rate Swap(1) | | 1.52% | | 12/09/2019 | | 11/26/2026 | | 175,000 | | | 15,663 | | | (3,444) | |
Interest Rate Swap(1) | | 1.51% | | 12/09/2019 | | 11/26/2026 | | 50,000 | | | 4,547 | | | (996) | |
Interest Rate Swap(1) | | 1.49% | | 12/09/2019 | | 11/26/2026 | | 25,000 | | | 2,253 | | | (481) | |
Interest Rate Swap(1) | | 1.26% | | 07/09/2020 | | 11/26/2026 | | 100,000 | | | 9,903 | | | (790) | |
Interest Rate Swap(1) | | 1.28% | | 07/09/2020 | | 11/26/2026 | | 80,000 | | | 7,906 | | | (629) | |
| Interest Rate Swap | | 3.19% | | 09/26/2022 | | 01/25/2028 | | 50,000 | | | 1,314 | | | — | |
| Interest Rate Swap | | 3.35% | | 09/26/2022 | | 01/25/2028 | | 50,000 | | | 953 | | | — | |
| Interest Rate Swap | | 3.36% | | 09/26/2022 | | 01/25/2028 | | 25,000 | | | 458 | | | — | |
| Interest Rate Swap | | 3.43% | | 09/26/2022 | | 01/25/2028 | | 50,000 | | | 748 | | | — | |
| Interest Rate Swap | | 3.71% | | 09/26/2022 | | 01/25/2028 | | 50,000 | | | 101 | | | — | |
| Interest Rate Swap | | 3.70% | | 09/26/2022 | | 01/25/2028 | | 25,000 | | | 33 | | | — | |
| | | | | | | | $ | 880,000 | | | $ | 50,657 | | | $ | (11,838) | |
_____________________________________
(1)In June 2022, the Company converted the reference rate used in these interest rate swaps from 1-month LIBOR to 1-month Adjusted Term SOFR.
(2)Notional value indicates the extent of the Company’s involvement in these instruments, but does not represent exposure to credit, interest rate or market risks.
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
In May 2021, in anticipation of the issuance of the 2031 Notes (which was completed in June 2021), the Company entered into a treasury rate lock agreement which was designated as a cash flow hedge associated with $330.0 million of principal. In June 2021, in connection with issuing the 2031 Notes, the agreement was settled in accordance with its terms. The Company recorded a deferred loss of $4.8 million from the settlement of this treasury rate lock agreement, which was recognized as a component of other comprehensive income (loss) on the Consolidated Statements of Comprehensive Income.
The following table presents amounts recorded to accumulated other comprehensive income (loss) related to derivative and hedging activities for the periods presented: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Other comprehensive income (loss) | | $ | 22,836 | | | $ | 2,779 | | | $ | 61,981 | | | $ | 13,695 | |
As of September 30, 2022, the fair value of derivatives in a net asset position, including accrued interest but excluding any adjustment for nonperformance risk related to these agreements, was $51.3 million. As of December 31, 2021, the fair value of derivatives in a net liability position, including accrued interest but excluding any adjustment for nonperformance risk related to these agreements, was $11.8 million. As of September 30, 2022, there were no derivatives in a net liability position and, as of December 31, 2021, there were no derivatives in a net asset position.
During the three months ended September 30, 2022, the Company recorded a gain on the change in fair value of its interest rate swaps of $0.7 million, which was included in interest expense in the Company's consolidated statements of operations. During the three months ended September 30, 2021 and the nine months ended September 30, 2022 and 2021, the Company recorded a loss on the change in fair value of its interest rate swaps of $2.7 million, $3.3 million and $7.6 million, respectively, which was included in interest expense in the Company's consolidated statements of operations.
As of September 30, 2022 and December 31, 2021, the Company had not posted any collateral related to these agreements and was not in breach of any provisions of such agreements. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value, which were a $51.3 million asset and $11.9 million liability as of September 30, 2022 and December 31, 2021, respectively.
7. Equity
Stockholders’ Equity
In April 2021, the Company completed a follow-on offering of 8,222,500 shares of its common stock, including 1,072,500 shares of common stock purchased by the underwriters pursuant to an option to purchase additional shares, at a public offering price of $23.50 per share. Net proceeds from this follow-on offering, after deducting underwriting discounts and commissions and other expenses, were $185.1 million.
In August 2022, the Company completed a follow-on offering of 8,740,000 shares of its common stock, including 1,140,000 shares of common stock purchased by the underwriters pursuant to an option to purchase additional shares, at a public offering price of $23.00 per share. Net proceeds from this follow-on offering, after deducting underwriting discounts and commissions and other expenses, were $192.6 million.
At the Market Program
In May 2022, the Company established a new at the market common equity offering program, pursuant to which it can publicly offer and sell, from time to time, shares of its common stock with an aggregate gross sales
price of up to $500 million (the "2022 ATM Program") through the identified sales agents, as its sales agents or, if applicable, as forward sellers, or directly to such agents as principals. In addition to the issuance and sale by the Company of shares to or through the agents, the 2022 ATM Program also permits the Company to enter into separate forward sale agreements with the identified forward purchasers. In connection with establishing the 2022 ATM Program, the Company terminated its prior at the market program, which it established in July 2021 (the “2021 ATM Program”) and no additional stock can be issued thereunder. Pursuant to the 2021 ATM Program, the Company could publicly offer and sell shares of its common stock with an aggregate gross sales price of up to $350 million and, prior to its termination, the Company issued common stock with an aggregate gross sales price of $348.1 million thereunder.
During the nine months ended September 30, 2022, the Company entered into a forward sale agreement with respect to 528,399 shares of its common stock sold under the 2022 ATM Program and settled this forward sale agreement in June 2022. As of September 30, 2022, the Company had no outstanding forward sale agreements. As of September 30, 2022, the Company issued common stock with an aggregate gross sales price of $53.2 million and could issue additional common stock with an aggregate gross sales price of up to $446.8 million under the 2022 ATM Program. As the context requires, the 2022 ATM Program, the 2021 ATM Program and prior ATM programs are referred to herein as the “ATM Program."
The following table details information related to activity under the ATM Program for each period presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except share and per share data) | | Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Shares of common stock sold | | 952,201 | | | 3,362,712 | | | 8,836,684 | | | 6,721,554 | |
| Weighted average sale price per share | | $ | 21.57 | | | $ | 30.51 | | | $ | 24.08 | | | $ | 27.15 | |
| Gross proceeds | | $ | 20,535 | | | $ | 102,590 | | | $ | 212,824 | | | $ | 182,510 | |
| Net proceeds | | $ | 20,283 | | | $ | 101,125 | | | $ | 210,334 | | | $ | 179,628 | |
Dividends on Common Stock
During the nine months ended September 30, 2022 and 2021, the Company’s board of directors declared the following quarterly cash dividends on common stock:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date Declared | | Record Date | | Date Paid | | Dividend per Share of Common Stock | | Total Dividend
(in thousands) |
| September 2, 2022 | | September 30, 2022 | | October 14, 2022 | | $ | 0.27 | | | $ | 38,533 | |
| June 2, 2022 | | June 30, 2022 | | July 14, 2022 | | $ | 0.27 | | | $ | 35,916 | |
| March 14, 2022 | | March 31, 2022 | | April 13, 2022 | | $ | 0.26 | | | $ | 34,188 | |
| September 2, 2021 | | September 30, 2021 | | October 14, 2021 | | $ | 0.25 | | | $ | 30,397 | |
| May 27, 2021 | | June 30, 2021 | | July 15, 2021 | | $ | 0.25 | | | $ | 29,559 | |
| March 5, 2021 | | March 31, 2021 | | April 15, 2021 | | $ | 0.24 | | | $ | 26,265 | |
8. Non-controlling Interests
Essential Properties OP G.P., LLC, a wholly owned subsidiary of the Company, is the sole general partner of the Operating Partnership and holds a 1.0% general partner interest in the Operating Partnership. The Company contributes the net proceeds from issuing shares of common stock to the Operating Partnership in exchange for a number of OP Units equal to the number of shares of common stock issued.
As of September 30, 2022, the Company held 142,377,215 OP Units, representing a 99.6% limited partner interest in the Operating Partnership. As of the same date, former members of EPRT Holdings, LLC (the "Non-controlling OP Unit Holders") held 553,847 OP Units in the aggregate, representing a 0.4% limited partner interest in the Operating Partnership. As of December 31, 2021, the Company held 124,649,053 OP Units, representing a 99.6% limited partner interest in the Operating Partnership. As of the same date, the Non-controlling OP Unit Holders held 553,847 OP Units in the aggregate, representing a 0.4% limited partner interest in the Operating Partnership. The OP Units held by the Non-controlling OP Unit Holders are presented as non-controlling interests in the Company’s consolidated financial statements.
A holder of OP Units has the right to distributions per unit equal to dividends per share paid on the Company’s common stock and has the right to redeem OP Units for cash or, at the Company’s election, shares of the Company's common stock on a one-for-one basis, provided, however, that such OP Units must have been outstanding for at least one year. Distributions to OP Unit holders are declared and paid concurrently with the Company’s cash dividends to common stockholders. See Note 7—Equity for details.
9. Equity Based Compensation
Equity Incentive Plan
In 2018, the Company adopted an equity incentive plan (the “Equity Incentive Plan”), which provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, other stock awards, performance awards and LTIP units. Officers, employees, non-employee directors, consultants, independent contractors and agents who provide services to the Company or to any subsidiary of the Company are eligible to receive such awards. A maximum of 3,550,000 shares may be issued under the Equity Incentive Plan, subject to certain conditions.
The following table presents information about the Company’s restricted stock awards ("RSAs") and restricted stock units ("RSUs") during the nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Restricted Stock Awards | | Restricted Stock Units |
| | Shares | | Wtd. Avg. Grant Date Fair Value | | Units | | Wtd. Avg. Grant Date Fair Value |
| Unvested, January 1, 2021 | | 240,598 | | | $ | 13.73 | | | 321,602 | | | $ | 25.27 | |
| Granted | | — | | | — | | | 213,686 | | | 31.78 | |
| Vested | | (221,694) | | | 13.70 | | | (69,702) | | | 18.74 | |
| Forfeited | | — | | | — | | | (7,717) | | | 23.52 | |
| Unvested, September 30, 2021 | | 18,904 | | | $ | 14.12 | | | 457,869 | | | $ | 29.33 | |
| | | | | | | | |
| Unvested, January 1, 2022 | | 18,904 | | | $ | 14.12 | | | 454,692 | | | $ | 29.39 | |
| Granted | | — | | | — | | | 607,135 | | | 29.08 | |
| Vested | | (9,865) | | | 14.12 | | | (240,463) | | | 25.77 | |
| Forfeited | | — | | | — | | | (501) | | | 27.25 | |
| Unvested, September 30, 2022 | | 9,039 | | | $ | 14.12 | | | 820,863 | | | $ | 30.22 | |
Restricted Stock Awards
On June 25, 2018, an aggregate of 691,290 shares of RSAs were issued to the Company's directors, executive officers and other employees under the Equity Incentive Plan. These RSAs vested over periods ranging from one year to three years from the date of grant, subject to the individual recipient's continued provision of service to the Company through the applicable vesting dates. The final vesting of these RSAs occurred on January 25, 2021.
In January 2019, RSAs relating to an aggregate of 46,368 shares of unvested restricted common stock were granted to the Company’s executive officers, other employees and an external consultant under the Equity Incentive Plan. These RSAs vest over periods ranging from one year to four years from the date of grant, subject to the individual recipient’s continued provision of service to the Company through the applicable vesting dates. The Company estimates the grant date fair value of RSAs granted under the Equity Incentive Plan using the average market price of the Company’s common stock on the date of grant.
The following table presents information about the Company’s RSAs for the periods presented:
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| | Three months ended September 30, | | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Compensation cost recognized in general and administrative expense | | $ | 32 | | | $ | 35 | | | $ | 96 | | | $ | 1,513 | |
| Dividends declared on unvested RSAs and charged directly to distributions in excess of cumulative earnings | | 2 | | | 5 | | | 6 | | | 65 | |
| Fair value of shares vested during the period | | — | | | — | | | 139 | | | 3,037 | |
The following table presents information about the Company’s RSAs as of the dates presented:
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(Dollars in thousands) | | September 30,
2022 | | December 31,
2021 |
Total unrecognized compensation cost | | $ | 34 | | | $ | 130 | |
| Weighted average period over which compensation cost will be recognized (in years) | | 0.3 | | 1.0 |
Restricted Stock Units
In 2019, 2020, 2021 and 2022 the Company issued target grants of 119,085, 84,684, 126,353, and 149,699 performance-based RSUs, respectively, to the Company’s senior management team under the Equity Incentive Plan. Of these awards, 75% are non-vested RSUs for which vesting percentages and the ultimate number of units vesting is calculated based on the total shareholder return (“TSR”) of the Company's common stock as compared to the TSR of peer companies identified in the grant agreements. The payout schedule can produce vesting percentages ranging from 0% to 250% of target. TSR is calculated over the performance period for each award based upon the average closing price for the 20-trading day period ending December 31st of the year prior to grant divided by the average closing price for the 20-trading day period ending December 31st of the third year following the grant. The target number of units is based on achieving a TSR equal to the 50th percentile of the peer group. The Company records expense on these TSR RSUs based on achieving the target.
The grant date fair value of the TSR RSUs was measured using a Monte Carlo simulation model based on the following assumptions: | | | | | | | | | | | | | | | | | | | | |
| | Grant Year |
| | 2022 | | 2021 | | 2020 |
| Volatility | | 54% | | 55% | | 20% |
| Risk free rate | | 1.68% | | 0.20% | | 1.61% |
The remaining 25% of these performance-based RSUs vest based on the Compensation Committee's subjective evaluation of the individual recipient’s achievement of certain strategic objectives over the performance period of the award. In January 2022, the Compensation Committee identified specific performance targets and completed its subjective evaluation in relation to the performance-based RSUs granted in 2019 and concluded that 78,801 RSUs should be awarded. 50% of these RSUs vested immediately and the remaining 50% vest on December 31, 2022, subject to the recipient's continued provision of service to the Company through such date. During the three and nine months ended September 30, 2022, the Company recorded $0.3 million and $1.9 million, respectively, of compensation expense with respect to these performance-based RSUs granted in 2019. As of September 30, 2022, the Compensation Committee had not identified specific performance targets relating to the individual recipients' achievement of strategic objectives for the subjective awards granted in 2020, 2021 and 2022. As such, these awards do not have either a service inception or a grant date for GAAP accounting purposes and the Company recorded no compensation expense with respect to this portion of the performance-based RSUs during the three and nine months ended September 30, 2022 and 2021.
In 2020, 2021 and during the nine months ended September 30, 2022, the Company issued an aggregate of 157,943, 118,921, and 199,581 RSUs, respectively, to the Company’s executive officers, other employees and directors under the Equity Incentive Plan. These awards vest over a period of up to five years from the date of grant, subject to the individual recipient’s continued provision of service to the Company through the applicable vesting dates.
In January 2022, the Company issued 69,372 performance-based RSUs (at target) to an executive officer under the Equity Incentive Plan. These RSUs vest based on the compound annual growth rate of the Company's adjusted funds from operations ("AFFO CAGR") over a five year performance period, and the payout schedule can produce vesting percentages ranging from 0% to 200% of target. To the extent the performance goal is achieved, these performance-based RSUs will vest in 50% increments on each of the four-year and five-year anniversary of the grant date, subject to the recipient's continued provision of service to the Company through the applicable vesting dates. As of September 30, 2022, based on its AFFO CAGR forecasts, the Company believes it is probable that the maximum performance level will be achieved and recorded $0.2 million and $0.7 million of compensation expense based off of this estimate during the three and nine months ended September 30, 2022, respectively.
A portion of the RSUs that vested in 2022 and 2021 were net share settled such that the Company withheld shares with a value equal to the relevant employee's income and employment tax obligations with respect to the vesting and remitted a cash payment to the appropriate taxing authority.
The following table presents information about the Company’s RSUs for the periods presented:
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| | Three months ended September 30, | | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Compensation cost recognized in general and administrative expense | | $ | 2,203 | | | $ | 1,068 | | | $ | 7,165 | | | $ | 3,041 | |
| Dividend equivalents declared and charged directly to distributions in excess of cumulative earnings | | 91 | | | 56 | | | 274 | | | 184 | |
| Fair value of units vested during the period | | 414 | | | 414 | | | 5,737 | | | 1,306 | |
The following table presents information about the Company’s RSUs as of the dates presented:
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| (Dollars in thousands) | | September 30,
2022 | | December 31,
2021 |
| Total unrecognized compensation cost | | $ | 15,970 | | | $ | 7,735 | |
| Weighted average period over which compensation cost will be recognized (in years) | | 2.9 | | 2.3 |
10. Net Income Per Share
The Company computes net income per share pursuant to the guidance in FASB ASC Topic 260, Earnings Per Share. The guidance requires the classification of the Company’s unvested restricted common stock and units, which contain rights to receive non-forfeitable dividends or dividend equivalents, as participating securities requiring the two-class method of computing net income per share. Diluted net income per share of common stock further considers the effect of potentially dilutive shares of common stock outstanding during the period, including the assumed vesting of restricted stock units with a market-based or service-based vesting condition, where dilutive. The OP Units held by non-controlling interests represent potentially dilutive securities as the OP Units may be redeemed for cash or, at the Company’s election, exchanged for shares of the Company’s common stock on a one-for-one basis.
The following is a reconciliation of the numerator and denominator used in the computation of basic and diluted net income per share (dollars in thousands):
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| | Three months ended September 30, | | Nine months ended September 30, |
| (dollar amounts in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Numerator for basic and diluted earnings per share: | | | | | | | | |
| Net income | | $ | 36,591 | | | $ | 27,646 | | | $ | 99,221 | | | $ | 66,421 | |
| Less: net income attributable to non-controlling interests | | (163) | | | (139) | | | (441) | | | (335) | |
| Less: net income allocated to unvested restricted common stock and RSUs | | (93) | | | (61) | | | (280) | | | (249) | |
| Net income available for common stockholders: basic | | 36,335 | | | 27,446 | | | 98,500 | | | 65,837 | |
| Net income attributable to non-controlling interests | | 163 | | | 139 | | | 441 | | | 335 | |
| Net income available for common stockholders: diluted | | $ | 36,498 | | | $ | 27,585 | | | $ | 98,941 | | | $ | 66,172 | |
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| Denominator for basic and diluted earnings per share: | | | | | | | | |
| Weighted average common shares outstanding | | 139,077,229 | | | 119,249,551 | | | 132,447,198 | | | 114,379,344 | |
| Less: weighted average number of shares of unvested restricted common stock | | (9,041) | | | (18,906) | | | (9,041) | | | (155,758) | |
| Weighted average shares outstanding used in basic net income per share | | 139,068,188 | | | 119,230,645 | | | 132,438,157 | | | 114,223,586 | |
Effects of dilutive securities: (1) | | | | | | | | |
| OP Units | | 553,847 | | | 553,847 | | | 553,847 | | | 553,847 | |
| Unvested restricted common stock and RSUs | | 268,658 | | | 514,188 | | | 329,983 | | | 562,223 | |
| Weighted average shares outstanding used in diluted net income per share | | 139,890,693 | | | 120,298,680 | | | 133,321,987 | | | 115,339,656 | |
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(1)The three months ended September 30, 2022 exclude the impact of 198,126 unvested RSUs, respectively, as the effect would have been antidilutive. The nine months ended September 30, 2022 exclude the impact of 191,042 unvested RSUs, respectively, as the effect would have been antidilutive.
11. Commitments and Contingencies
As of September 30, 2022, the Company had remaining future commitments under mortgage notes, reimbursement obligations or similar arrangements to fund $40.1 million to its tenants for development, construction and renovation costs related to properties leased from the Company.
Litigation and Regulatory Matters
In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. There are no material legal or regulatory proceedings pending or known to be contemplated against the Company or its properties.
Environmental Matters
In connection with the ownership of real estate, the Company may be liable for costs and damages related to environmental matters. As of September 30, 2022, the Company had not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity.
Defined Contribution Retirement Plan
The Company has a defined contribution retirement savings plan qualified under Section 401(a) of the Code (the “401(k) Plan”). The 401(k) Plan is available to all of the Company’s full-time employees. The Company provides
a matching contribution in cash equal to 100% of the first 6% of eligible compensation contributed by participants, which vests immediately.
The following table presents the matching contributions made by the Company for the three and nine months ended September 30, 2022 and 2021:
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| | Three months ended September 30, | | Nine months ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| 401(k) matching contributions | | $ | 33 | | | $ | 29 | | | $ | 240 | | | $ | 149 | |
Employment Agreements
The Company has employment agreements with its executive officers. These employment agreements have an initial term of four years, with automatic one year extensions unless notice of non-renewal is provided by either party. These agreements provide for initial annual base salaries and an annual performance bonus. If an executive officer’s employment terminates under certain circumstances, the Company would be liable for any annual performance bonus awarded for the year prior to termination, to the extent unpaid, continued payments equal to 12 months of base salary, monthly reimbursement for 12 months of COBRA premiums, and under certain situations, a pro rata bonus for the year of termination.
12. Fair Value Measurements
GAAP establishes a hierarchy of valuation techniques based on the observability of inputs used in measuring financial instruments at fair value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures regularly and, depending on various factors, it is possible that an asset or liability may be classified differently from period to period. However, the Company expects that changes in classifications between levels will be rare.
In addition to the disclosures for assets and liabilities required to be measured at fair value at the balance sheet date, companies are required to disclose the estimated fair values of all financial instruments, even if they are not presented at their fair value on the consolidated balance sheet. The fair values of financial instruments are estimates based upon market conditions and perceived risks as of September 30, 2022 and December 31, 2021. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities.
Financial assets and liabilities for which the carrying values approximate their fair values include cash and cash equivalents, restricted cash, accounts receivable included within rent receivables, prepaid expenses and other assets, net, dividends payable and accrued liabilities and other payables. Generally, these assets and liabilities are short term in duration and their carrying value approximates fair value on the consolidated balance sheets.
The estimated fair values of the Company’s fixed-rate loans receivable have been derived based on primarily unobservable market inputs such as interest rates and discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. These measurements are classified as Level 3 within the fair value hierarchy. The Company believes the carrying value of its fixed-rate loans receivable approximates fair value.
The estimated fair values of the Company’s borrowings under the Revolving Credit Facility, the 2024 Term Loan, the 2027 Term Loan and the 2028 Term Loan have been derived based on primarily unobservable market inputs such as interest rates and discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads. These measurements are classified as Level 3 within the fair value hierarchy. The Company believes the carrying value of its borrowings under the Revolving Credit Facility, the 2024 Term Loan, the 2027 Term Loan and the 2028 Term Loan as of September 30, 2022 and December 31, 2021 approximate fair value.
The estimated fair value of the Company's indebtedness under its senior unsecured notes has been based primarily on quoted prices in active markets that the Company has the ability to access at the measurement date. The measurement is classified as Level 1 within the fair value hierarchy. As of September 30, 2022, the Company's senior unsecured notes had an aggregate carrying value of $400 million (excluding net deferred financing costs of $4.2 million and net discount of $0.7 million) and an estimated value of $338.6 million. As of December 31, 2021, the Company's senior unsecured notes had an aggregate carrying value of $400 million (excluding net deferred financing costs of $4.5 million and net discount of $0.8 million) and an estimated fair value of $400.6 million.
The Company measures its derivative financial instruments at fair value on a recurring basis. The fair values of the Company’s derivative financial instruments were determined using widely accepted valuation techniques, including discounted cash flow analyses on the expected cash flows of the derivative financial instruments. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including interest rate market data and implied volatilities in such interest rates. While it was determined that the majority of the inputs used to value the derivatives fall within Level 2 of the fair value hierarchy under authoritative accounting guidance, the credit valuation adjustments associated with the derivatives also utilized Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of September 30, 2022 and December 31, 2021, the significance of the impact of the credit valuation adjustments on the overall valuation of the derivative financial instruments was assessed and it was determined that these adjustments were not significant to the overall valuation of the derivative financial instruments. As a result, it was determined that the derivative financial instruments in their entirety should be classified in Level 2 of the fair value hierarchy. As of September 30, 2022 and December 31, 2021, the Company estimated the fair value of its interest rate swap contracts to be a $50.7 million asset and a $11.8 million liability, respectively.
The Company measures its real estate investments at fair value on a nonrecurring basis. The fair values of these real estate investments were determined using the following input levels as of September 30, 2022. The Company did not record any impairment and therefore did not make any real estate fair value estimates as of December 31, 2021.
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| | Net Carrying Value | | | | Fair Value Measurements Using Fair Value Hierarchy |
(in thousands) | | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| September 30, 2022 | | | | | | | | | | |
| Non-financial assets: | | | | | | | | | | |
| Long-lived assets | | $ | 2,267 | | | $ | 2,267 | | | $ | — | | | $ | — | | | $ | 2,267 | |
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Long Lived Assets
The Company reviews its investments in real estate when events or circumstances change indicating that the carrying amount of an asset may not be recoverable. In the evaluation of an investment in real estate for impairment, many factors are considered, including estimated current and expected operating cash flows from the asset during the projected holding period, costs necessary to extend the life or improve the asset, expected capitalization rates, projected stabilized net operating income, selling costs, and the ability to hold and dispose of the asset in the ordinary course of business.
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| (dollar amounts in thousands) | | Fair Value | | Valuation Techniques | | Significant Unobservable Inputs |
| Non-financial assets: | | | | | | | | |
| Long-lived assets | | | | | | | | |
| Restaurant - Selma AL | | $ | 367 | | | Discounted cash flow approach | | Terminal Value:8.00% Discount Rate:8.50% | | |
| Industrial - Tyler, TX | | $ | 1,900 | | | Sales comparison approach | | Comparable sales price | | |
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The fair values of impaired real estate investments were determined by using the following information, depending on availability, in order of preference: (i) signed purchase and sale agreements or letters of intent; (ii) recently quoted bid or ask prices; (iii) estimates of future cash flows, which consider, among other things, contractual and forecasted rental revenues, leasing assumptions, terminal capitalization rates, discount rates and expenses based upon market conditions; or (iv) expectations for the use of the real estate. Based on these inputs, the Company determined that its valuation of the impaired real estate falls within Level 3 of the fair value hierarchy.
13. Subsequent Events
The Company has evaluated all events and transactions that occurred after September 30, 2022 through the filing of this Quarterly Report on Form 10-Q and determined that there have been no events that have occurred that would require adjustment to disclosures in the consolidated financial statements except as disclosed below.
2028 Term Loan Additional Borrowing
In October 2022, the Company borrowed the remaining $150.0 million available under the 2028 Term Loan and, following this borrowing, the Company had $400.0 million in aggregate principal outstanding under the 2028 Term Loan. In October 2022, the Company entered into an interest rate swap to effectively fix the interest rate with respect to $50.0 million of the new borrowings.
Investment Activity
Subsequent to September 30, 2022, the Company invested in fourteen real estate properties for an aggregate investment amount (including acquisition-related costs) of $56.2 million and invested $2.5 million in new and ongoing construction in progress and reimbursements to tenants for development, construction and renovation costs. In addition, the Company invested $0.9 million in mortgage loans receivable subsequent to September 30, 2022.
Subsequent to September 30, 2022, the Company sold or transferred its investment in two real estate properties for an aggregate gross sales price of $7.5 million and incurred approximately $0.3 million of disposition costs related to these transactions.