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As filed with the Securities and Exchange Commission on September 8, 2020

Registration Statement No. 333-240381

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1

TO

FORM S-11

FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933

OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

 

 

Broadstone Net Lease, Inc.

(Exact name of registrant as specified in its governing instruments)

 

 

800 Clinton Square

Rochester, New York 14604

(585) 287-6500

(Address, including Zip Code and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Christopher J. Czarnecki

Chief Executive Officer and President

800 Clinton Square

Rochester, New York 14604

(585) 287-6500

(Name, Address, including Zip Code and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Stuart A. Barr

Fried, Frank, Harris, Shriver & Jacobson LLP

801 17th Street, NW

Washington, DC 20006

(202) 639-7000

 

Kathleen L. Werner

Jason D. Myers

Clifford Chance US LLP

31 West 52nd Street

New York, New York 10019

(212) 878-8000

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.  ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act  ☒

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Securities to be Registered  

Proposed

Maximum
Aggregate
Offering Price (1)(2)

  Amount of
Registration Fee (3)

Class A Common Stock, $0.00025 par value per share

  $731,975,000   $95,011

Common Stock, $0.00025 par value per share (4)

  $—     $—  

 

 

(1)

Estimated solely for the purpose of determining the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.

(2) 

Includes the offering price of Class A Common Stock that may be purchased by the underwriters upon the exercise of their option to purchase additional shares.

(3)

Calculated in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes $12,980 previously paid.

(4)

In accordance with Rule 457(i) under the Securities Act, this registration statement also registers shares of Common Stock that are issuable upon automatic conversion of Class A Common Stock registered hereby 180 days after the completion of the offering. Under Rule 457(i), no additional filing fee is payable with respect to the shares of Common Stock issuable upon conversion of the Class A Common Stock because no additional consideration will be received in connection with the automatic conversion. The par value of the Common Stock is presented on a post-split basis.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated September 8, 2020

33,500,000 Shares

 

LOGO

Class A Common Stock

Broadstone Net Lease, Inc.

 

 

Broadstone Net Lease, Inc., a Maryland corporation, is an internally-managed real estate investment trust (“REIT”) that acquires, owns, and manages primarily single-tenant, commercial real estate properties that are net leased on a long-term basis to a diversified group of tenants.

We are offering 33,500,000 shares of our Class A Common Stock, $0.00025 par value per share (the “Class A Common Stock”). All of the shares of Class A Common Stock offered by this prospectus are being sold by us. This is our initial public offering, and no public market currently exists for our Class A Common Stock. We expect the initial public offering price of our Class A Common Stock to be between $17.00 and $19.00 per share.

Our Class A Common Stock has been approved for listing, subject to notice of issuance, on the New York Stock Exchange under the symbol “BNL.”

We elected to qualify to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), beginning with our taxable year ended December 31, 2008, and we believe we have been organized and operated in a manner that allowed us to qualify to be taxed as a REIT commencing with such year. We intend to continue to operate as a REIT in the future. Shares of our capital stock (including our Class A Common Stock) are subject to limitations on ownership and transfer that are primarily intended to assist us in maintaining our qualification as a REIT. Subject to certain exceptions, our Charter restricts the direct or indirect ownership by one person or entity to no more than 9.8% of the value of our then outstanding shares of capital stock and no more than 9.8% of the value or number of shares, whichever is more restrictive, of our then outstanding Common Stock (including our Class A Common Stock). See “Description of Stock—Restrictions on Ownership and Transfer” for a detailed description of the ownership and transfer restrictions applicable to our Common Stock (including our Class A Common Stock).

We are an “emerging growth company” under the U.S. federal securities laws and, as such, have elected to comply with certain reduced disclosure requirements in this prospectus and in future filings that we make with the Securities and Exchange Commission (the “SEC”). See “Prospectus Summary—Emerging Growth Company Status.”

 

 

Investing in our Class A Common Stock involves risks. See “Risk Factors” beginning on page 33 for factors you should consider before investing in our Class A Common Stock.

 

 

Neither the SEC nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts (1)

   $                    $                

Proceeds, before expenses, to us

   $                    $                

 

(1) 

We refer you to “Underwriting” beginning on page 241 of this prospectus for additional information regarding underwriting compensation.

To the extent that the underwriters sell more than 33,500,000 shares of our Class A Common Stock, the underwriters have the option, exercisable within 30 days from the date of this prospectus, to purchase up to an additional 5,025,000 shares from us at the initial public offering price less the underwriting discounts and commissions. The underwriters expect to deliver the shares of Class A Common Stock to purchasers on or about                     , 2020.

 

 

Joint Book-Running Managers

 

J.P. Morgan   Goldman Sachs & Co. LLC   BMO Capital Markets   Morgan Stanley
Capital One Securities   Truist Securities

Co-Managers

 

Regions Securities LLC   BTIG   KeyBanc Capital Markets   Ramirez & Co., Inc.

Prospectus dated                     , 2020.


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LOGO

$288mm Annualized Base Rent 44% Industrial 15% Restaurants 9% Retail 20% Healthcare 10% Office 2% Other 99.6% Leased1 34.4% Master Leases 11.0 Years WALT 2.1% Annual Escalation 93.9% Rent Collections in Q2 95.0% Financial Reporting2 633 Properties 41 States 1 Canadian Province >$600M Annual Acquisitions 2017 - 2019 182 / 168 / 54 Tenants / Brands / Industries 2.5% Top Tenant 18.8% Top Ten Tenants $900mm Revolver3 Baa3 Moody's Rating Source: Company filings and management provided info as of 6/30/20 1 Based on square footage 2 Includes 6.6% of tenants who are public filers 3 Pro forma for IPO and pending revolver refinancing


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TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     33  

FORWARD-LOOKING STATEMENTS

     70  

USE OF PROCEEDS

     71  

DISTRIBUTION POLICY

     72  

CAPITALIZATION

     76  

SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA

     78  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     81  

MARKET OPPORTUNITY

     112  

BUSINESS AND PROPERTIES

     123  

MANAGEMENT

     157  

EXECUTIVE COMPENSATION

     166  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     179  

RECAPITALIZATION, INTERNALIZATION, AND STRUCTURE OF OUR COMPANY

     183  

HISTORICAL PRIVATE EQUITY ISSUANCES AND REDEMPTIONS

     187  

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

     189  

DESCRIPTION OF THE SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF BROADSTONE NET LEASE, LLC

     193  

PRINCIPAL STOCKHOLDERS

     200  

DESCRIPTION OF OUR CAPITAL STOCK

     202  

CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND SECOND AMENDED AND RESTATED BYLAWS

     207  

SHARES ELIGIBLE FOR FUTURE SALE

     214  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     216  

ERISA CONSIDERATIONS

     238  

UNDERWRITING

     240  

LEGAL MATTERS

     249  

EXPERTS

     249  

WHERE YOU CAN FIND MORE INFORMATION

     249  

We have not, and the underwriters have not, authorized anyone to provide you with information other than what is contained in this prospectus or in any free writing prospectus prepared by us. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus and any free writing prospectus prepared by us is accurate only as of their respective dates or on the date or dates which are specified in these documents. Our business, financial condition, liquidity, results of operations, and prospects may have changed since those dates.

We use market data and industry forecasts and projections throughout this prospectus and, in particular, in the sections entitled “Prospectus Summary,” “Market Opportunity,” and “Business and Properties.” We have obtained substantially all of this information from a market study prepared for us in connection with this offering by Rosen Consulting Group (“RCG”), a nationally recognized real estate consulting firm. Such information is included in this prospectus in reliance on RCG’s authority as an expert on such matters. Any forecasts prepared by RCG are based on data (including third party data), models, and experience of various professionals and are based on various assumptions, all of which are subject to change without notice. See “Experts.” In addition, we have obtained certain market and industry data from publicly available industry publications. These sources

 

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generally state that the information they provide has been obtained from sources believed to be reliable but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers’ experience in the industry, and there is no assurance that any of the projected amounts will be achieved. We have not independently verified this information.

Immediately prior to the closing of this offering, we will effect a recapitalization of our common stock, $0.001 par value per share (“Common Stock”), pursuant to which (i) we will establish a new class of Common Stock as “Class A Common Stock” for sale in this offering and (ii) we will effect a four-for-one stock split of our Common Stock that is outstanding immediately prior to the closing of this offering (the “REIT Recapitalization”); provided, however, that we shall issue no fractional shares of Common Stock as a result of the stock split, but shall instead pay to any stockholder who would be entitled to receive a fractional share as a result of the REIT Recapitalization a sum in cash equal to the fair market value of such fractional share as determined in good faith by our Board of Directors. The REIT Recapitalization shall be effected on a record holder-by-record holder basis, such that any fractional shares of Common Stock resulting from the REIT Recapitalization and held by a single record holder shall be aggregated.

The Class A Common Stock sold in this offering will be listed on the NYSE as of the closing of this offering and will be freely tradeable. Each share of our Class A Common Stock will automatically convert into one share of our Common Stock 180 days after the completion of this offering (the “Class A Conversion”). Immediately following the Class A Conversion, all outstanding shares of our Common Stock, including those shares of Common Stock issued upon conversion of the Class A Common Stock, will be listed on the NYSE and will be freely tradeable. In connection with the REIT Recapitalization, Broadstone Net Lease, LLC, a New York limited liability company and our operating company (the “OP”), will effect a recapitalization of its membership units (“OP Units”), pursuant to which it will effect a four-for-one split of its outstanding OP Units (collectively, with the REIT Recapitalization, the “Recapitalization”). Unless the context requires otherwise, all information set forth herein assumes the completion of the Recapitalization. For further information on the Recapitalization, refer to the section entitled “Recapitalization, Internalization, and Structure of our Company—Recapitalization.”

Unless otherwise indicated, the information contained in this prospectus assumes (1) that the underwriters’ option to purchase additional shares is not exercised and (2) that the Class A Common Stock to be sold in this offering is sold at $18.00 per share, which is the mid-point of the price range set forth on the front cover of this prospectus.

Certain Terms Used in This Prospectus

Unless the context otherwise requires, the following terms and phrases are used throughout this prospectus as described below:

 

   

“2020 Equity Incentive Plan” means our 2020 Omnibus Equity and Incentive Plan, which was approved and adopted by our board of directors on August 4, 2020;

 

   

“2020 Unsecured Term Loan” means our $300 million unsecured term loan by and among the Company, the OP, JPMorgan Chase Bank, N.A., and the other lenders party thereto, dated August 2, 2019;

 

   

“annualized base rent” or “ABR” means the annualized contractual cash rent due for the last month of the reporting period, excluding the impacts of the short-term rent deferrals and abatements agreed to as a result of tenant requests for rent relief related to the global coronavirus (“COVID-19”) pandemic described under “Summary—COVID-19 Pandemic and Rent Collections”) and adjusted to remove rent from properties sold during the month and to include a full month of contractual cash rent for properties acquired during the last month;

 

   

“BRE” means Broadstone Real Estate, LLC;

 

   

“Cash Cap Rate” represents the estimated first year cash yield to be generated on a real estate investment property, which was estimated at the time of investment based on the contractually

 

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specified cash base rent for the first full year after the date of the investment, divided by the purchase price for the property;

 

   

“CPI” means the Consumer Price Index for All Urban Consumers (CPI-U): U.S. City Average, All Items, as published by the U.S. Bureau of Labor Statistics, or other similar index which is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services;

 

   

“Exchange Act” means the Securities and Exchange Act of 1934, as amended;

 

   

“Founding Owners” means Amy Tait and certain affiliated members of her family;

 

   

“GAAP” means accounting principles generally accepted in the United States of America;

 

   

“gross asset value” means the undepreciated book value of an asset, which represents the fair value of the asset as of the date it was acquired, less any subsequent writedowns due to impairment charges;

 

   

“Industrial Portfolio Acquisition” refers to our acquisition of a portfolio of 23 industrial and office/flex assets on August 29, 2019;

 

   

“Internalization” means the internalization of the external management team and functions previously performed for the Company by BRE, which closed on February 7, 2020;

 

   

“JOBS Act” means the Jumpstart Our Business Startups Act;

 

   

“MGCL” means the Maryland General Corporation Law;

 

   

“NYSE” means the New York Stock Exchange;

 

   

“occupancy” or a specified percentage of our portfolio that is “occupied” means the quotient of (1) the total square footage of our properties minus the square footage of our properties that are vacant and from which we are not receiving any rental payment, and (2) the total square footage of our properties as of a specified date;

 

   

“Registration Rights Agreement” means that certain Registration Rights Agreement, dated February 7, 2020, among the Company, the Trident Owners, and the Founding Owners;

 

   

“rent coverage ratio” means the ratio of tenant-reported or, when unavailable, management’s estimate, based on tenant-reported financial information, of annual earnings before interest, taxes, depreciation, amortization, and cash rent attributable to the leased property (or properties, in the case of a master lease) to the annualized base rental obligation as of a specified date;

 

   

“Revolving Credit Facility” means our $600 million unsecured revolving credit facility, dated June 23, 2017, by and among the Company, the OP, Manufacturers and Traders Trust Company, and the other lenders party thereto, as amended from time to time, which, concurrently with the completion of this offering, will be terminated and, thereafter, “Revolving Credit Facility” means the new $900 million unsecured revolving credit facility by and among the Company, the OP, J.P. Morgan Chase Bank, N.A., and the other lenders party thereto that we will enter into concurrently with the completion of this offering;

 

   

“Sarbanes-Oxley” means the Sarbanes-Oxley Act of 2002, as amended;

 

   

“Securities Act” means the Securities Act of 1933, as amended;

 

   

“Trident Owners” means Trident BRE LLC and its affiliates, each of which is an affiliate of Stone Point Capital LLC; and

 

   

“we,” “our,” “us,” “BNL,” and “Company” mean Broadstone Net Lease, Inc., a Maryland corporation, together with its consolidated subsidiaries, including the OP.

 

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PROSPECTUS SUMMARY

The following summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our Class A Common Stock. You should read the entire prospectus carefully, including the section entitled “Risk Factors,” as well as the financial statements and related notes included elsewhere in this prospectus, before making an investment decision.

Our Company

We are an internally-managed REIT that acquires, owns, and manages primarily single-tenant commercial real estate properties that are net leased on a long-term basis to a diversified group of tenants. We utilize an investment strategy underpinned by strong fundamental credit analysis and prudent real estate underwriting. Since our inception in 2007, we have selectively invested in net leased real estate across the industrial, healthcare, restaurant, office, and retail property types, and as of June 30, 2020, our portfolio has grown to 632 properties in 41 U.S. states and one property in Canada, with an aggregate gross asset value of approximately $4.0 billion.

We focus on investing in real estate that is operated by creditworthy single tenants in industries characterized by positive business drivers and trends, where the properties are an integral part of the tenants’ businesses and there are opportunities to secure long-term net leases. Through long-term net leases, our tenants are able to retain operational control of their strategically important locations, while allocating their debt and equity capital to fund their core business operations rather than real estate ownership.

 

   

Diversified Portfolio. As of June 30, 2020, our portfolio comprised approximately 27.4 million rentable square feet of operational space, and was highly diversified based on property type, geography, tenant, and industry:

 

   

Property Type: We are focused primarily on industrial, healthcare, restaurant, office, and retail property types based on our extensive experience in and conviction around these sectors. Within these sectors, we have meaningful concentrations in manufacturing, distribution and warehouse, clinical, casual dining, quick service restaurant, strategic operations, corporate headquarters, food processing, flex/research and development, and cold storage.

 

   

Geographic Diversity: Our properties are located in 41 U.S. states and British Columbia, Canada, with no single geographic concentration exceeding 10.4% of our ABR.

 

   

Tenant and Industry Diversity: Our properties are occupied by approximately 182 different commercial tenants who operate 168 different brands that are diversified across 54 differing industries, with no single tenant accounting for more than 2.5% of our ABR.

 

   

Strong In-Place Leases with Significant Remaining Lease Term. As of June 30, 2020, our portfolio was 99.6% leased based on rentable square footage with an ABR weighted average remaining lease term of approximately 11.0 years, excluding renewal options.

 

   

Standard Contractual Base Rent Escalation. Approximately 98.2% of our leases have contractual rent escalations, with an ABR weighted average minimum increase of 2.1%.

 

   

Extensive Tenant Financial Reporting. Approximately 88.4% of our ABR is received from tenants that are required to provide us with specified financial information on a periodic basis. An additional 6.6% of our ABR is received from tenants that are public companies, which are required to file financial statements with the SEC, although they are not required to provide us with specified financial information under the terms of our lease.



 

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From our inception in 2007 through 2015, our portfolio grew to over 300 properties with a gross asset value of $1.4 billion. Growth further accelerated under the leadership of Christopher J. Czarnecki, our Chief Executive Officer since 2017, who joined us in 2009 and was instrumental in building our senior leadership team, developing our strategy, and increasing our level of acquisition activity. Our team has acquired more than $500 million of net leased real estate each year from 2015 to 2019, including acquisition activity of approximately $1.0 billion during 2019, and has grown our portfolio to 633 properties with a gross asset value of approximately $4.0 billion as of June 30, 2020. In order to benefit from increasing economies of scale as we continue to grow, and as a part of our evolution toward entering the public markets, our board of directors made the decision to internalize the external management team and functions previously performed by BRE and its affiliates through a series of mergers that became effective on February 7, 2020. Upon closing of the Internalization, each member of our senior management team became a full-time employee of BNL.

 

 

LOGO

Our Competitive Strengths

We believe we possess the following competitive strengths that enable us to implement our business and growth strategies and distinguish our Company from other market participants, allowing us to compete effectively in the single-tenant, net lease market:

 

   

Diversified Portfolio of High-Quality Properties that are Key to Tenant Operations. Our portfolio is diversified by property type, geography, tenant, and industry, and is cross-diversified within each (e.g., property-type diversification within a geographic concentration). Our portfolio is primarily focused in industrial, healthcare, restaurant, office, and retail property types, with approximately 182 tenants operating 168 different brands across 54 different industries. Our top ten tenants represented only 18.8% of our portfolio ABR as of June 30, 2020, with no single tenant representing more than 2.5%. We focus on maintaining a diversified portfolio of properties that are strategically located or important to the tenant’s business. We believe that our highly diversified portfolio provides us with acquisition flexibility, positioning us for significant growth, and helps mitigate the risks inherent in a



 

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concentration in only one or a few property types, geographies, tenants, or industries, including risks presented by tenant bankruptcies, adverse industry trends, and economic downturns in a particular geographic area and the ongoing COVID-19 pandemic.

 

   

Scalable Net Lease Platform Well Positioned for Significant Growth. With 73 employees who have extensive net lease expertise and significant experience managing our portfolio, our platform is highly scalable. We have developed leading institutional capabilities across origination, transaction negotiation and documentation, underwriting, financing, and property and asset management. In tandem with our highly diversified portfolio, we have structured our acquisition, property management, and credit underwriting personnel in teams of experienced, dedicated industry specialists focused on each of our core property types. Given our team and organizational structure, we expect that as our portfolio grows, we will experience limited increases in general and administrative expenses, as those expenses are expected to grow at a significantly slower rate than the overall portfolio and corresponding lease revenues.

 

   

Meaningful Value Creation and Risk Mitigation through Active Asset Management. Our asset and property management teams focus on creating value post-acquisition through active tenant engagement and risk monitoring and mitigation. As experienced through our requests for rent relief from tenants related to COVID-19, we leveraged our strong tenant relationships to find mutually agreeable terms that seek to protect and in certain circumstances improve our position by negotiating enhanced tenant financial reporting, lease extensions, or the early exercise of tenant renewal options. Approximately 88.4% of our ABR is received from tenants that are required to periodically provide us with certain financial information and an additional 6.6% of our ABR is received from tenants that are public companies, which are required to file financial statements with the SEC. We believe this enhances our ability to actively monitor our investments, negotiate lease renewals, and proactively manage our portfolio to protect stockholder value.

 

   

Strong Balance Sheet with Investment Grade Credit Rating. Upon completion of this offering, we expect to have pro forma total debt outstanding of $1,549.9 million, approximately $900.0 million of borrowing capacity under our Revolving Credit Facility, approximately $82.8 million of cash and cash equivalents, and a pro forma net debt to annualized adjusted EBITDAre ratio of approximately 5.23x. Our disciplined ownership and operation of our business is reflected in our investment grade credit rating from Moody’s Investors Service (“Moody’s”) of Baa3 with a stable outlook. We believe we are well positioned to grow our portfolio successfully while maintaining an attractive leverage profile.

 

   

Experienced and Innovative Senior Leadership Team with Proven Net Lease Track Record. Our senior management team has significant net lease real estate, public company, finance, and capital markets experience. Our Chief Executive Officer, Christopher J. Czarnecki, has over 13 years of experience in the real estate industry and joined us in 2009. Our senior management team also has a strong track record working together and collectively managing our business, operations, and portfolio, having acquired $3.4 billion of net leased real estate from 2015 to 2019. Our senior management team also has an extensive network of relationships in the net lease real estate business, as well as in the investment banking, real estate broker, financial advisory, and lending communities, which will continue to underpin the expansion of our platform. Our Chief Financial Officer, Ryan M. Albano, who joined us in 2013, has extensive experience in finance and real estate and has significantly contributed to our debt capital markets strategy, particularly since becoming our Chief Financial Officer in 2017, having executed more than $2 billion of debt transactions in that time. Our Chief Investment Officer, Sean T. Cutt, who joined us in 2012, has extensive experience in real estate and has led the sourcing, underwriting, and execution of our acquisitions and dispositions strategies since 2016. Our Chief Operating Officer, John D. Moragne, who joined us in 2016, has extensive experience in real estate and corporate operations, and was instrumental in leading our transition to a public reporting company in 2017.



 

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Our Business and Growth Strategies

Our primary business objectives are to maximize cash flows, the value of our portfolio, and total returns to our stockholders through pursuit of the following business and growth strategies:

 

   

Internal Growth through Long-Term Net Leases with Strong Contractual Rent Escalations. We seek to enter into long-term net leases that include strong rent escalations over the lease term. As of June 30, 2020, substantially all of our portfolio (based on ABR) was subject to net leases, our leases had an ABR weighted average remaining lease term of approximately 11.0 years, excluding renewal options, and approximately 98.2% of our leases had contractual rent escalations, with an ABR weighted average minimum increase of 2.1%.

 

   

Disciplined and Targeted Acquisition Growth while Maintaining Our Diversified Portfolio. We plan to continue our disciplined and targeted acquisition strategy to identify properties that are both individually compelling and contribute to our portfolio’s overall diversification based on property type, geography, tenant, and industry. We also are highly focused on growing our business where we can capture the best opportunities across different property types while maintaining the overall diversity of our portfolio. We believe our reputation, in-depth market knowledge, and extensive network of established relationships in the net lease industry will continue to provide us access to potential attractive investment opportunities.

 

   

Selectively Identify Attractive Adjacent Opportunities to Our Core Property Types. We have and will continue to seek attractive adjacent opportunities to our core property types in the net lease space, which have historically provided us the opportunity to earn higher relative returns. For example, in 2015, we began acquiring and structuring long-term net leases for laboratory facilities, veterinary clinics, and cold storage facilities prior to what we believe was the more general market acceptance of these asset types in the healthcare and industrial sectors. We intend to continue opportunistically employing this strategy where we believe we can generate appropriate risk-adjusted returns for our stockholders on a long-term basis.

 

   

Actively Manage Our Balance Sheet to Maximize Capital Efficiency. We seek to maintain a prudent balance between debt and equity financing and to maintain funding sources that lock in long-term investment spreads, limit interest rate sensitivity, and align with our lease terms. As of June 30, 2020, on a pro forma basis, we had $1,549.9 million of total debt outstanding, net debt of $1,466.5 million, a ratio of net debt to annualized adjusted EBITDAre of 5.23x, $900 million of borrowing capacity under our Revolving Credit Facility, and $82.8 million of cash and cash equivalents. In the future, we will seek to maintain on a sustained basis a level of net debt that is generally less than six times our annualized adjusted EBITDAre.

 

   

Proactively Manage Our Portfolio. We believe our proactive approach to asset management and property management helps enhance the performance of our portfolio through risk mitigation strategies and opportunistic sales. We believe that our proactive approach to asset management helps to identify and address issues, such as tenant credit deterioration, changes in real estate fundamentals, general market disruption such as from the COVID-19 pandemic, or otherwise, including determining to sell any of our properties where we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives. From 2015 through June 30, 2020, we sold 110 properties for an aggregate sales price of approximately $407.1 million, resulting in a 21.0% gain over book value and a 15.0% gain over original purchase price.



 

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Our Real Estate Investment Portfolio

To achieve an appropriate risk-adjusted return, we intend to maintain a highly diversified portfolio of primarily single-tenant commercial real estate properties spread across multiple property types, geographic locations, tenants, and industries and that have cross-diversification within each. The following discussion summarizes our portfolio diversification by property type, tenant, industry, and geographic location as of June 30, 2020. The percentages below are calculated based on our ABR as of June 30, 2020.

As of June 30, 2020, our top ten tenants (based on ABR) represented only 18.8% of our total ABR and included Red Lobster, Jack’s Family Restaurants, Axcelis, Hensley, Outback Steakhouse, Krispy Kreme, BluePearl, Big Tex Trailer Manufacturing, Siemens, and Nestle. For additional information regarding these tenants, including the number of properties each tenant leases from us, please see “Business and Properties—Our Real Estate Portfolio—Top 20 Tenants.”

Diversification by Property Type. We are focused primarily on industrial, healthcare, restaurant, office, and retail property types based on our extensive experience in and conviction around these sectors. Within these sectors, we have meaningful concentrations in manufacturing, distribution and warehouse, clinical, casual dining, quick service restaurant, strategic operations, corporate headquarters, food processing, flex/research and development, and cold storage.



 

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Diversification by Property Type

(based on ABR)

 

 

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Property Type

   #
Properties
     ABR
($000s)
     ABR as
a % of
Total
Portfolio
    Square
Feet
(000s)
     SF as a
% of
Total
Portfolio
 

Industrial

             

Manufacturing

     56      $ 40,360        14.0     7,686        28.0

Distribution & Warehouse

     32        39,589        13.8     7,013        25.6

Food Processing

     14        18,194        6.3     2,131        7.8

Flex and R&D

     7        16,432        5.7     1,457        5.3

Cold Storage

     4        12,258        4.3     933        3.4
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Industrial Total

     113        126,833        44.1     19,220        70.1

Healthcare

             

Clinical

     50        25,371        8.8     1,081        3.9

Surgical

     16        9,690        3.4     369        1.3

Animal Health Services

     20        8,072        2.8     314        1.2

Life Science

     9        7,394        2.6     549        2.0

Healthcare Services

     26        6,761        2.3     262        1.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Healthcare Total

     121        57,288        19.9     2,575        9.4

Restaurant

             

Quick Service Restaurants

     152        24,845        8.6     511        1.9

Casual Dining

     91        19,956        6.9     579        2.1
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Restaurant Total

     243        44,801        15.5     1,090        4.0

Office

             

Strategic Operations

     7        13,554        4.7     1,021        3.7

Corporate Headquarters

     6        9,583        3.3     671        2.5

Call Center

     4        5,564        2.0     392        1.4
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Office Total

     17        28,701        10.0 %      2,084        7.6 % 

Retail

             

Automotive

     56        9,697        3.4     784        2.9

General Merchandise

     57        8,425        2.9     677        2.5

Home Furnishings

     15        7,175        2.5     860        3.1
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Retail Total

     128        25,297        8.8     2,321        8.5

Other

     11        4,963        1.7 %      117        0.4 % 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

     633      $ 287,883        100.0     27,407        100.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Diversification by Tenant. Our properties are occupied by approximately 182 different commercial tenants, with no single tenant accounting for more than 2.5% of our ABR.

Diversification by Industry and Brand. Our properties were occupied by commercial tenants who operate 168 different brands that are diversified across 54 differing industries. Tenants operating in the industrial, healthcare, and restaurant industries provided 44.1%, 19.9%, and 15.5%, respectively, of our ABR.

Diversification by Geography. We have a diversified portfolio of 632 properties located in 41 states, including Texas, which represented 10.4% of our ABR, and one property located in British Columbia, Canada.

Lease Maturity. As of June 30, 2020, approximately 99.6% of our portfolio’s rentable square footage, representing all but seven of our properties, was subject to a lease. As of June 30, 2020, the ABR weighted average remaining term of our leases was approximately 11.0 years, excluding renewal options. Approximately 58.8% of our rental revenue was derived from leases that expire during 2030 and thereafter, and no more than



 

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9.1% of our rental revenue was derived from leases that expire in any single year prior to 2030. The following chart sets forth our lease expirations based upon the terms of our leases in place as of June 30, 2020.

 

 

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Expiration Year

  2020     2021     2022     2023     2024     2025     2026     2027     2028     2029     2030     2031     2032     2033     2034     2035     2036     2037     2038     2039     2040+  

Number of properties

    1       9       4       8       11       19       34       30       33       60       88       16       36       37       30       49       28       27       32       12       62  

Number of leases

    2       9       5       9       11       21       26       24       27       28       41       11       17       11       15       10       6       10       28       7       11  

Substantially all of our leases provide for periodic contractual rent escalations. As of June 30, 2020, leases contributing 98.2% of our ABR provided for increases in future annual base rent, generally ranging from 1.5% to 2.5% annually, with an ABR weighted average annual minimum increase equal to 2.1% of base rent. Generally, our rent escalators increase rent on specified dates by a fixed percentage. Our escalations provide us with a source of organic growth and a measure of inflation protection. Additional information on lease escalation frequency and weighted average annual escalation rates as of June 30, 2020 is displayed below.

 

Lease Escalation Frequency

   % of ABR     Weighted
Average Annual
Minimum
Increase (1)
 

Annually

     80.5     1.9%  

Every 2 years

     0.1     1.8%  

Every 3 years

     3.1     2.2%  

Every 4 years

     1.3     2.4%  

Every 5 years

     7.9     2.0%  

Other escalation frequencies

     5.3     1.7%  

Flat

     1.8     N/A  
  

 

 

   

Total/Weighted Average (2)

     100.0     2.1%  
  

 

 

   

 



 

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(1)

Represents the ABR weighted average annual minimum increase of the entire portfolio as if all escalations occurred annually. For leases where rent escalates by the greater of a stated fixed percentage or the change in CPI, we have assumed an escalation equal to the stated fixed percentage in the lease. As of June 30, 2020, leases contributing 10.5% of our ABR provide for rent increases equal to the lesser of a stated fixed percentage or the change in CPI. As any future increase in CPI is unknowable at this time, we have not included an increase in the rent pursuant to these leases in the weighted average annual minimum increase presented.

(2)

Weighted by ABR.

COVID-19 Pandemic and Rent Collections

As of the date of this prospectus, we have successfully resolved all active tenant requests for rent relief and our cash collections totaled approximately 93.9%, 96.5%, and 98.2% of second quarter, July, and August base rents due, respectively. If we collect the remaining amount owed to us pursuant to the terms of a court approved settlement with the Art Van bankruptcy estate (please see below for additional information), we will have collected approximately 95.5% of base rents due for the second quarter of 2020. The following chart summarizes our second quarter 2020 rent collections to date:

 

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1 

Relates to post-petition rents due from one tenant who had filed for bankruptcy.

For the second quarter of 2020:

 

   

Other than one tenant that filed for bankruptcy, all but one tenant paid their rent due for the second quarter, either in full or in accordance with the terms of the agreed-upon rent relief agreements. Uncollected base rent not subject to deferment, abatement, or bankruptcy, represents less than 0.02% of base rents due.

 

   

We granted partial rent relief requests to 15 tenants related to 93 properties whose total base contractual rents represent 9.7% of our ABR as of June 30, 2020, compared with total requests received from 59 tenants related to 295 properties whose total base contractual rents represented 33.7% of our ABR as of June 30, 2020. Of the 33.7% of our ABR that was the subject of a rent relief request, we declined 15.3%, granted 9.7%, and 8.7% was either rescinded or the tenant ceased pursuing the request.



 

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We collected 100% of rents due from tenants to whom we declined to provide relief or who withdrew or ceased pursuit of their deferral requests and 100% of base rents due under the terms of partial deferral and abatement agreements.

 

   

We agreed to partial rent deferrals with 14 tenants ranging in length between two and six months, with a weighted average deferral of 3.4 months and repayment periods ranging from three months to one year, with a weighted average repayment period of 5.6 months beginning in July 2020. We have received 100% of deferred rent that was required to be repaid in July and August 2020.

 

   

We agreed to a partial abatement of rent with one tenant for rents over a nine-month period with the minimum required rent payable increasing during the period. In exchange, we negotiated a three-year lease term extension and an upside percentage rent clause during the abatement period, which we expect to provide us with long-term value accretion. Additionally, as of June 30, 2020, we had received payment of the base amounts due for the second and third quarters of 2020 under the agreement.

 

   

Approximately 2.0% of our base rent outstanding for the second quarter relates to Art Van Furniture, LLC (“Art Van”), which is currently subject to Chapter 7 bankruptcy proceedings. Pursuant to the terms of a court approved settlement with the Art Van bankruptcy estate, we collected $1.175 million of the base rent outstanding from Art Van in August 2020 and have a right to collect an additional $1.175 million in September 2020. If the September payment is collected, we will have received approximately 95.5% of base rents due for the second quarter of 2020. We successfully re-tenanted six of 10 properties previously leased to Art Van under new long-term leases as of June 30, 2020 with base rents equivalent to approximately 71.5% of the base rent previously received from Art Van for those six properties.

The following tables present information concerning our collections for rent due in the second quarter by tenant industry and property type:

 

           % Base Rent Collected     % Q2 Base Rent Not Collected  

Tenant Industry

   % of June
ABR
    April     May     June     Q2     Deferred     Abated     Bankruptcy  

Restaurants

     15.8     97.0     84.0     83.9     88.7     4.4     6.9     0.0

Home Furnishing Retail

     3.3     91.2     26.9     26.9     48.3     4.8     0.0     46.9

Specialty Stores

     2.2     68.3     68.3     68.3     68.3     31.7     0.0     0.0

Industrial Machinery

     1.9     84.6     84.6     84.6     84.6     15.4     0.0     0.0

Home Furnishings

     1.8     72.9     72.9     72.9     72.9     27.1     0.0     0.0

Life Sciences Tools & Services

     1.4     81.8     81.8     81.8     81.8     18.2     0.0     0.0

Movies & Entertainment(1)

     1.1     100.0     50.0     50.0     66.7     33.3     0.0     0.0

All Other

     72.5     100.0     100.0     100.0     100.0     0.0     0.0     0.0
  

 

 

               

Grand Total

     100.0     97.4     92.1     92.1     93.9     3.0     1.1     2.0
  

 

 

               

 

(1) 

Industrial tenant.

 

           % Base Rent Collected     % Q2 Base Rent Not Collected  

Property Type

   % of June
ABR
    April     May     June     Q2     Deferred     Abated     Bankruptcy  

Industrial

     44.1     96.2     95.0     95.0     95.4     4.6     0.0     0.0

Healthcare

     19.9     98.6     98.6     98.6     98.6     1.4     0.0     0.0

Restaurant

     15.5     97.0     83.8     83.7     88.4     4.5     7.1     0.0

Office

     10.0     100.0     100.0     100.0     100.0     0.0     0.0     0.0

Retail

     8.8     98.2     69.9     69.9     79.3     0.0     0.0     20.7

Other

     1.7     100.0     100.0     100.0     100.0     0.0     0.0     0.0
  

 

 

               

Grand Total

     100.0     97.4     92.1     92.1     93.9     3.0     1.1     2.0
  

 

 

               


 

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The following tables present information concerning the rent relief requests we have received as of the date of this prospectus by tenant industry and property type:

 

    COVID-19 Rent Relief Requests     Portfolio Diversification  

Tenant Industry

  #
Properties
    ABR
($000s)
    % of Portfolio
ABR
    % of Tenant
Industry
ABR
    #
Properties
    ABR
($000s)
    % of Portfolio
ABR
 

Restaurants

    176     $  31,693       11.0     69.7     242     $ 45,465       15.8

Health Care Facilities

    26       7,732       2.7     17.1     95       45,320       15.7

Food Distributors

    1       1,031       0.4     8.1     7       12,755       4.4

Auto Parts & Equipment

    20       7,495       2.6     74.0     31       10,130       3.5

Home Furnishing Retail

    2       1,318       0.5     13.9     19       9,453       3.3

Specialized Consumer Services

    36       9,138       3.2     97.4     37       9,380       3.3

Health Care Services

    1       1,082       0.4     13.2     16       8,177       2.8

Air Freight & Logistics

    1       2,767       1.0     43.1     3       6,422       2.2

Specialty Stores

    1       2,615       0.9     42.2     15       6,192       2.2

Industrial Machinery

    6       2,695       0.9     49.2     15       5,474       1.9

Home Furnishings

    2       5,185       1.8     100.0     2       5,185       1.8

Life Sciences Tools & Services

    3       1,449       0.5     36.5     5       3,973       1.4

Paper Packaging

    1       793       0.3     20.1     3       3,948       1.4

Movies & Entertainment (1)

    1       3,124       1.1     100.0     1       3,125       1.1

Personal Products

    1       1,311       0.4     45.2     2       2,899       1.0

Distillers & Vintners

    1       2,344       0.8     100.0     1       2,344       0.8

Electronic Manufacturing Services

    1       2,062       0.7     100.0     1       2,062       0.7

Construction Machinery & Heavy Trucks

    1       1,972       0.7     100.0     1       1,972       0.7

Automotive Retail

    3       742       0.3     37.8     8       1,964       0.7

Food Retail

    1       1,860       0.6     100.0     1       1,860       0.6

Footwear

    1       1,761       0.6     100.0     1       1,761       0.6

Publishing

    3       1,759       0.6     100.0     3       1,759       0.6

Data Processing & Outsourced Services

    1       1,580       0.5     100.0     1       1,580       0.5

Marine

    1       1,571       0.5     100.0     1       1,571       0.5

Commodity Chemicals

    3       783       0.3     56.3     4       1,392       0.5

Automobile Manufacturers

    1       1,126       0.4     100.0     1       1,126       0.4

Miscellaneous

    —         —         —         —         117       90,594       31.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    295     $ 96,988       33.7     N/A       633     $ 287,883       100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Industrial tenant



 

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     Portfolio Diversification     COVID-19 Related Requests  

Property Type

   #
Properties
     ABR
($000s)
     % of
Portfolio
ABR
    #
Properties
     ABR
($000s)
3
     % of
Portfolio
ABR
    % of Prop
Type
ABR
 

Industrial

                  

Manufacturing

     56      $ 40,360        14.0     24      $  14,728        5.1     11.6

Distribution & Warehouse

     32        39,589        13.8     11        16,000        5.5     12.6

Food Processing

     14        18,194        6.3     2        3,375        1.2     2.6

Flex and R&D

     7        16,432        5.7     1        3,124        1.1     2.5

Cold Storage

     4        12,258        4.3     1        2,767        1.0     2.2
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Industrial Total

     113        126,833        44.1     39        39,994        13.9     31.5

Healthcare

                  

Clinical

     50        25,371        8.8     16        5,705        2.0     9.9

Surgical

     16        9,690        3.4     1        268        0.1     0.5

Animal Health Services

     20        8,072        2.8                   0.0     0.0

Life Science

     9        7,394        2.6     4        2,531        0.9     4.4

Healthcare Services

     26        6,761        2.3     9        1,758        0.6     3.1
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Healthcare Total

     121        57,288        19.9     30        10,262        3.6     17.9

Restaurant

                  

Quick Service

     152        24,845        8.6     91        13,104        4.5     29.2

Casual Dining

     91        19,956        6.9     85        18,589        6.5     41.5
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Restaurant Total

     243        44,801        15.5     176        31,693        11.0     70.7

Office

                  

Strategic Operations

     7        13,554        4.7     1        1,571        0.5     5.5

Corporate Headquarters

     6        9,583        3.3     3        3,679        1.3     12.8

Call Center

     4        5,564        2.0                   0.0     0.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Office Total

     17        28,701        10.0     4        5,250        1.8     18.3

Retail

                  

Automotive

     56        9,697        3.4     45        7,929        2.8     31.3

General Merchandise

     57        8,425        2.9                   0.0     0.0

Home Furnishings

     15        7,175        2.5                   0.0     0.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Retail Total

     128        25,297        8.8     45        7,929        2.8     31.3

Other

     11        4,963        1.7     1        1,860        0.6     37.5
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

Total

     633        287,883        100.0     295        96,988        33.7     N/A  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 


 

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Historical Acquisitions and Dispositions

The following charts illustrate our annual acquisition and disposition activity from 2015 through June 30, 2020. The acquisition dollar amounts are based on investment cost and the disposition dollar amounts reflect the sale prices of the properties sold:

Historical Acquisitions ($ in thousands)

 

 

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We did not acquire any new properties during the six months ended June 30, 2020.



 

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Historical Dispositions ($ in thousands)

 

 

LOGO

Market Opportunity

Outlook

Rosen Consulting Group (“RCG)” has a long-term positive outlook on the net lease real estate market generally and on certain segments of property types for the following reasons:

 

   

Net leases offer multiple benefits for property owners and tenants, including, for property owners, rental income stability, inflation mitigation and potential residual property value appreciation, and for tenants, the opportunity to monetize real properties and allocate capital more efficiently.

 

   

RCG estimates the total value of owner-occupied commercial real estate in the U.S. is in the $1.5 to $2.0 trillion range as of 2019. RCG believes that many of these owner-occupied properties could become net leased assets, increasing the size of the net lease market through sale-leaseback transactions.

 

   

RCG believes that the net lease market generally can increase in size and will accommodate a substantial increase in investment activity.

 

   

Economic uncertainty from COVID-19 pandemic-related economic shutdowns may lead to net lease acquisition opportunities from smaller investors and corporate owner-users seeking liquidity via monetization of real property assets.

Net Lease Real Estate Overview

The net lease market is characterized primarily by single-tenant properties occupied by tenants across a range of industries, including corporate headquarters, manufacturing and distribution facilities, quick service restaurants and healthcare. The structure of a net lease can result in passive and stable cash flows for the owner with the benefit of potential property value appreciation. Net leases are often executed for seven to 15 years or



 

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more. Lease agreements typically include tenant options to renew, further extending the life of a net lease beyond the initial term. Comparatively, multitenant real estate properties with gross leases typically have average lease terms between five and ten years with fewer options to extend. Within the lease term, net leases may feature rent escalations of a fixed percentage or in relation to an inflation measure such as the CPI. This allows a net lease investment to provide some mitigation against inflation pressures or economic downturns. As a result, net leases can offer stable, predictable and passive cash flows over time, similar to interest-bearing corporate bonds but with potential upside for appreciation in property values and inflation mitigation.

The structure of a net lease can be beneficial in several ways to lessees:

 

   

Tenants are able to occupy and control locations for longer periods than a standard lease while preserving needed capital for core business operations.

 

   

Assists corporate tenants with expansion opportunities by foregoing capital-intensive ownership and property development alternatives.

 

   

Allows an owner-occupier to monetize real estate through a sale-leaseback transaction, which can provide capital for expansion opportunities, to retire debt or reinvest in the business platform.

For property owners, there are multiple benefits of a net lease structure:

 

   

A net lease offers greater rental income stability and predictability than traditional leases. The longer term and agreed upon rent escalations can create stable cash flows over an extended period of time, potentially outlasting economic downturns.

 

   

The contractual rent increases, often at an annual frequency, can serve to hedge against rising inflation. With the tenant financially responsible for most expenses, the landlord is further insulated against potential surges in inflation. Furthermore, minimal operating expenses borne by the lessor combined with the net lease structure can translate to a more consistent and predictable rental income stream.

 

   

Tenants with strong corporate financial metrics can minimize the vacancy risk to property owners of real estate assets. As net-leased locations are often critical to core businesses, tenants that occupy these mission-critical net-leased properties are likely to maintain lease payments even in the case of corporate reorganizations, bankruptcy filings or mergers. Should a net lease tenant relocate or go out of business, the real estate asset often holds residual value, which may be substantial, depending upon the characteristics and location of the property.

 

   

Even without a tenant and the recurring cash flow, the building may be repositioned to a single tenant or multitenant facility with the potential to secure a new cash flow stream. The underlying land also holds value regardless of the existing structure, particularly well-located sites in urban areas or within proximity to transportation infrastructure, business customers or consumers.

 

   

Finally, the long-term nature of the lease may offer some protection for property owners against economic volatility because short-term fluctuations in market-rate rents should not materially impact the in-place rental income from a net lease property. In both economic expansions and downturns, net lease rent growth exhibits less volatility than most other commercial real estate categories. During 2008 and 2009, one of the most severe economic downturns in modern times, rent growth for net-leased properties remained positive while average rent growth declined among other commercial property types. As the current economic downturn caused by the outbreak of COVID-19 progresses, a similar trend may occur as market-rate rents decline while in-place net lease rents remain stable or increase due to contractual rent increases. Economic cycles can often cause shifts in real estate occupancy and rental income, but the long-term lease structure of net lease real estate can often be more resistant to market downturns and volatile periods.



 

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The fragmented and evolving nature of ownership in the net lease market make it difficult to quantify the overall market size. Net lease tenants constantly expand into new locations and owner-occupiers engage in sale-leaseback and other net lease transactions, adding to and removing properties from the universe of investable net lease real estate properties. RCG estimates the total value of owner-occupied real estate in the U.S. is in the $1.5 to $2.0 trillion range as of 2019. Many of these owner-occupied properties could become net leased assets, increasing the size of the net lease market through sale-leaseback transactions. This estimate is a modest portion of the nearly 71 billion square feet of commercial real estate located in the 200 largest markets in the U.S. in 2018, according to an estimate by the National Association of Real Estate Investment Trusts. With this magnitude, there is considerable potential for the net lease market to expand as owner-occupiers sell properties to raise capital and corporations expand operations.

Net Lease Real Estate Investment Trends

In line with the challenge of measuring the size of the net lease market, assessing the volume of transactions in net lease real estate is similarly challenging. However, sales volume of single tenant properties can be a helpful proxy for net lease transactions as a large share of single tenant properties are net leased. Through the second quarter of 2020 as the economic impacts of the COVID-19 pandemic began to impact real estate transactions, single tenant investment sales activity reached an annualized figure of $40.8 billion, significantly lower than 2018 and 2019, according to Real Capital Analytics. During the five-year period from 2015 through 2019, single tenant investment sales reached $262.9 billion, or $52.6 billion on average each year.

The high level of interest from investors has continued to place pressure on cap rates for single tenant real estate assets, even as transaction volume slowed in 2020. The average single tenant transactional cap rate remained near historical lows at 6.3% through the second quarter of 2020, according to Real Capital Analytics. The average cap rates are based on properties throughout the country and contain tenants of varying credit ratings and, as such, there is a range of cap rates. Generally, cap rates may be lower than the average for high-quality properties and properties with investment-grade tenants.

Even as single tenant cap rates remained near historical lows, the spread to corporate and sovereign bonds widened as 10-year Treasury yields declined. Through the second quarter of 2020, the single tenant cap rate spread to 10-year Treasury bond yields was 557 basis points, compared with the average spread of 463 basis points since 2010. Even as bond yields moved lower, the average cap rate was stable, leading to widened spreads and potential opportunities for greater investment returns relative to a comparable investment class.

Economic Overview of Selected Markets

Industrial. The movement of materials and goods between producers, wholesalers, retailers, businesses and consumers is an essential part of the economy. In recent years, growth in online sales activities continued to drive an increase in freight traffic as businesses and consumers increased consumption. During the economic shutdowns, the need for continued distribution to stores and distribution centers for online purchases underscored the essential nature of industrial businesses and underlying real estate. As consumers transition to a new normal as economies reopen, many purchases will remain online. Online, or e-commerce, sales increased to $160.3 billion in the first quarter of 2020, up from $39.3 billion in the first quarter of 2010, according to the Census Bureau, and may increase further despite the pandemic-induced recession as consumers leverage the convenience and contact-free nature of online shopping. The Transportation Services Index for freight remained stable for much of 2019, and decreased only slightly from the peak in 2019 in early 2020 to 135.5, according to the Bureau of Transportation Services.

In order to transport goods to stores, provide food to restaurants and take-out services, and ship items to consumers, retailers typically employ distribution activities from warehouse facilities located across the country.



 

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In particular, last mile delivery locations to consumers and businesses can be mission-critical for distribution and logistics services. The essential nature of delivery services was highlighted as local economies shutdown due to the COVID-19 pandemic and consumers increased the volume of deliveries to their homes. With more households eating meals at home, consumer demand for perishable food items such as produce, meat and frozen food rose during the economic shutdowns, offsetting some of the decline in activity by wholesale deliveries to dine-in restaurants and bars. As businesses reopen, demand for food items should be additive, driving a recovery in demand for cold storage warehouse and distribution space close to farms and producers as well as in proximity to retailers, restaurants and consumers. The increase in consumer demand for organic food products of the last few years should continue and, in conjunction with the growing online grocery sector, will increase demand for specialized storage and distribution facilities. Warehouses and distribution facilities particularly those serving essential businesses, with proximity to consumers or storefronts and prime transportation infrastructure access will remain highly sought after by retailers and wholesalers.

Healthcare. Access to high quality healthcare has never been more important than as during the COVID-19 pandemic. Prior to the pandemic, healthcare spending increased annually, driven not only by increasing costs but also a growing population and increased access to healthcare through insurance. The expansion of public health insurance programs combined with a large share of the population employed resulted in approximately 91.5% of the U.S. population in 2018 under health insurance at some point during the year, according to the Census Bureau. National healthcare spending increased to $3.6 trillion in 2018, the latest data available, an increase of 4.6% from the previous year, according to the U.S. Centers for Medicare & Medicaid Services. While healthcare providers will be strained by the delivery of services during the COVID-19 pandemic as well as enhancing safety protocols throughout medical and dental offices, the continued support of the federal government through aid packages will help offset some of the increased costs. As the delivery of healthcare normalizes, a return to longer term trends should take hold with healthcare demand driven by demographic trends, including an aging population, extended life expectancy and large portions of the population transitioning into life stages that typically indicate an increase in healthcare utilization. While many healthcare providers and systems are under increasing pressure from the ongoing pandemic in the near term, longer term trends such as increased patient referrals to outpatient facilities for procedures and increased usage of preventative and alternative healthcare should drive continued increase in demand for healthcare services outside of hospital system campuses. The essential nature of medical services combined with locations accessible by patients and providers or with proximity to hospital systems should culminate in heightened long-term demand for select net leased real estate.

Restaurants. During the COVID-19 pandemic, food service establishments with takeout, delivery or drive-through meals underscored the critical mission of providing prepared food to individuals and families. While legal restrictions adopted by many U.S. states temporarily prohibited indoor dining and more households turned to grocery stores for food to cook at home, many restaurants were able to remain open in order to provide food throughout the crisis through takeout and drive-through options. While some food service establishments increased sales during the economic shutdowns, the loss of dine-in options hurt most restaurants. Spending in restaurants and bars declined in the first quarter of 2020, according to the Census Bureau, as many consumers cooked at home instead of dining out. The reduction in sales due to the prohibition of indoor dining and “shelter in place” orders underscored the importance of well-capitalized tenants that may be better able to adjust to evolving market conditions. Many of these casual dining restaurants and fast food outlets were able to serve customers via curbside pickup and drive-throughs.

As local economies have reopened and more forms of dining have been permitted in some regions, many diners returned to restaurants, highlighting the potential for in-person dining to recover once the pandemic is over. Restaurant concepts with financial strength and flexibility may be able better positioned to respond to evolving consumer preferences, including online menus, virtual ordering and contactless payment systems. These more resilient food service establishments should recover from the economic shutdowns and support additional opportunities for net lease real estate investments.



 

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Office. While the COVID-19 pandemic will drive shifts in tenant location preferences and utilization of space, the extent of the shift is unclear as many office workforces have yet to return to the workplace. Office-using employment is a key indicator of the demand for office space. In recent years, hiring accelerated and there were nearly 32.1 million office-using employees in 2019. With the onset of the COVID-19 economic shutdowns, many office-using employees were able to transition to work-from-home environments, preventing a further decline in employment levels. Through the first quarter of 2020, office-using employment was stable even as job losses began in the service industries.

In the near term, as companies return to leased office space, employees are likely to be spaced farther apart, allowing more physical distance between workers. This reversal of the densification trend of the past several years may lead some tenants to require larger office footprints to house employees. Conversely, some tenants may allow employees to work remotely, leading to a decreased need for office space. While the exact balance of tenant demand is unknown, the mission-critical nature of headquarters and other key office sites is likely to increase in importance for business continuity plans. For some tenants, shifting part of the mission-critical workforce from a downtown area to a suburban location may mean that there are now multiple key sites, leading to additional opportunities for net lease investors.

Retail. The effects of the COVID-19 pandemic are likely to accelerate many of the recent shifts in the retail industry with more purchase activity moving online. Innovative retailers with stronger balance sheets may be able to respond to shifting consumer shopping behavior more quickly, allowing these retailers to increase market share. The ability to purchase online and pick up items curbside, for example, may remain popular with consumers long after the pandemic is over. Larger retailers with omnichannel sales strategies likely weathered the economic shutdowns better than those that relied solely on physical storefronts for sales revenue. Essential retail, such as grocery stores, pharmacies, automotive parts and supplies, home improvement, gas stations, and pet stores, among others, are a large and vital segment of the retail industry and occupy a large share of retail real estate. During the pandemic, relatively strong consumer activity underscored the resiliency of essential retailers and highlighted the attractiveness to consumers of storefronts that offered curbside pickup, drive-throughs and delivery services.

Consumer spending, as measured by seasonally adjusted retail and food services sales, had increased since 2009 prior to the economic shutdowns resulting from the COVID-19 pandemic. In 2019, retail sales increased to more than $6.2 trillion, an average of $518 billion per month and an increase of 3.6% from 2018. By the end of the first quarter of 2020, as initial economic shutdowns hit several major metropolitan areas, monthly retail sales decreased to $483.9 billion. As economies reopen and more stores are allowed to welcome customers, retail sales may recover. In recent years, online sales growth accelerated faster than overall retail sales, and the pandemic may shift additional sales activity. With approximately 11.8% of retail sales conducted online in the first quarter of 2020, according to the Census Bureau, there is ample room for additional purchasing activity, and innovative and well-capitalized retailers may be poised to expand market share and provide additional tenant opportunities for net lease real estate.

Corporate Responsibility—Environmental, Social, and Governance (ESG)

Corporate responsibility, including environmental, social, and governance (ESG) efforts, has been one of our cornerstones since our inception. We believe that our corporate responsibility and ESG initiatives are key to our performance and we are focused on efforts and changes designed to have long-term, positive impacts for our stockholders, employees, tenants, other stakeholders, and the communities where we live, work, and own our properties. We are committed to our ESG efforts not just because we believe it is the right thing to do but also because it is good for our business. Our mission is to operate our business in a way that honors and advances our guiding values: performance excellence, integrity, respect, leadership, humility, partnership, and transparency.



 

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Environmental—As a real estate owner, we are aware of the need to develop and implement environmentally sustainable practices within our business and are committed to doing so. Our efforts in this area are primarily undertaken in partnership with our tenants due to the nature of our business model. In addition, we have established our “Go Green” Committee, which promotes environmental mindfulness and spearheads our internal initiatives to encourage sustainability at our corporate offices.

Social—Our commitment to our employees is central to our ability to continue to deliver strong performance and financial results for our stockholders and other stakeholders. We are as passionate about our people as we are about real estate. We seek to create and cultivate an engaging work environment for our employees which allows us to attract, retain, and develop top talent to manage our business. We are committed to providing our employees with an environment that is free from discrimination and harassment, that respects and honors their differences and unique life experiences, and that enables every employee the opportunity to develop and excel in their role and reach their full potential.

Governance—We are committed to conducting our business in accordance with corporate governance best practices. Our reputation is one of our most important assets and each director, officer, and employee must contribute to the care and preservation of that asset. We have structured our corporate governance in a manner we believe closely aligns our interests with those of our stockholders.

Notable features of our corporate governance structure include the following:

 

   

our board of directors is not classified, with each of our directors subject to election annually, and we may not elect to be subject to the elective provision of the MGCL that would classify our board of directors without the affirmative vote of a majority of the votes cast on the matter by stockholders entitled to vote generally in the election of directors;

 

   

stockholders have the ability to amend our bylaws by majority vote;

 

   

five out of eight directors are independent;

 

   

we have a fully independent Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee as well as independent director representation on our Real Estate Investment Committee;

 

   

at least one of our directors qualifies as an “audit committee financial expert” as defined by the SEC;

 

   

we have opted out of the business combination and control share acquisition statutes in the MGCL; and

 

   

we do not have a stockholder rights plan, and we will not adopt a stockholder rights plan in the future without (a) the approval of our stockholders or (b) seeking ratification from our stockholders within 12 months of adoption of the plan if the board of directors determines, in the exercise of its duties under applicable law, that it is in our best interest to adopt a rights plan without the delay of seeking prior stockholder approval.

Summary Risk Factors

You should carefully consider the matters discussed in the “Risk Factors” section beginning on page 33 of this prospectus for factors you should consider before investing in our Class A Common Stock, which will automatically convert into shares of our Common Stock 180 days after completion of this offering. Some of these risks include:

 

   

Single-tenant leases involve significant risks of tenant default and tenant vacancies, which could materially and adversely affect us.



 

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The failure of one or more of our tenants to pay rent due to the market disruption caused by the COVID-19 outbreak or any other reason could materially and adversely affect us, including our results of operations.

 

   

Actual or perceived threats associated with epidemics, pandemics or public health crises, including the ongoing COVID-19 pandemic, could have a material adverse effect on our results of operations and the businesses of our tenants.

 

   

We have limited opportunities to increase rents under our long-term leases with tenants, which could impede our growth and materially and adversely affect us.

 

   

We may not be able to achieve growth through acquisitions at a rate that is comparable to our historical results, including as a result of decreases in real estate transaction activity resulting from the COVID-19 pandemic, which could materially and adversely affect us.

 

   

We may not be able to effectively manage our growth and any failure to do so could materially and adversely affect us.

 

   

The departure of any of our key personnel with long-standing business relationships could materially and adversely affect us.

 

   

Our portfolio is concentrated in certain states, particularly Texas and Florida, and any adverse developments and economic downturns in these geographic markets resulting from the COVID-19 pandemic or other factors could materially and adversely affect us.

 

   

The decrease in demand for restaurant and retail space resulting from the COVID-19 pandemic or other factors may materially and adversely affect us.

 

   

Legal restrictions intended to mitigate the impact of COVID-19 have had, and may continue to have, a particularly adverse impact on the restaurant, retail and certain sectors of the healthcare industries, which may materially and adversely affect us.

 

   

General economic disruption resulting from the COVID-19 pandemic could result in a reduction in the willingness or ability of consumers to use their discretionary income in the businesses of our tenants and potential tenants, which could reduce the demand for our properties and the ability of our tenants to satisfy their obligations to us, and in turn could materially and adversely affect us.

 

   

We may be unable to renew leases, re-lease properties as leases expire, or lease vacant spaces on favorable terms or at all, which, in each case, could materially and adversely affect us.

 

   

We could face potential material adverse effects from the bankruptcies or insolvencies of our tenants.

 

   

As of June 30, 2020, on a pro forma basis, we had approximately $1.5 billion principal balance of indebtedness outstanding, which may expose us to the risk of default under our debt obligations.

 

   

Market conditions could adversely affect our ability to refinance existing indebtedness on acceptable terms or at all, which could materially and adversely affect us.

 

   

Our Revolving Credit Facility and term loan agreements contain various covenants which, if not complied with, could accelerate our repayment obligations, thereby materially and adversely affecting us.

 

   

We are a holding company with no direct operations and rely on funds received from the OP to pay liabilities.

 

   

Failure to qualify as a REIT would materially and adversely affect us and the value of our Common Stock (including our Class A Common Stock).

 

   

There has been no public market for our Common Stock (including our Class A Common Stock) prior to this offering and an active trading market for our Common Stock (including our Class A Common Stock) may not develop following this offering.



 

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We may not be able to make distributions to our stockholders at the times or in the amounts we expect, or at all.

Recapitalization, Internalization, and Structure of Our Company

Recapitalization

Immediately prior to the closing of this offering, we will effect the REIT Recapitalization, pursuant to which (i) we will establish a new class of Common Stock as “Class A Common Stock” for sale in this offering and (ii) we will effect a four-for-one stock split of our Common Stock that is outstanding immediately prior to the closing of this offering. The four-for-one stock split is intended to achieve a stock price that is consistent with market expectations for underwritten public offerings by REITs. In connection with the REIT Recapitalization, the OP will effect a recapitalization of its OP Units, pursuant to which it will effect a four-for-one split of its outstanding OP Units; provided, however, that we shall issue no fractional shares of Common Stock as a result of the stock split, but shall instead pay to any stockholder who would be entitled to receive a fractional share as a result of the REIT Recapitalization a sum in cash equal to the fair market value of such fractional share as determined in good faith by our Board of Directors. The REIT Recapitalization shall be effected on a record holder-by-record holder basis, such that any fractional shares of Common Stock resulting from the REIT Recapitalization and held by a single record holder shall be aggregated.

The terms of our Class A Common Stock are identical to the terms of our Common Stock, except that each share of our Class A Common Stock will automatically convert into one share of our Common Stock 180 days after completion of this offering. The automatic conversion feature of the Class A Common Stock is the only difference between the terms of the Class A Common Stock and the Common Stock. Additionally, prior to the Class A Conversion, the holders of Class A Common Stock, voting as a separate class, are required to approve any amendment to our Charter that will affect such holders differently than the holders of our Common Stock.

The Class A Common Stock will be listed on the NYSE under the symbol “BNL” and will be freely tradeable upon completion of this offering. The Common Stock (then including the shares of Common Stock issued upon conversion of the Class A Common Stock) will be listed on the date that is 180 days after completion of this offering.

The Recapitalization will have the effect of increasing the total number of outstanding shares of our Common Stock. Immediately prior to the Recapitalization, we had approximately 26.9 million shares of Common Stock outstanding. Upon completion of this offering and Recapitalization, and assuming the underwriters do not exercise their option to purchase additional shares, we expect to have an aggregate of approximately 141.3 million shares of our Common Stock (including our Class A Common Stock) outstanding. Of this amount, approximately 33.5 million shares will be Class A Common Stock (representing 23.7% of our total outstanding Common Stock (including our Class A Common Stock) and 21.8% of our Common Stock (including our Class A Common Stock) and OP Units on a fully diluted basis).

The Recapitalization will be effected on a pro rata basis with respect to all of our stockholders immediately prior to this offering. Accordingly, it will not affect any such stockholder’s proportionate ownership of our outstanding shares. The Recapitalization also will be effected on a pro rata basis with respect to all of the members of the OP immediately prior to this offering.

The terms of our Common Stock (including our Class A Common Stock) are described more fully under “Description of Our Capital Stock” in this prospectus.



 

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Internalization

On February 7, 2020, we completed the Internalization, which included the following transactions:

 

   

On December 27, 2019, we repurchased all of the outstanding shares of our Common Stock held by BRE at $85.00 per share for approximately $20 million;

 

   

On February 7, 2020, we acquired 100% of BRE through three mergers (the “Mergers”):

 

   

Our newly-formed corporate subsidiary merged into Trident BRE Holdings I, Inc. (“Blocker Corp 1”);

 

   

Another newly-formed corporate subsidiary of ours merged into Trident BRE Holdings II, Inc. (“Blocker Corp 2” and together with Blocker Corp 1, the “Blocker Corps”);

 

   

The Blocker Corps contributed their interests in BRE to the OP in exchange for OP Units; and

 

   

BRE merged into the OP, with the OP surviving.

 

   

On February 7, 2020, on a pre-stock split basis, we issued approximately 780,893 shares of Common Stock and the OP issued approximately 1,319,513 OP Units and we and the OP paid approximately $31 million in cash, for aggregate consideration of approximately $209.5 million, and the OP assumed approximately $90.5 million of debt. We refinanced $60 million of the assumed indebtedness with a new term loan which is guaranteed by the Founding Owners;

 

   

Our current management team and corporate staff became employed by a subsidiary of the OP, and we became internally managed. We entered into employment agreements (the “Employment Agreements”) with our four named executive officers, which became effective upon completion of the Internalization;

 

   

We entered into the Registration Rights Agreement with the Trident Owners and the Founding Owners and a tax protection agreement with the Founding Owners (the “Founding Owners’ Tax Protection Agreement”);

 

   

We terminated our previous asset management agreement and property management agreement with BRE and certain of its affiliates;

 

   

The OP was obligated to provide specified transition services in connection with the sale by BRE of certain businesses, operations, and legal entities unrelated to the management of the Company (the “Unrelated Businesses”) for a five-month period ending on July 7, 2020; and

 

   

In connection with the Internalization, we may be required to pay up to $75 million of additional “earnout” consideration (payable in four tranches of $10 million, $15 million, $25 million, and $25 million, and in the same proportion of equity interests and cash as the initial payments) if certain milestones related to the 40-day dollar volume-weighted average price (“VWAP”) of our Class A Common Stock (or Common Stock after the Class A Conversion) are achieved during specified periods of time following the completion of this offering. The number of shares of Common Stock and OP Units potentially issuable as “earnout” consideration will be determined by dividing the dollar value of the payment by $85 (as adjusted to reflect any stock splits or recapitalizations, as applicable).

See “Recapitalization, Internalization, and Structure of Our Company—Internalization” for a further discussion of the terms of the Internalization. The terms of the Employment Agreements are more fully described under “Executive Compensation— Narrative Disclosure—Executive Officer Employment Agreements.” The terms of the Registration Rights Agreement and the Founding Owners’ Tax Protection Agreement are more fully described under “Certain Relationships and Related Party Transactions.”



 

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Consequences of the Recapitalization, the Internalization, and this Offering

Share amounts and percentages below assume that the underwriters’ option to purchase additional shares is not exercised. Upon completion of the Recapitalization, the Internalization, and this offering, and assuming the earnout consideration in the Internalization is paid in full:

 

   

Purchasers of shares of our Class A Common Stock in this offering will own 23.5% of the outstanding shares of our Common Stock, including our Class A Common Stock (or 21.4% of our Common Stock, including our Class A Common Stock, and OP Units on a fully diluted basis).

 

   

Our directors and named executive officers will own 979,841 shares of our Common Stock, representing 0.7% of the outstanding shares of our Common Stock, including our Class A Common Stock (or 0.6% of our Common Stock, including our Class A Common Stock, and OP Units on a fully diluted basis).

 

   

The Trident Owners will own 2,656,359 shares of our Common Stock and 2,763,738 OP Units, representing 3.5% of the outstanding shares of our Common Stock, including our Class A Common Stock, and OP Units on a fully diluted basis.

 

   

The Founding Owners will own 1,368,174 shares of our Common Stock and 4,373,585 OP Units, representing 3.7% of the outstanding shares of our Common Stock, including our Class A Common Stock, and OP Units on a fully diluted basis.

 

   

Our other continuing investors prior to this offering (i.e., the continuing investors other than our directors and named executive officers, the Trident Owners, and the Founding Owners) will own 103,857,237 shares of our Common Stock, representing 73.0% of the outstanding shares of our Common Stock, including our Class A Common Stock (or 66.4% of our Common Stock, including our Class A Common Stock, and OP Units on a fully diluted basis).

 

   

The other existing OP Unit holders (i.e., the existing OP Unit holders other than the Founding Owners, the Trident Owners, the Blocker Corps, and us) will own 6,948,157 OP Units, representing 4.4% of the outstanding OP Units and 4.4% of our Common Stock, including our Class A Common Stock, and OP Units on a fully diluted basis.

 

   

We will contribute the net proceeds from this offering to the OP in exchange for 33,500,000 OP Units, and we will, directly or indirectly, own 91.0% of the outstanding OP Units.

 

   

The OP will use the net proceeds from this offering to repay borrowings under the 2020 Unsecured Term Loan and Revolving Credit Facility and for general business and working capital purposes, including potential future acquisitions. See “Use of Proceeds.”

 

   

As of June 30, 2020, on a pro forma basis, we have $1,549.9 million of total debt outstanding, net debt of $1,466.5 million, a ratio of net debt to annualized adjusted EBITDAre of 5.23x, $900 million of borrowing capacity under our Revolving Credit Facility, which will be available for general corporate purposes, including for funding future acquisitions, and $82.8 million of cash and cash equivalents.

 

   

We adopted our 2020 Equity Incentive Plan to provide equity incentive opportunities to certain parties, including members of our board of directors and our management team and other employees.



 

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The following chart sets forth information about our Company, the OP, and certain related parties upon completion of the Recapitalization, Internalization, and this offering, and assuming the earnout consideration in the Internalization is paid in full. Share amounts and percentages below assume that the underwriters’ option to purchase additional shares is not exercised.

 

 

LOGO

 

(1) 

Directors & Named Executive Officers excludes Common Stock beneficially owned by Amy L. Tait, which is included in Common Stock owned by Founding Owners and Trident Owners.

(2) 

Other Continuing Investors includes the continuing investors other than Directors & Named Executive Officers and Founding Owners and Trident Owners.

(3) 

Other Existing OP Unit Holders includes the existing OP Unit holders other than Founding Owners and Trident Owners, Blocker Corps, and Our Company.



 

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Distribution Policy

Following completion of this offering, we intend to make regular quarterly distributions to holders of our Common Stock (including our Class A Common Stock). Prior to May 2020, we have paid distributions to holders of shares of our Common Stock on a monthly basis. In light of the economic uncertainty and rapidly evolving circumstances related to the COVID-19 pandemic and then-current tenant rent relief requests, to preserve cash, strengthen our liquidity position, and manage our leverage profile, in May 2020 our board of directors determined that we would temporarily suspend our monthly distribution. We did not pay a distribution for the months of May, June, and July 2020. We reinstated our distribution in August 2020, announcing that we would transition to quarterly distribution payments, and announced that we intend to pay a $0.54 distribution per share (on a pre-stock split

basis; $0.135 on a post-stock split basis) on our Common Stock (including our Class A Common Stock if outstanding on the record date for the distribution) for the third quarter with a record date of September 30, 2020, and a payment date of October 15, 2020. If this offering closes on or prior to September 30, 2020 and we pay the anticipated dividend on our Common Stock for the third quarter of 2020, holders of record of the Class A Common Stock as of September 30, 2020 will be entitled to such distribution together with holders of our Common Stock.

We currently expect that the per share amount of our quarterly distributions on our Common Stock following completion of this offering will be $0.25 on a post-stock split basis, compared to the $0.33 on a post-stock split basis (equivalent to $1.32 on a pre-stock split basis) paid in the aggregate on our Common Stock in the last three months that we paid distributions prior to the suspension. On an annualized basis, this would be $1.00 per share, or an annualized distribution rate of approximately 5.6% based on the mid-point of the price range set forth on the front cover of this prospectus and on a post-stock split basis. We intend to maintain our initial distribution rate for the 12 months following the completion of this offering unless our results of operations, FFO, AFFO, liquidity, cash flows, financial condition, prospects, economic conditions, or other factors differ materially from the assumptions used in projecting our initial distribution rate. We do not intend to reduce the annualized distribution per share if the underwriters exercise their option to purchase additional shares.

Any distributions will be at the sole discretion of our board of directors, and their form, timing, and amount, if any, will depend upon a number of factors, including our actual and projected results of operations, FFO, AFFO, liquidity, cash flows and financial condition, the revenue we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, our REIT taxable income, the annual REIT distribution requirements, applicable law, including restrictions on distributions under Maryland law, and such other factors as our board of directors deems relevant.

Restrictions on Ownership and Transfer of Our Capital Stock

Our Charter, subject to certain exceptions, authorizes our board of directors to take such actions as are necessary or appropriate to allow us to qualify and to preserve our status as a REIT. To assist us in preserving our status as a REIT, among other consequences, our Charter contains limitations on the ownership and transfer of shares of our stock which are intended to prohibit: (1) any person or entity from owning or acquiring, directly or indirectly, more than 9.8% of the value of the aggregate of our then outstanding capital stock or more than 9.8% of the value or number of shares, whichever is more restrictive, of the aggregate of our then outstanding Common Stock (including our Class A Common Stock) and (2) any transfer of or other event or transaction with respect to shares of capital stock that would result in the beneficial ownership of our outstanding shares of capital stock by fewer than 100 persons. In addition, our Charter includes provisions intended to prohibit any transfer of, or other event with respect to, shares of our capital stock that would result in us being “closely held” within the meaning of Section 856(h) of the Code or otherwise failing to qualify as a REIT (including, but not limited to,



 

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ownership that would result in us owning an interest in a tenant if the income derived by us from such tenant would cause us to fail to satisfy any of the gross income requirements of Section 856(c) of the Code). However, these ownership limits do not apply to a person or persons that our board of directors exempts (prospectively or retroactively) from the ownership limits upon receiving appropriate assurances from such person that our qualification as a REIT is not jeopardized.

The restrictions on ownership and transfer of our stock contained in our Charter will not apply if our board of directors determines that it is no longer in our best interests to attempt to, or continue to, qualify as a REIT or if our board of directors determines that compliance with any such restriction is no longer required in order for us to qualify as a REIT. The ownership limits may delay or impede a transaction or a change of control that might be in your best interest. See “Description of Our Capital Stock—Restrictions on Ownership and Transfer.”

Tax Status

We elected to qualify to be taxed as a REIT under the Code beginning with our taxable year ended December 31, 2008. We believe that as of such date we have been organized and have operated in a manner to qualify for taxation as a REIT for U.S. federal income tax purposes. We intend to continue to be organized and operate in such a manner.

Implications of Being an Emerging Growth Company

We are an emerging growth company, as defined in the JOBS Act, and as such we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Although we have not made a determination whether to take advantage of any or all of these exemptions, we have irrevocably opted-out of the extended transition period afforded to emerging growth companies in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. As a result, we will comply with new or revised accounting standards on the same time frames as other public companies that are not emerging growth companies.

We expect to remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which we have total annual gross revenue of $1.07 billion or more (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the first sale of our common stock pursuant to an effective registration statement, (iii) the date on which we have, during the previous 3-year period, issued more than $1.0 billion in non-convertible debt, or (iv) the date on which we are deemed to be a “large accelerated filer.”

Corporate Information

We were formed in October 2007. Our principal executive offices are located at 800 Clinton Square, Rochester, New York, 14604, and our telephone number is (585) 287-6500.



 

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The Offering

(all share and unit amounts presented on a post-stock split basis)

 

Class A Common Stock offered by us

33,500,000 shares (or 38,525,000 shares if the underwriters exercise in full their option to purchase additional shares)
 
 
 

 

Common Stock held by continuing investors (which includes the Trident Owners and the Founding Owners)

107,772,611 shares (1)

 

Common Stock issuable pursuant to Internalization earnout after this offering

1,089,000 shares (2)
 

 

Total Common Stock (including our Class A Common Stock) to be outstanding upon completion of this offering (assuming Internalization earnout is achieved in full)

142,361,611 shares (or 147,386,611 shares if the underwriters exercise in full their option to purchase additional shares of our Class A Common Stock) (3)

OP Units to be outstanding upon completion of this offering (excluding OP Units held directly

or indirectly by us)

12,226,207 OP Units (4)

 

OP Units issuable pursuant to the Internalization earnout after this offering

1,859,273 OP Units (5)

 

Total Common Stock (including our Class A Common Stock) and OP Units to be outstanding upon completion of this offering (excluding OP Units held directly or indirectly by us and assuming Internalization earnout is achieved in full)

156,447,091 shares of Common Stock (including our Class A Common Stock) and OP Units (or 161,472,091 shares of Common Stock (including our Class A Common Stock) and OP Units if the underwriters exercise in full their option to purchase additional shares of our Class A Common Stock) (6)

 

Class A Conversion

The terms of the Class A Common Stock and the terms of the Common Stock are identical, except that each share of our Class A Common Stock will automatically convert into one share of our Common Stock 180 days after completion of this offering when the Common Stock is listed on the NYSE. The automatic conversion feature of the Class A Common Stock is the only difference between the terms of the Class A Common Stock and the Common Stock. Additionally, prior to the Class A Conversion, the holders of Class A



 

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Common Stock, voting as a separate class, are required to approve any amendment to our Charter that will affect such holders differently than the holders of our Common Stock.

 

Proposed NYSE symbol / Listing

The Class A Common Stock will be immediately listed on the NYSE under the symbol “BNL” upon completion of this offering. The Common Stock (then including shares of Common Stock issued as a result of the Class A Conversion) will be listed on the NYSE on the date that is 180 days after completion of this offering.

 

Dividend Rights

Prior to the Class A Conversion, our Class A Common Stock and Common Stock will share equally in any dividends authorized by our board of directors and declared by us.

 

Voting Rights

Each share of Class A Common Stock and Common Stock will entitle its holder to one vote per share. The Class A Common Stock and Common Stock will vote together as a single class prior to the Class A Conversion, except that the holders of Class A Common Stock, voting as a separate class, are required to approve any amendment to our Charter that will affect such holders differently than the holders of our Common Stock.

 

Registration Rights Agreement

Pursuant to the Registration Rights Agreement, we granted the Trident Owners, the Founding Owners, and their respective affiliates certain demand and piggyback registration rights. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

 

Use of Proceeds

We estimate that the net proceeds to us from this offering will be approximately $561.8 million, or $646.8 million if the underwriters exercise in full their option to purchase additional shares, after deducting underwriting discounts and commissions and other estimated expenses, in each case, based on an assumed initial public offering price of $18.00 per share, which is the mid-point of the price range set forth on the front cover of this prospectus. We intend to contribute the net proceeds from this offering to the OP in exchange for OP Units. We expect the OP to use the net proceeds from this offering to repay borrowings under the 2020 Unsecured Term Loan and Revolving Credit Facility and for general business and working capital purposes, including potential future acquisitions. The existing Revolving Credit Facility will then be terminated and we will enter into the new $900 million unsecured Revolving Credit Facility. No acquisitions are probable as of the date of this prospectus. See “Use of Proceeds.”

 

Risk Factors

Investing in our Class A Common Stock involves risks. You should carefully read and consider the information set forth under the heading “Risk Factors” beginning on page 33 and other information included in this prospectus before investing in our Class A Common Stock.

 

(1) 

Includes (a) 104,649,035 shares of Common Stock held by continuing investors (excluding shares issued in connection with the Internalization) and (b) 3,123,576 shares of Common Stock issued in connection with the Internalization as base consideration.



 

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(2)

Represents the maximum potential contingent consideration payable in the form of Common Stock in connection with the Internalization earnout.

(3)

Includes (a) 33,500,000 shares of Class A Common Stock issued in this offering, (b) 104,649,035 shares of Common Stock held by continuing investors (excluding shares issued in connection with the Internalization), and (c) 4,212,576 shares of Common Stock issued (or potentially issuable) in connection with the Internalization, which represents the base consideration paid and the maximum potential contingent consideration payable in the form of Common Stock in connection with the Internalization. Excludes 8,659,024 shares of our Common Stock issuable in the future under our 2020 Equity Incentive Plan, as more fully described in “Executive Compensation—Material Terms of the 2020 Equity Incentive Plan.”

(4)

Includes (a) 6,948,157 OP Units held by existing members of the OP and (b) 5,278,050 OP Units issued in connection with the completion of the Internalization as base consideration.

(5)

Represents the maximum potential contingent consideration payable in the form of OP Units in connection with the Internalization earnout.

(6)

Includes (a) 33,500,000 shares of Class A Common Stock issued in this offering, (b) 104,649,035 shares of Common Stock held by continuing investors (excluding shares issued in connection with the Internalization), (c) 6,948,157 OP Units held by existing members of the OP, and (d) 4,212,576 shares of Common Stock and 7,137,323 OP Units issued (or potentially issuable) in connection with the Internalization, which represents the base consideration paid and the maximum potential contingent consideration payable in connection with the Internalization. Excludes 8,659,024 shares of our Common Stock issuable in the future under our 2020 Equity Incentive Plan, as more fully described in “Executive Compensation—Material Terms of the 2020 Equity Incentive Plan.”



 

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Summary Consolidated Historical and Pro Forma Financial and Other Data

Our historical consolidated balance sheet data as of December 31, 2019, 2018, and 2017 and consolidated results of operations for the years ended December 31, 2019, 2018, and 2017 have been derived from our audited historical consolidated financial statements included elsewhere in this prospectus. The financial information below also includes our unaudited condensed consolidated balance sheet data as of June 30, 2020 and our unaudited condensed consolidated results of operations for the six months ended June 30, 2020 and 2019, which have been derived from our historical unaudited condensed consolidated financial statements contained elsewhere in this prospectus. The condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and Article 10 of Regulation S-X. The Company believes all adjustments necessary for a fair presentation have been included in these interim condensed consolidated financial statements (which include only normal recurring adjustments). Our historical consolidated financial data included below and set forth elsewhere in this prospectus are not necessarily indicative of our future performance.

Our unaudited summary pro forma consolidated operating and balance sheet data as of and for the six months ended June 30, 2020, and for the year ended December 31, 2019, is presented (i) with respect to statements of operations data, giving effect to the Industrial Portfolio Acquisition; the Internalization; the Recapitalization; and the completion of this offering and the use of proceeds described herein, based on the mid-point of the price range set forth on the front cover of this prospectus, assuming each of the transactions was completed on January 1, 2019, and (ii) with respect to balance sheet data, giving effect to the Internalization, assuming the earnout consideration in the Internalization is paid in full; the Recapitalization; and the completion of this offering and the use of proceeds described herein, based on the mid-point of the price range set forth on the front cover of this prospectus, assuming that each of the transactions was completed on June 30, 2020, in each case, giving effect to the other adjustments described in the unaudited pro forma consolidated financial statements included elsewhere in this prospectus. The preparation of the unaudited pro forma consolidated financial statements requires management to make estimates and assumptions deemed appropriate. The unaudited pro forma consolidated financial statements are not intended to represent, or be indicative of what our actual financial position and results of operations would have been as of the date and for the period indicated, nor does it purport to represent our future financial position or results of operations.



 

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You should read the following summary financial and other data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business and Properties,” and our consolidated financial statements and condensed consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

    For the six months ended June 30,     For the years ended December 31,  
(in thousands, except per share data)   2020
(Pro forma)
(Unaudited)
    2020
(Historical)
(Unaudited)
    2019
(Historical)
(Unaudited)
    2019
(Pro forma)

(Unaudited)
    2019
(Historical)
    2018
(Historical)
    2017
(Historical)
 

Operating Data

             

Revenues

             

Lease revenues

  $ 158,602     $ 158,602     $ 137,483     $ 334,819     $ 298,815     $ 237,479     $ 181,563  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

             

Depreciation and amortization

    71,151       71,140       49,597       122,878       108,818       83,994       62,263  

Asset management fees

    —         2,461       10,438       —         21,863       18,173       14,754  

Property management fees

    —         1,275       3,820       —         8,256       6,529       4,988  

Property and operating expense

    8,305       8,305       7,642       16,993       15,990       11,157       6,505  

General and administrative

    14,447       11,542       2,492       24,643       5,456       6,162       4,939  

Provision for impairment of investment in rental properties

    2,667       2,667       1,017       3,452       3,452       2,061       2,608  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    96,570       97,390       75,006       167,966       163,835       128,076       96,057  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expenses)

             

Preferred distribution income

    —         —         —         —         —         440       737  

Interest income

    20       20       1       9       9       179       467  

Interest expense

    (33,795     (40,504     (32,560     (71,821     (72,534     (52,855     (34,751

Cost of debt extinguishment

    (22     (22     (721     (1,238     (1,176     (101     (5,151

Gain on sale of real estate

    8,774       8,665       4,187       31,679       29,914       10,496       12,992  

Income taxes

    (951     (951     (748     (2,586     (2,415     (857     (624

Gain on sale of investment in related party

    —         —         —         —         —         8,500       —    

Internalization expenses

    —         (1,594     (272     —         (3,658     —         —    

Change in fair value of earnout liability

    352       2,144       —         —         —         —         —    

Other (losses) gains

    (24     (24 )       —         (6     (6     (100     379  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    36,386       28,946       32,364       122,890       85,114       75,105       59,555  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to non-controlling interests

    (2,905     (2,777     (2,292     (10,257     (5,720     (5,730     (4,756
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Broadstone Net Lease, Inc.

  $ 33,481     $ 26,169     $ 30,072     $ 112,633     $ 79,394     $ 69,375     $ 54,799  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma weighted average number of shares of Common Stock outstanding

             

Basic

    140,892           133,908        
 

 

 

       

 

 

       

Diluted

    153,116           146,136        
 

 

 

       

 

 

       

Pro forma net earnings per share of Common Stock

             

Basic

  $ 0.24         $ 0.84        
 

 

 

       

 

 

       

Diluted

  $ 0.24         $ 0.84        
 

 

 

       

 

 

       


 

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     As of June 30,      As of December 31,  
(In thousands)    2020
(Pro forma)
(Unaudited)
     2020
(Historical)
(Unaudited)
     2019
(Historical)
     2018
(Historical)
     2017
(Historical)
 

Balance Sheet Data

              

Investment in rental property, at cost

   $ 3,690,679      $ 3,690,679      $ 3,728,334      $ 2,890,735      $ 2,376,141  

Investment in rental property, net

     3,377,745        3,377,745        3,457,290        2,683,746        2,227,758  

Cash and cash equivalents

     82,761        9,241        12,455        18,612        9,355  

Total assets

     4,216,293        4,144,055        3,917,858        3,096,797        2,578,756  

Unsecured revolving credit facility

     —          248,300        197,300        141,100        273,000  

Mortgage and notes payable, net

     109,512        109,512        111,793        78,952        67,832  

Unsecured term notes, net

     1,433,195        1,673,092        1,672,081        1,225,773        836,912  

Total liabilities

     1,747,491        2,267,408        2,138,838        1,567,877        1,294,555  

Total mezzanine equity

     —          178,535        —          —          —    

Total Broadstone Net Lease, Inc. stockholders’ equity

     2,250,172        1,591,633        1,667,614        1,417,099        1,186,825  

Total equity

     2,468,802        1,698,112        1,779,020        1,528,920        1,284,201  

 

    For the six months ended June 30,     For the years ended December 31,  
(In thousands, except per share
amounts)
  2020
(Pro forma)
(Unaudited)
    2020
(Historical)
(Unaudited)
    2019
(Historical)
(Unaudited)
    2019
(Pro forma)
(Unaudited)
    2019
(Historical)
    2018
(Historical)
    2017
(Historical)
 

Other Data

             

Dividend declared

  $ 51,659     $ 51,659     $ 65,214     $ 136,280     $ 136,280     $ 112,969     $ 92,768  

Dividends declared per common share

    0.44       1.76       2.63       1.32       5.27       5.15       4.975  

FFO(1)

    101,388       94,057       78,791       217,462       167,470       150,664       111,434  

AFFO(1)

    95,069       87,124       68,806       191,298       149,197       124,065       99,952  

EBITDA(1)

    142,283       141,541       115,269       320,175       268,881       212,811       157,193  

EBITDARE(1)

    136,176       135,543       112,099       291,948       242,419       204,376       146,809  

 

     As of June 30,     As of December 31,  
(dollars in thousands)    2020
(Pro forma)
(Unaudited)
    2020
(Historical)
(Unaudited)
    2019
(Historical)
    2018
(Historical)
    2017
(Historical)
 

Net Debt(1)

   $ 1,466,510     $ 2,028,330     $ 1,969,140     $ 1,431,562     $ 1,171,371  

Number of properties

     633       633       646       621       528  

Occupancy at period end

     99.5     99.5     99.7     99.7     99.6

 

1

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for definitions of these metrics and reconciliations of these metrics to the most directly comparable GAAP measures.



 

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RISK FACTORS

Investing in our Class A Common Stock involves a high degree of risk. Before making an investment decision, you should carefully consider the following risk factors, together with all of the other information included in this prospectus. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section in this prospectus entitled “Forward-Looking Statements.”

Risks Related to Our Business and Properties

Single-tenant leases involve significant risks of tenant default and tenant vacancies, which could materially and adversely affect us.

Our portfolio consists primarily of single-tenant net leased properties and we are dependent on our tenants for substantially all of our revenue. As a result, our success depends on the financial stability of our tenants. The ability of our tenants to meet their obligations to us, including their obligations to pay rent, maintain certain insurance coverage, pay real estate taxes, and maintain the properties in a manner so as not to jeopardize their operating licenses or regulatory status depends on the performance of their business and industry, as well as general market and economic conditions, which are outside of our control. At any given time, any tenant may experience a downturn in its business that may weaken its operating results or the overall financial condition of individual properties or its business as whole. As a result, a tenant may fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent, or declare bankruptcy. The financial failure of, or default in payment by, a single tenant under its lease is likely to cause a significant or complete reduction in our rental revenue from that property and a reduction in the value of the property. We may also experience difficulty or a significant delay in re-leasing or selling such property. The occurrence of one or more tenant defaults could materially and adversely affect us.

This risk is magnified in situations where we lease multiple properties to a single tenant under a master lease. As of June 30, 2020, master leases contributed approximately 34.4% of our overall ABR (our largest master lease by ABR related to 24 properties and contributed 2.5% of our ABR, and our smallest master lease by ABR related to two properties and contributed 0.1% of our ABR), 72.9% of our restaurant property ABR (161 of our 243 restaurant properties), and 52.8% of our retail property ABR (79 of our 128 retail properties). A tenant failure or default under a master lease could reduce or eliminate rental revenue from multiple properties and reduce the value of such properties. Although the master lease structure may be beneficial to us because it restricts the ability of tenants to remove individual underperforming assets, there is no guarantee that a tenant will not default in its obligations to us or decline to renew its master lease upon expiration. The default of a tenant that leases multiple properties from us or its decision not to renew its master lease upon expiration could materially and adversely affect us.

The failure of one or more of our tenants to pay rent due to the market disruption caused by the COVID-19 outbreak or any other reason could materially and adversely affect us, including our results of operations.

Our performance depends on the financial condition of our tenants and their ability to fulfill their lease obligations by paying rent in a timely manner. The COVID-19 outbreak has adversely affected our tenants’ businesses generally. As of the date of this prospectus, we have granted partial rent relief requests to 15 tenants related to 93 properties whose total base contractual rents represent 9.7% of our ABR as of June 30, 2020. Total requests for rent relief from 59 tenants related to 295 properties whose total base contractual rents represented 33.7% of our ABR were received as of June 30, 2020. Deferrals granted range in length between two and six months, with a weighted average deferral of 3.4 months and repayment periods range from three months to one year, with a weighted average repayment period of 5.6 months beginning in July 2020. We also agreed to a partial abatement of rent with one tenant for rents over a nine-month period with the minimum required rent payable increasing during the period. In exchange, we negotiated a three-year lease term extension and an upside percentage rent clause during the abatement period, which we expect to provide us with long-term value accretion.

 

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We cannot predict whether we will receive additional rent relief requests from our tenants in the future, the ultimate resolution of any discussions with our tenants regarding such potential requests, or whether any such negotiations could break down in the future and result in any such tenants refusing to pay all or a substantial portion of the rent due under their leases. In addition, we cannot predict whether additional tenants may declare bankruptcy. The duration of the COVID-19 pandemic and our tenants’ ability to return to business after governmental restrictions are lifted will have a significant impact on our ability to continue to collect rents, and any material disruption in our ability to collect rents could have a material adverse impact on our business and results of operations.

Actual or perceived threats associated with epidemics, pandemics or public health crises, including the ongoing COVID-19 pandemic, could have a material adverse effect on our results of operations and the businesses of our tenants.

In response to the COVID-19 pandemic, many countries and U.S. states, including the areas in which we operate, have adopted certain measures to mitigate the ongoing public health crises. Such measures include “shelter in place” or “stay at home” rules, restrictions on travel, and restrictions on the types of businesses that may continue to operate in many countries and U.S. states. The COVID-19 pandemic has negatively impacted nearly every industry directly or indirectly.

The COVID-19 pandemic, and future epidemics, pandemics, and other public health crises could materially and adversely affect our and our tenants’ results of operations, liquidity, and ability to access capital markets or pay distributions due to, among other factors:

 

   

an ongoing reduction in general economic activity, which may cause one or more of our tenants to be unable to maintain profitability and make timely rental payments to us pursuant to their leases, or to declare bankruptcy;

 

   

an increase in property vacancies, which could result in our obligation to pay the associated real estate taxes, insurance, and general property operating expenses;

 

   

a continuing complete or partial closure of, or other operational issues at, one or more of our properties resulting from government or tenant action;

 

   

delays in the supply of material products or services to us or our tenants from vendors;

 

   

a reduction in our tenants’ available workforce as a result of local, state or federal “shelter in place” or “stay at home” rules and restrictions;

 

   

indications of a tenant’s inability to continue as a going concern, changes in our view of strategy relative to a tenant’s business or industry, or changes in our long-term hold strategies, which could be indicative of an impairment triggering event with respect to a particular property or properties;

 

   

a general decline in business activity and demand for real estate transactions, which could adversely affect our ability to grow our portfolio or sell properties upon desirable terms;

 

   

difficulty accessing debt and equity capital on attractive terms, if at all; and

 

   

an inability to maintain compliance with financial covenants of credit facility, senior notes, and other loan agreements, which may result in a default of such arrangements and potentially result in an acceleration of indebtedness, or increased interest expense should a waiver be required from the lending institutions.

The extent to which the COVID-19 pandemic impacts our investments and operations will depend on future developments, including, among others, the duration of the outbreak, new information that may emerge

 

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concerning the severity of COVID-19, and the actions taken to contain the COVID-19 pandemic or treat the disease. These developments and the full impact of the COVID-19 pandemic on our business are highly uncertain and cannot be predicted with confidence. Nevertheless, the COVID-19 pandemic and any future epidemics, pandemics or public health crises could materially and adversely affect our business, financial condition, liquidity and results of operations, as well as our ability to pay distributions to our stockholders, for the reasons discussed above.

We have limited opportunities to increase rents under our long-term leases with tenants, which could impede our growth and materially and adversely affect us.

We typically lease our properties pursuant to long-term net leases with initial terms of 10 years or more that often have renewal options. As of June 30, 2020, the ABR weighted average remaining term of our leases was approximately 11.0 years, excluding renewal options. Substantially all of our leases provide for periodic rent escalations, but these built-in increases may be less than what we otherwise could achieve in the market. Most of our leases contain rent escalators that increase rent at a fixed amount on fixed dates, which may be less than prevailing market rates over the lease duration. For those leases that contain rent escalators based on CPI changes, our rent increases during periods of low inflation or deflation may be less than what we otherwise could achieve in the market. As a result, the long-term nature of our leases could impede our growth and materially and adversely affect us.

We may not be able to achieve growth through acquisitions at a rate that is comparable to our historical results, including as a result of decreases in real estate transaction activity resulting from the COVID-19 pandemic, which could materially and adversely affect us.

Our growth strategy depends significantly on acquiring new properties. From 2015 to 2019, our team has acquired more than $500 million of net leased real estate each year, including approximately $1 billion during 2019. Our ability to continue to grow requires us to identify and complete acquisitions that meet our investment criteria and depends on general market and economic conditions. Although the long-term impact of the COVID-19 pandemic on investment sales markets is currently difficult to predict, the disruption from the pandemic thus far has resulted in a significant decrease in real estate investment sales. Our growth strategy depends significantly on acquiring new properties. Contrary to our experience from 2015 to 2019 when we acquired more than $500 million of net leased real estate each year, including approximately $1 billion during 2019, we did not complete any acquisitions during the six months ended June 30, 2020, which significantly increases the risk of lower overall acquisition activity for the full year given the ongoing impact of the COVID-19 pandemic.

Changes in the volume of real estate transactions, the availability of acquisition financing, capitalization rates, interest rates, competition, or other factors may negatively impact our acquisition opportunities in 2020 and beyond. If we are unable to achieve growth through acquisitions at a rate that is comparable to our historical results, it could materially and adversely affect us.

We may not achieve the total returns we expect from our future acquisitions, which could materially and adversely affect us.

As we pursue our growth strategy, we may encounter increasingly difficult market conditions that place downward pressure on the total returns we can achieve on our investments. Accordingly, future acquisitions may have lower yield characteristics than past and present opportunities. To the extent that our future growth is achieved through acquisitions that yield lower returns, it could materially and adversely affect us. In addition, if we fund future acquisitions with equity issuances, the dilutive impact could outweigh the benefits of acquisitions that achieve lower returns, which could materially and adversely affect us.

 

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We may not be able to obtain acquisition financing or obtain other capital from third-party sources on favorable terms or at all, which could materially and adversely affect our growth prospects and our business.

In order to qualify as a REIT, we are required under the Code, among other things, to distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to income tax at the corporate rate to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gain. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, or repay debt obligations from operating cash flow. Consequently, we expect to rely, in part, on third-party sources to fund our capital needs. We may not be able to obtain the financing on favorable terms or at all. Our access to third-party sources of capital depends, in part, on:

 

   

general market conditions, including the impact of the COVID-19 pandemic;

 

   

the market’s perception of our growth potential;

 

   

our current debt levels;

 

   

our current and expected future earnings;

 

   

the performance of our portfolio;

 

   

our cash flow and cash distributions; and

 

   

the market price per share of our Common Stock (including our Class A Common Stock).

If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, or satisfy our debt service obligations, which could materially and adversely affect us.

Our acquisition volume may not be consistent on a quarterly basis, which may not meet investors’ expectations and could negatively impact the value of our Common Stock (including our Class A Common Stock).

Our team has acquired more than $500 million of net leased real estate each year from 2015 to 2019, including approximately $1 billion during 2019. However, our acquisition volume within each year has not always been consistent on a quarterly basis. For example, for the year ended December 31, 2019, we completed acquisitions totaling approximately $1.0 billion, but $735.7 million of that total represented a single portfolio acquisition that we completed in the third quarter. In the first six months of 2020, we completed no acquisitions. Our acquisition volume following completion of this offering may not be consistent on a quarterly basis. As a result, our acquisition results that we report on a quarterly basis may not meet investors’ expectations and could negatively impact the value of our Common Stock (including our Class A Common Stock).

Any expansion into adjacent opportunities to our core property types may prove to be unsuccessful, which could harm our growth prospects and materially and adversely affect us.

We may seek to capture adjacent opportunities to our core property types in the net lease space. Adjacent property types may not provide us with the opportunity to earn higher returns relative to more traditional assets in our core property types. In order to be successful in capturing adjacent opportunities, we will be required to carefully analyze and develop selection criteria taking into account different competitive and operating conditions. As a result, pursuing adjacent opportunities inherently involves more risk. If we are unsuccessful in identifying compelling opportunities, it could harm our growth prospects and materially and adversely affect us.

 

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We may not be able to effectively manage our growth and any failure to do so could materially and adversely affect us.

We have grown rapidly, acquiring a total of $3.4 billion of net leased real estate from 2015 to 2019. Our growth strategy depends significantly on continued growth through acquisitions. Our future operating results will depend on our ability to effectively manage this growth. To accomplish this, we will need to:

 

   

invest in enhanced operational systems that can scale as our portfolio grows in size;

 

   

attract, integrate, and retain operations personnel as our Company grows in complexity; and

 

   

identify and supervise a number of suitable third-parties to provide services to us.

We cannot provide any assurance that we will be able to effectively manage our growth, which could materially and adversely affect us.

As we continue to acquire properties pursuant to our growth strategy, our portfolio may become less diversified which could materially and adversely affect us.

In pursuing our growth strategy, we may acquire properties that cause our portfolio to become less diversified. If our portfolio becomes less diverse, our business may become subject to greater risk, including tenant bankruptcies, adverse industry trends, and economic downturns in a particular geographic area. As a result, if any such risks of a less diversified portfolio are realized, we could be materially and adversely affected.

We face increasing competition for acquiring properties from both publicly traded REITs and private equity investors that have greater resources than we do, which could materially and adversely affect us.

We are facing increasing competition from other entities engaged in real estate investment activities, including publicly traded REITs, private and institutional real estate investors, sovereign wealth funds, banks, mortgage bankers, insurance companies, investment banking firms, lenders, specialty finance companies, and other entities. Some of our competitors are larger and may have considerably greater financial, technical, leasing, underwriting, marketing, and other resources than we do. Some competitors may have a lower cost of capital and access to funding sources that may not be available to us. In addition, other competitors may have higher risk tolerances or different risk assessments and may not be subject to the same operating constraints, including maintaining REIT status. This competition may result in fewer acquisitions, higher prices, lower yields, less desirable property types, and acceptance of greater risk. As a result, we cannot provide any assurance that we will be able to successfully execute our growth strategy. Any failure to grow through acquisitions as a result of the increasing competition we face could materially and adversely affect us.

We face significant competition for tenants, which could materially and adversely affect us, including our occupancy, rental rates, results of operations, and business.

We compete with numerous developers, owners, and operators of properties, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates or to offer more substantial rent abatements, tenant improvements, early termination rights, or below-market renewal options to retain tenants when our leases expire. Competition for tenants could decrease or prevent increases of the occupancy and rental rates of our properties, which could materially and adversely affect us.

The departure of any of our key personnel with long-standing business relationships could materially and adversely affect us.

Our success and our ability to manage anticipated future growth depend, in large part, upon the efforts of our key personnel, particularly our Chief Executive Officer, Christopher J. Czarnecki. Mr. Czarnecki has

 

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extensive market knowledge and relationships and exercises substantial influence over our operational, financing, acquisition, and disposition activity. If we lost his services, our network of external relationships and resources would be materially diminished.

Our senior management team has worked together and collectively managed our business, operations, and portfolio since 2015 and has a strong investment track record having acquired $3.4 billion of net leased real estate from 2015 to 2019. Many of our other key executive personnel, particularly our senior management team, also have extensive experience and strong reputations in the real estate industry and have been instrumental in setting our strategic direction, operating our business, identifying, recruiting, and training key personnel, and arranging necessary financing. The departure of any member of our senior management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities, and weaken our relationships with lenders, business partners, existing and prospective tenants, and industry personnel, which could materially and adversely affect us.

Our portfolio is concentrated in certain states, particularly Texas and Florida, and any adverse developments and economic downturns in these geographic markets resulting from the COVID-19 pandemic or other factors could materially and adversely affect us.

As of June 30, 2020, approximately 32.9% of our ABR came from properties in our top five states: Texas (10.4%), Illinois (6.5%), Michigan (5.4%), Wisconsin (5.3%), and Florida (5.3%). These geographic concentrations could adversely affect our operating performance if conditions become less favorable in any of the states or markets within which we have a concentration of properties. The ongoing COVID-19 pandemic has greatly impacted the United States and particularly Texas and Florida. We can provide no assurance that any of our markets will grow, not experience adverse developments, or that underlying real estate fundamentals will be favorable to owners and operators of industrial, healthcare, restaurant, office, and retail properties. The current downturn in the economy resulting from the COVID-19 pandemic is adversely affecting the states or regions in which we have a concentration of properties, or markets within such states or regions, and the slowdown in the demand for our tenants’ businesses caused by adverse economic, regulatory, or other conditions may continue to adversely affect our tenants operating businesses in those states and impair their ability to pay rent to us, which, in turn could materially and adversely affect us.

Our portfolio is also concentrated in certain property types and any adverse developments relating to one or more of these property types could materially and adversely affect us.

As of June 30, 2020, approximately 44.1% of our ABR came from industrial properties, 19.9% from healthcare properties, 15.5% from restaurant properties, 10.0% from office properties, and 8.8% from retail properties. Any adverse developments in one or more of these property types could materially and adversely affect us. For example, stay-at-home orders and other measures implemented as a result of COVID-19 have particularly affected the restaurant and retail sectors. If our restaurant or retail tenants suffer weakening demand for their goods or services, it could adversely affect their ability to meet their rent and other obligations under their leases with us. It also may be difficult and expensive to re-tenant a property designed for a particular property type with a new tenant that operates in an industry requiring a different property type. As a result, any adverse developments in one or more of our concentrated property types could materially and adversely affect us.

The decrease in demand for restaurant and retail space resulting from the COVID-19 pandemic or other factors may materially and adversely affect us.

As of June 30, 2020, leases with tenants in the restaurant industry represented approximately 15.5% of our ABR, and leases with tenants in the retail industry represented approximately 8.8% of our ABR. In the future, we may acquire additional restaurant and retail properties. Accordingly, decreases in the demand for restaurant and/or retail spaces may have a greater adverse effect on us than if we had fewer investments in these industries. The market for restaurant and retail space has been, and could continue to be, adversely affected by weakness in the

 

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national, regional, and local economies including the impact of the ongoing COVID-19 pandemic, the adverse financial condition of some large restaurant and retail companies, the ongoing consolidation in the restaurant and retail industries, and the excess amount of restaurant and retail space in a number of markets. For example, in recent years a number of companies in the restaurant industry have declared bankruptcy, gone out of business, or significantly reduced the number of their locations. As a result, we have experienced, and expect to continue to experience, challenges with some of our restaurant tenants, and have recorded asset impairments, which were immaterial on a consolidated basis, on certain assets as a result of increased credit losses.

Similarly, the ongoing impacts of the disruption in the retail industry, particularly adverse changes in consumer spending and consumer preferences for particular goods, services, or store-based retailing could severely impact retail tenants’ ability to pay rent. Shifts from in-store to online shopping could increase due to changing consumer shopping patterns and the increase in consumer adoption and use of mobile electronic devices. Further, our assessment that certain businesses are insulated from such e-commerce pressure may prove to be incorrect. To the extent that these conditions continue in the retail and restaurant industries, they are likely to negatively affect market rents for such properties and could materially and adversely affect us.

Legal restrictions intended to mitigate the impact of COVID-19 have had, and may continue to have, a particularly adverse impact on the restaurant, retail and certain sectors of the healthcare industries, which may materially and adversely affect us.

The legal restrictions adopted by many U.S. states to mitigate the ongoing public health crises related to COVID-19, including “shelter in place” and “stay at home” rules, restrictions on travel, and restrictions on the types of businesses that may continue to operate, have had a particularly acute negative economic impact on restaurant and retail businesses throughout the areas in which we operate. In addition, restrictions on elective medical procedures had an acute negative impact on certain sectors of the healthcare industry. As of June 30, 2020, leases with tenants in the healthcare industry represented approximately 19.9% of our ABR, leases with tenants in the restaurant industry represented approximately 15.5% of our ABR, and leases with tenants in the retail industry represented 8.8% of our ABR. Accordingly, decreases in the demand for healthcare, restaurant, and/or retail spaces may have a greater adverse effect on us than if we had fewer investments in these industries. For example, if there is an increase in the number of companies in the healthcare, restaurant or retail industries that declare bankruptcy, go out of business, or significantly reduce the number of their locations as a result of the pandemic, then we are likely to experience challenges with our healthcare, restaurant, or retail tenants, and may record asset impairments on certain assets as a result of increased credit losses. To the extent that economic conditions continue to deteriorate in the healthcare, restaurant, and retail industries, they are likely to negatively affect market rents for such properties and could materially and adversely affect us.

General economic disruption resulting from the COVID-19 pandemic could result in a reduction in the willingness or ability of consumers to use their discretionary income in the businesses of our tenants and potential tenants, which could reduce the demand for our properties and the ability of our tenants to satisfy their obligations to us, and in turn could materially and adversely affect us.

A significant portion of our portfolio is leased to tenants operating businesses that rely on discretionary consumer spending. Leases with tenants in the restaurant industry (including quick service and casual and family dining) represent a material portion of our portfolio and the highest proportion of tenants seeking rent relief at this time are in the restaurant sector. Red Lobster Hospitality, Jack’s Family Restaurants, Outback Steakhouse, and Krispy Kreme are among the most significant tenants in our portfolio. The success of most of these businesses depends on the willingness of consumers to use discretionary income to purchase their products or services. A downturn in the economy resulting from the COVID-19 pandemic could cause consumers to reduce their discretionary spending, which could result in tenant bankruptcies or otherwise have an adverse impact on our tenants’ ability to successfully manage their businesses and pay us amounts due under our lease agreements, thereby materially and adversely affecting us.

 

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The ongoing COVID-19 pandemic has resulted in a sustained period of economic slowdown and declining demand for real estate. It may also result in rising interest rates. Any of the foregoing could cause a general decline in rents or an increased incidence of defaults under existing leases. A lack of demand for rental space could adversely affect our ability to maintain our current tenants and gain new tenants, which may affect our growth and results of operations. Accordingly, the ongoing deterioration in economic conditions resulting from the COVID-19 pandemic could materially and adversely affect us.

If one or more of our top 20 tenants, which together represented approximately 31.7% of our ABR as of June 30, 2020, suffers a downturn in their business, it could materially and adversely affect us.

As of June 30, 2020, our top 20 tenants together represented 31.7% of our ABR. Our largest tenant is Red Lobster, a casual dining restaurant, which leases 24 properties that in the aggregate represent approximately 2.5% of our ABR. Our top 20 tenants may experience a material business downturn weakening their financial position resulting in their failure to make timely rent payments and/or default under their leases. As a result, our revenue and cash flow could be materially and adversely affected.

We may be unable to renew leases, re-lease properties as leases expire, or lease vacant spaces on favorable terms or at all, which, in each case, could materially and adversely affect us.

Our results of operations depend on our ability to continue to successfully lease our properties, including renewing expiring leases, re-leasing properties as leases expire, leasing vacant space, optimizing our tenant mix, or leasing properties on more economically favorable terms. As of June 30, 2020, one lease representing approximately 0.2% of our ABR will expire during 2020 and nine leases representing approximately 0.7% of our ABR will expire during 2021. Current tenants may decline, or may not have the financial resources available, to renew current leases, and we cannot assure you that leases that are renewed will have terms that are as economically favorable to us as the expiring lease terms. If tenants do not renew the leases as they expire, we cannot provide any assurance that we will be able to find new tenants or that our properties will be re-leased at rental rates equal to or above the current average rental rates or that substantial rent abatements, tenant improvement allowances, early termination rights, or below-market renewal options will not be required to attract new tenants. We may experience significant costs in connection with re-leasing a significant number of our properties, which could materially and adversely affect us. As of June 30, 2020, seven of our properties, representing approximately 0.4% of our total rentable square footage, were unoccupied. We may experience difficulties in leasing this vacant space on favorable terms or at all. Any failure to renew leases, re-lease properties as leases expire, or lease vacant space could materially and adversely affect us.

Our business is subject to significant re-leasing risk, particularly for specialty properties that are suitable for only one use.

The loss of a tenant, either through lease expiration or tenant bankruptcy or insolvency, may require us to spend significant amounts of capital to renovate the property before it is suitable for a new tenant and cause us to incur significant costs. In particular, our specialty properties are designed for a particular type of tenant or tenant use. If tenants of specialty properties do not renew or default on their leases, we may not be able to re-lease properties without substantial capital improvements, which may be significant. Alternatively, we may not be able to re-lease or sell the property without such improvements or may be required to reduce the rent or selling price significantly. This potential illiquidity may limit our ability to modify quickly our portfolio in response to changes in economic or other conditions, including tenant demand. Such occurrences could materially and adversely affect us.

We may experience a higher number of tenant defaults because we lease most of our properties to unrated tenants.

We depend on the ability of our tenants to meet their obligations to pay rent to us due under our lease for substantially all of our revenue. As of June 30, 2020, only approximately 16.1% of our ABR came from tenants

 

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who had an investment grade credit rating. A substantial majority of our properties are leased to unrated tenants. Our investments in properties leased to such tenants may have a greater risk of default than investments in properties leased exclusively to investment grade tenants. The ability of an unrated tenant to meet its rent and other obligations under its lease with us may be subject to greater risk than our tenants that have an investment grade rating. When we invest in properties where the tenant does not have a publicly available credit rating, we will use certain credit-assessment tools as well as rely on our own estimates of the tenant’s credit rating which includes reviewing the tenant’s financial information (e.g., financial ratios, net worth, revenue, cash flows, leverage and liquidity, if applicable). Our methods, however, may not adequately assess the risk of an investment and, if our assessment of credit quality proves to be inaccurate, we may be subject to defaults and investors may view our cash flows as less stable. If one or more of our unrated tenants defaults, it could have a material adverse effect on us.

Our underwriting and risk-management procedures that we use to evaluate a tenant’s credit risk may be faulty, deficient, or otherwise fail to accurately reflect the risk of our investment, which could materially and adversely affect us.

Our underwriting and risk-management procedures that we use to evaluate a tenant’s credit risk may not be sufficient to identify tenant problems in a timely manner or at all. To evaluate tenant credit risk, we utilize a third-party model, S&P Capital IQ to help us determine a tenant’s implied credit rating when a public rating is not available. However, a rating from S&P Capital IQ is not the same as a published credit rating and lacks extensive company participation that is typically involved when a rating agency publishes a rating. Therefore, such rating may not be as indicative of creditworthiness as a rating published by a nationally recognized statistical rating organization. Tenant credit ratings, public or implied, however, are only one component of how we assess the risk of tenant insolvency. We also use our own internal estimate of the likelihood of an insolvency or default, based on the regularly monitored performance of our properties, our assessment of each tenant’s financial health, including profitability, liquidity, indebtedness, and leverage profile, and our assessment of the health and performance of the tenant’s particular industry. If our assessment of credit quality proves to be inaccurate, we may experience one or more tenant defaults, which could have a material adverse effect on us.

Any failure of one or more tenants to provide accurate or complete financial information could prevent us from identifying tenant problems that could materially and adversely affect us.

We rely on information from our tenants to determine a potential tenant’s credit risk as well as for on-going risk management. As of June 30, 2020, approximately 88.4% of our ABR comes from tenants that are required to periodically provide us with specified financial information and an additional 6.6% of our tenants (based on ABR) are public companies, which are required to file financial statements with the SEC, although they are not required to provide us with specified financial information under the terms of our lease. Ratings or conclusions derived from both S&P Capital IQ and our internal teams rely on such information provided to us by our tenants and prospective tenants without independent verification on our part, and we must assume the appropriateness of estimates and judgments that were made by the party preparing the financial information. A tenant’s failure to provide appropriate information may interfere with our ability to accurately evaluate a potential tenant’s credit risk or determine an existing tenant’s default risk, the occurrence of either could materially and adversely affect us.

We could face potential material adverse effects from the bankruptcies or insolvencies of our tenants.

If a tenant, or the guarantor of a lease of a tenant, commences, or has commenced against it, any legal or equitable proceeding under any bankruptcy, insolvency, receivership, or other debtor’s relief statute or law (collectively, a “bankruptcy proceeding”), we may be unable to collect all sums due to us under that tenant’s lease or be forced to “take back” a property as a result of a default or a rejection of a lease by a tenant in a bankruptcy proceeding. If a tenant becomes bankrupt or insolvent, federal law may prohibit us from evicting such tenant based solely upon such bankruptcy or insolvency. In addition, a bankrupt or insolvent tenant may be

 

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authorized to reject and terminate its lease or leases with us. Any claims against such bankrupt tenant for unpaid future rent would be subject to statutory limitations that would likely result in our receipt of rental revenues that are substantially less than the contractually specified rent we are owed under the lease or leases. Any or all of the lease obligations of our tenants, or any guarantor of our tenants, could be subject to a bankruptcy proceeding which may bar our efforts to collect pre-bankruptcy debts from these entities or their properties, unless we are able to obtain an enabling order from the bankruptcy court. If our lease is rejected by a tenant in bankruptcy, we may only have a general unsecured claim against the tenant and may not be entitled to any further payments under the lease. We may also be unable to re-lease a terminated or rejected space or to re-lease it on comparable or more favorable terms. A bankruptcy proceeding could hinder or delay our efforts to collect past due balances and ultimately preclude collection of these sums, resulting in a decrease or cessation of rental payments, which could materially and adversely affect us.

On March 8, 2020, Art Van, a home furnishings store and BNL’s largest tenant as of March 31, 2020 (representing 2.9% of our ABR at the time), filed for bankruptcy protection. At the time, BNL leased 10 properties to Art Van, representing approximately 665,000 square feet of operational retail space, with nine properties located in Michigan and one property located in Illinois. On June 30, 2020, at our request, the bankruptcy court rejected seven of these leases, and we successfully re-leased six of these properties (representing approximately 71.3% of our portfolio’s square footage leased to Art Van) to American Signature, Inc. (“American Signature”), the owner of the American Signature and Value City furniture brands, for a ten year term with base rents equivalent to approximately 71.5% of the base rent previously received from Art Van for those six properties. The seventh property (equivalent to approximately 18.4% of our portfolio’s square footage leased to Art Van) will be operated by American Signature to conduct going out of business sales for Art Van inventory acquired by American Signature through the bankruptcy proceedings, and American Signature will pay us rents over a three-month period equal to the pre-bankruptcy rents paid by Art Van. The three remaining sites were released from the bankruptcy proceedings on July 31, 2020. In August 2020, we agreed to a court approved settlement with the Art Van bankruptcy estate pursuant to which we are entitled to receive $2.35 million, which represents approximately 78% of our total post-petition claim through July 31, 2020, and approximately 86.5% of the total post-petition base rent owed to us by Art Van from the period from March 8, 2020, through July 31, 2020. We collected $1.175 million in August 2020 and have a right to collect the remaining $1.175 million in September 2020.

Some of our customers operate their businesses under franchise or license agreements, which, if terminated or not renewed prior to the expiration of their leases with us, would likely impair their ability to pay us rent.

As of June 30, 2020, 72.7% of our restaurant property tenants operated their businesses under franchise or license agreements. Generally, these franchise agreements have terms that end earlier than the respective expiration dates of the related leases. In addition, a tenant’s rights as a franchisee or licensee typically may be terminated by the franchisor or licensor and the tenant may be precluded from competing with the franchisor or licensor upon termination. Usually, we have no notice or cure rights with respect to such a termination and have no rights to assignment of any such franchise agreement. This may have an adverse effect on our ability to mitigate losses arising from a default on any of our leases. A franchisor’s or licensor’s termination or refusal to renew a franchise or license agreement would likely have a material adverse effect on the ability of the tenant to make payments under its lease, which could materially and adversely affect us.

Security breaches and other technology disruptions could compromise our information systems and expose us to liability, which could materially and adversely affect us.

Information security risks generally have increased in recent years due to the increased technological sophistication and activities of perpetrators of cyber-attacks. Our business involves the storage and transmission of numerous classes of sensitive and confidential information and intellectual property, including tenants’ information, private information about our stockholders and our employees, and financial and strategic information about us. We face risks associated with security breaches through cyber-attacks or cyber-intrusions,

 

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malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased. If we fail to assess and identify cybersecurity risks associated with our operations, we may become increasingly vulnerable to such risks. Additionally, the measures we have implemented to prevent security breaches and cyber incidents may not be effective. The theft, destruction, loss, misappropriation, or release of sensitive or confidential information or intellectual property, or interference with or disruptions of our IT networks and related systems or the technology systems of third parties on which we rely, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of tenants, potential liability, and competitive disadvantage. Laws and regulations governing data privacy are constantly evolving. Many of these laws and regulations, including the California Consumer Protection Act (the “CCPA”), contain detailed requirements regarding collecting and processing personal information, restrict the use and storage of such information, and govern the effectiveness of consumer consent. Any of the above risks could materially and adversely affect us.

An increase in market interest rates could increase our interest costs on existing and future debt and could adversely affect our stock price, and a decrease in market interest rates could lead to additional competition for the acquisition of real estate, which could adversely affect our results of operations.

If interest rates increase, so could our interest costs for any new debt and our existing variable-rate debt obligations. Absent a simultaneous increase in acquisition yields, this increased cost could make the financing of any acquisition more expensive and lower our current period earnings. Rising interest rates could limit our ability to refinance existing debt when it matures or cause us to pay higher interest rates upon refinancing. See “Risks Related to Debt Financing” for additional information. In addition, an increase in interest rates could decrease the access current and prospective tenants have to credit, thereby decreasing the amount they are willing to pay to lease our assets and consequently limiting our ability, if necessary, to reposition our portfolio promptly in response to changes in economic or other conditions. Furthermore, the distribution yield on our Common Stock (including our Class A Common Stock) will influence the price of such Common Stock (including our Class A Common Stock). Thus, an increase in market interest rates may lead prospective purchasers of our Common Stock (including our Class A Common Stock) to expect a higher distribution yield, which could adversely affect the market price of our common stock. See “Risks Related to this Offering and Ownership of Our Common Stock (Including Our Class A Common Stock)” for more information. In addition, decreases in interest rates may lead to additional competition for the acquisition of real estate due to a reduction in desirable alternative income-producing investments. Increased competition for the acquisition of real estate may lead to a decrease in the yields on real estate we have targeted for acquisition. In such circumstances, if we are not able to offset the decrease in yields by obtaining lower interest costs on our borrowings, our results of operations will be adversely affected.

Our properties may be subject to impairment charges.

We routinely evaluate our real estate investments for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions and tenant performance. For example, the early termination of, or default under, a lease by a tenant may lead to an impairment charge. Since our investment focus is on properties net leased to a single tenant, the financial failure of, or other default by, a single tenant under its lease(s) may result in a significant impairment loss. If we determine that an impairment has occurred, we would be required to make a downward adjustment to the net carrying value of the property, which could have a material adverse effect on our results of operations in the period in which the impairment charge is recorded. Management has recorded impairment charges related to certain properties in each of the years ended December 31, 2019, 2018, and 2017, and may record future impairments based on actual results and changes in circumstances. Negative developments in the real estate market may cause management to reevaluate the business and macro-economic assumptions used in its impairment analysis. Changes in management’s

 

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assumptions based on actual results may have a material impact on the Company’s financial statements. See “Critical Accounting Polices – Long-Lived Asset Impairment” in the Management’s Discussion and Analysis contained elsewhere in this prospectus for a discussion of real estate impairment charges.

Changes in accounting standards may materially and adversely affect us.

From time to time the Financial Accounting Standards Board (“FASB”), and the SEC, who create and interpret appropriate accounting standards, may change the financial accounting and reporting standards or their interpretation and application of these standards that will govern the preparation of our financial statements. These changes could materially and adversely affect our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Similarly, these changes could materially and adversely affect our tenants’ reported financial condition or results of operations and affect their preferences regarding leasing real estate.

We may acquire properties or portfolios of properties through tax-deferred contribution transactions, which could result in stockholder dilution and limit our ability to sell such assets.

In the future we may acquire properties or portfolios of properties through tax-deferred contribution transactions in exchange for OP Units, which may result in stockholder dilution. This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of debt to the contributors to maintain their tax bases. As of June 30, 2020, we were party to tax protection agreements covering three properties. Based on values as of June 30, 2020, taxable sales of the applicable properties would trigger liability under the agreements of approximately $12.3 million. In addition, in connection with the Internalization, we entered into the Founding Owners’ Tax Protection Agreement. See “Certain Relationships and Related Party Transactions—Tax Protection Agreement.” These restrictions could limit our ability to sell certain assets or the OP (or our interest in the OP) at a time, or on terms, that would be favorable absent such restrictions.

Certain provisions of our leases or loan agreements may be unenforceable, which could materially and adversely affect us.

Our rights and obligations with respect to the leases at our properties, mortgage loans, or other loans are governed by written agreements. A court could determine that one or more provisions of such agreements are unenforceable, such as a particular remedy, a master lease covenant, a loan prepayment provision, or a provision governing our security interest in the underlying collateral of a borrower or lessee. We could be adversely impacted if this were to happen with respect to an asset or group of assets.

We may become subject to litigation, which could materially and adversely affect us.

In the future we may become subject to litigation, including, but not limited to, claims relating to our operations, past and future securities offerings, corporate transactions, and otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. We generally intend to vigorously defend ourselves. However, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby materially and adversely affecting us. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could materially and adversely impact us, expose us to increased risks that would be uninsured, and materially and adversely impact our ability to attract directors and officers.

 

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A failure to maintain effective internal controls could materially and adversely affect us.

Effective internal controls over financial reporting, disclosures, and operations are necessary for us to provide reliable financial reports and public disclosures, effectively prevent fraud, and operate successfully. If we cannot provide reliable financial reports and public disclosures or prevent fraud, our reputation and operating results would be harmed. Our internal controls over financial reporting and our operating internal controls may not prevent or detect financial misstatements or loss of assets because of inherent limitations, including the possibility of human error, management override of controls, or fraud. Effective internal controls can provide only reasonable assurance with respect to financial statement accuracy, public disclosures, and safeguarding of assets. Any failure of these internal controls, including any failure to implement required new or improved controls as a result of changes to our business or otherwise, or if we experience difficulties in their implementation, could result in decreased investor confidence in the accuracy and completeness of our financial reports and public disclosures, civil litigation, or investigations by the SEC or other regulatory authorities, and we could fail to meet our reporting obligations, which could materially and adversely affect us.

A limited number of our leases may require us to pay property-related expenses that are not the obligations of our tenants, which could materially and adversely affect us.

Under the terms of substantially all of our leases, our tenants are responsible for the payment or reimbursement of property expenses such as real estate taxes, insurance, maintenance, repairs, and capital costs in addition to satisfying their rent obligations. Under the provisions of a limited number of our existing leases and leases that we may enter into in the future, however, we may be required to pay some or all of the expenses of the property, such as the costs of environmental liabilities, roof and structural repairs, real estate taxes, insurance, certain non-structural repairs, and maintenance. If our properties incur significant expenses that must be paid by us under the terms of our leases, our business, financial condition and results of operations may be adversely affected and the amount of cash available to meet expenses and to make distributions to our stockholders and unitholders may be reduced.

The costs of environmental contamination or liabilities related to environmental laws may materially and adversely affect us.

There may be known or unknown environmental liabilities associated with properties we previously owned, currently own, or may acquire in the future. Under various federal, state, and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from environmental matters, including the presence or discharge of hazardous or toxic substances, waste, or petroleum products at, on, in, under or migrating from such property, including costs to investigate or clean up such contamination and liability for personal injury, property damage, or harm to natural resources. Certain uses of some properties may have a heightened risk of environmental liability because of the hazardous materials used in performing services on those properties, such as industrial properties or auto parts and auto service businesses using petroleum products, paint, machine solvents, and other hazardous materials. We typically undertake customary environmental diligence prior to our acquisition of any property, including obtaining Phase I environmental site assessments. The Phase I environmental site assessments are limited in scope and therefore may not reveal all environmental conditions affecting a property. Therefore, there could be undiscovered environmental liabilities on the properties we own.

The known or potential presence of hazardous substances on a property may adversely affect our ability to sell, lease, or improve the property, or to borrow using the property as collateral. In addition, environmental laws may create liens on contaminated properties in favor of the government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which they may be used or which businesses may be operated, and these restrictions may require substantial expenditures.

Our environmental liabilities may include property and natural resources damage, personal injury, investigation, and clean-up costs, among other potential environmental liabilities. These costs could be

 

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substantial. Although we may obtain insurance for environmental liability for certain properties that are deemed to warrant coverage, our insurance may be insufficient to address any particular environmental situation and we may be unable to continue to obtain insurance for environmental matters, at a reasonable cost or at all, in the future. If our environmental liability insurance is inadequate, we may become subject to material losses for environmental liabilities. Our ability to receive the benefits of any environmental liability insurance policy will depend on the financial stability of our insurance company and the position it takes with respect to our insurance policies. If we were to become subject to significant environmental liabilities, we could be materially and adversely affected.

Although our leases generally require our tenants to operate in compliance with all applicable federal, state, and local environmental laws, ordinances, and regulations, and to indemnify us against any environmental liabilities arising from the tenants’ activities on the property, we could nevertheless be subject to liability, as a current or previous owner of real estate, including strict liability, by virtue of our ownership interest and may be required to remove or remediate hazardous or toxic substances on, under, or in a property. Further, there can be no assurance that our tenants, or the guarantor of a lease, could or would satisfy their indemnification obligations under their leases. We may face liability regardless of our knowledge of the contamination, the timing of the contamination, the cause of the contamination, or the party responsible for the contamination of the property. The cost of compliance or defense against claims from a contaminated property could materially and adversely affect us.

We could become subject to liability for asbestos-containing building materials in the buildings on our property, which could cause us to incur additional expenses.

Some of our properties may contain, or may have contained, asbestos-containing building materials. Environmental, health, and safety laws require that owners or operators of or employers in buildings with asbestos-containing materials (“ACM”) properly manage and maintain these materials, adequately inform or train those who may come into contact with ACM, and undertake special precautions, including removal or other abatement, in the event that ACM is disturbed during building maintenance, renovation, or demolition. These laws may impose fines and penalties on employers, building owners, or operators for failure to comply with these laws. In addition, third parties may seek recovery from employers, owners, or operators for personal injury associated with exposure to asbestos. If we become subject to any of these penalties or other liabilities as a result of ACM at one or more of our properties, it could have a material adverse effect on us.

Our properties may contain or develop harmful mold or suffer from other adverse conditions, which could lead to liability for adverse health effects and costs of remediation.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues also can stem from inadequate ventilation, chemical contamination from indoor or outdoor sources and other biological contaminants such as pollen, viruses, and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants, and others if property damage or personal injury occurs. Thus, conditions related to mold or other airborne contaminants could have a material adverse effect on us.

 

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Risks Related to Investments in Real Estate

Our operating results are affected by economic and regulatory changes that impact the commercial real estate market in general.

Our core business is the ownership of commercial real estate that is net leased on a long-term basis to businesses in the industrial, healthcare, restaurant, office, and retail sectors. Accordingly, our performance is subject to risks generally attributable to the ownership of commercial real property, including:

 

   

inability to collect rents from tenants due to financial hardship, including bankruptcy, financial difficulties, or lease defaults by tenants;

 

   

changes in global, national, regional, or local economic, demographic, or real estate market conditions in the markets in which we operate, including the supply and demand for single-tenant space in the industrial, healthcare, restaurant, office, and retail sectors;

 

   

increased competition for real property investments targeted by our investment strategy;

 

   

changes in consumer trends and preferences that affect the demand for products and services offered by our tenants;

 

   

inability to lease or sell properties upon expiration or termination of existing leases and renewal of leases at lower rental rates;

 

   

the subjectivity of real estate valuations and changes in such valuations over time;

 

   

the illiquid nature of real estate compared to most other financial assets;

 

   

changes in laws, government rules, regulations, and fiscal policies, including changes in tax, real estate, environmental, and zoning laws;

 

   

changes in interest rates and availability of financing, including changes in the terms of available financing such as more conservative loan-to-value requirements and shorter debt maturities;

 

   

unexpected expenditures relating to physical or weather-related damage to properties;

 

   

the potential risk of functional obsolescence of properties over time;

 

   

acts of terrorism and war;

 

   

acts of God and other factors beyond our control; and

 

   

competition from other properties.

The factors described above are out of our control, and we are unable to predict future changes in such factors. Any negative changes in these factors may cause the value of our real estate to decline, which could materially and adversely affect us.

Global market and economic conditions may materially and adversely affect us and the ability of our tenants to make rental payments to us pursuant to our leases.

Our results of operations are sensitive to changes in the overall economic conditions that impact our tenants’ financial condition and leasing practices. Adverse economic conditions such as high unemployment levels, interest rates, tax rates, and fuel and energy costs may have an impact on the results of operations and financial conditions of our tenants. During periods of economic slowdown, rising interest rates and declining demand for real estate may result in a general decline in rents or an increased incidence of defaults under existing leases. A lack of demand for rental space could adversely affect our ability to maintain our current tenants and gain new tenants, which may affect our growth and results of operations. Accordingly, a decline in economic conditions could materially and adversely affect us.

 

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Our real estate investments are illiquid.

Because real estate investments are relatively illiquid, our ability to adjust our portfolio promptly in response to economic, financial, investment, or other conditions may be limited. Return of capital and realization of gains, if any, from an investment generally will occur upon disposition or refinancing of the underlying property. We may be unable to realize our investment objective by sale, other disposition, or refinancing at attractive prices within any given period of time, or we may otherwise be unable to complete any exit strategy. In particular, these risks could arise from weakness in or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions, and changes in laws, regulations, or fiscal policies of the jurisdiction in which the property is located. Further, certain significant expenditures generally do not change in response to economic or other conditions, such as (i) debt service, (ii) real estate taxes, and (iii) operating and maintenance costs. The inability to dispose of a property at an acceptable price or at all, as well as the combination of variable revenue and relatively fixed expenditures may result, under certain market conditions, in reduced earnings and could have an adverse effect on our financial condition.

Inflation may materially and adversely affect us and our tenants.

Increased inflation could lead to interest rate increases that could have a negative impact on variable rate debt we currently have or that we may incur in the future. During times when inflation is greater than the increases in rent provided by many of our leases, rent increases will not keep up with the rate of inflation. Increased costs may have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue, which may adversely affect the tenants’ ability to pay rent owed to us, which in turn could materially and adversely affect us.

Natural disasters, terrorist attacks, other acts of violence or war, or other unexpected events could materially and adversely impact us.

Natural disasters, terrorist attacks, other acts of violence or war, or other catastrophic events (e.g., hurricanes, floods, earthquakes, or other types of natural disasters or wars or other acts of violence) could cause damage to our properties, materially interrupt our business operations (or those of our tenants), cause consumer confidence and spending to decrease, or result in increased volatility in the U.S. and worldwide financial markets and economy. Such occurrences also could result in or prolong an economic recession in the United States. We own properties in regions that have historically been impacted by natural disasters and it is probable such regions will continue to be impacted by such events. If a disaster occurs, we could suffer a complete loss of capital invested in, and any profits expected from, the affected properties. Any of these occurrences could materially and adversely affect us.

We face risks associated with climate change, which could materially and adversely impact us.

As a result of climate change, our properties in certain markets could experience increases in storm intensity, flooding, drought, wildfires, rising sea levels, and extreme temperatures. The potential physical impacts of climate change on our properties are uncertain and would be particular to the geographic circumstances in areas in which we own property. Over time, these conditions could result in volatile or decreased demand for certain of our properties or, in extreme cases, the inability of our tenants to operate the properties at all. Climate change may also have indirect effects on our business by increasing the cost of insurance (or making insurance unavailable), increasing the cost of energy at our properties, or requiring us to spend funds to repair and protect our properties against such risks. Moreover, compliance with new laws or regulations related to climate change, including compliance with “green” building codes or other laws or regulations relating to reduction of carbon footprints and/or greenhouse gas emissions, may require us to make improvements to our existing properties or increase taxes and fees assessed on us or our properties. Any of these occurrences could materially and adversely impact us.

 

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Insurance on our properties may not adequately cover all losses and uninsured losses could materially and adversely affect us.

Our tenants are required to maintain comprehensive insurance coverage for the properties they lease from us pursuant to our net leases. Pursuant to such leases, our tenants are required to name us (and any of our lenders that have a mortgage on the property leased by the tenant) as additional insureds on their liability policies and additional named insured and/or loss payee (or mortgagee, in the case of our lenders) on their property policies. All tenants are required to maintain casualty coverage and most carry limits at 100% of replacement cost. Depending on the location of the property, losses of a catastrophic nature, such as those caused by earthquakes and floods, may be covered by insurance policies that are held by our tenant with limitations such as large deductibles or co-payments that a tenant may not be able to meet. In addition, losses of a catastrophic nature, such as those caused by wind/hail, hurricanes, terrorism, or acts of war, may be uninsurable or not economically insurable. In the event there is damage to our properties that is not covered by insurance and such properties are subject to recourse indebtedness, we will continue to be liable for the indebtedness, even if these properties are irreparably damaged. In addition, if uninsured damages to a property occur or a loss exceeds policy limits and we do not have adequate cash to fund repairs, we may be forced to sell the property at a loss or to borrow capital to fund the repairs.

Inflation, changes in building codes and ordinances, environmental considerations, and other factors, including terrorism or acts of war, may make any insurance proceeds we receive insufficient to repair or replace a property if it is damaged or destroyed. In that situation, the insurance proceeds received may not be adequate to restore our economic position with respect to the affected real property. Furthermore, in the event we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications without significant capital expenditures which may exceed any amounts received pursuant to insurance policies, as reconstruction or improvement of such a property would likely require significant upgrades to meet zoning and building code requirements. The loss of our capital investment in or anticipated future returns from our properties due to material uninsured losses could materially and adversely affect us.

Our costs of compliance with laws and regulations may reduce the investment return of our stockholders.

All real property and the operations conducted on real property are subject to numerous federal, state, and local laws and regulations. We cannot predict what laws or regulations will be enacted in the future, how future laws or regulations will be administered or interpreted, or how future laws or regulations will affect us or our properties, including, but not limited to, environmental laws and regulations and the Americans with Disabilities Act (“ADA”). Compliance with new laws or regulations, or stricter interpretation of existing laws, may require us or our tenants to incur significant expenditures, impose significant liability, restrict or prohibit business activities, and could cause a material adverse effect on us.

Compliance with the ADA may require us to make unanticipated expenditures that materially and adversely affect us.

Our properties are subject to the ADA. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. While our tenants are obligated by law to comply with the ADA and typically obligated under our leases to cover costs associated with compliance, if required changes involve greater expenditures than anticipated or if the changes must be made on a more accelerated basis than anticipated, the ability of our tenants to cover costs could be adversely affected. We could be required to expend our own funds to comply with the provisions of the ADA, which could materially and adversely affect us.

 

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Compliance with fire, safety, environmental, and other regulations may require us to make unanticipated expenditures that materially and adversely affect us.

We are required to operate our properties in compliance with fire and safety regulations, building codes, environmental regulations, and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We may be required to make substantial capital expenditures to comply with those requirements and may be required to obtain approvals from various authorities with respect to our properties, including prior to acquiring a property or when undertaking improvements of any of our existing properties. There can be no assurance that existing laws and regulatory policies will not adversely affect us or the timing or cost of any future acquisitions or improvements, or that additional regulations will not be adopted that increase such delays or result in additional costs. Additionally, failure to comply with any of these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. While we intend to only acquire properties that we believe are currently in substantial compliance with all regulatory requirements, these requirements may change and new requirements may be imposed which would require significant unanticipated expenditures by us and could materially and adversely affect us.

Risks Related to Debt Financing

As of June 30, 2020, on a pro forma basis, we had approximately $1.5 billion principal balance of indebtedness outstanding, which may expose us to the risk of default under our debt obligations.

As of June 30, 2020, on a pro forma basis, we had approximately $1.5 billion principal balance of indebtedness outstanding. We have incurred, and plan to incur in the future, financing through borrowings under term loans, senior notes, our Revolving Credit Facility, and mortgage loans secured by some or all of our properties. In some cases, the mortgage loans we incur are guaranteed by us, the OP, or both. We may also borrow funds if necessary to satisfy the requirement that we distribute to stockholders as dividends at least 90% of our annual REIT taxable income (computed without regard to the dividends paid deduction and our net capital gains), or otherwise as is necessary or advisable to assure that we maintain our qualification as a REIT for U.S. federal income tax purposes. Payments of principal and interest on borrowings may leave us with insufficient cash resources to meet our cash needs or make the distributions to our common stockholders currently contemplated or necessary to qualify as a REIT. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:

 

   

our cash flow may be insufficient to meet our required principal and interest payments;

 

   

cash interest expense and financial covenants relating to our indebtedness, including a covenant in our Revolving Credit Facility that restricts us from paying distributions if an event of default exists, other than distributions required to maintain our REIT status, may limit or eliminate our ability to make distributions to our common stockholders;

 

   

we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to capitalize upon investment opportunities or meet operational needs;

 

   

we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;

 

   

because a portion of our debt bears interest at variable rates, increases in interest rates would increase our interest expense;

 

   

we may be unable to hedge floating rate debt, counterparties may fail to honor their obligations under any hedge agreements we enter into, such agreements may not effectively hedge interest rate fluctuation risk, and, upon the expiration of any hedge agreements we enter into, we would be exposed to then-existing market rates of interest and future interest rate volatility;

 

   

we may be forced to dispose of properties, possibly on unfavorable terms or in violation of certain covenants to which we may be subject;

 

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we may default on our obligations and the lenders or mortgagees may foreclose on our properties or our interests in the entities that own the properties that secure their loans and receive an assignment of rents and leases;

 

   

we may be restricted from accessing some of our excess cash flow after debt service if certain of our tenants fail to meet certain financial performance metric thresholds;

 

   

we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations; and

 

   

our default under any loan with cross default provisions could result in a default on other indebtedness.

The occurrence of any of these events could materially and adversely affect us. Furthermore, foreclosures could create taxable income without accompanying cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code.

Disruptions in the financial markets and deteriorating economic conditions, due to COVID-19 or other factors, could adversely affect our ability to obtain debt financing on commercially reasonable terms and adversely impact our ability to implement our investment strategy and achieve our investment objectives.

The United States and global financial markets have experienced significant volatility and disruption in the past. During the mid-2000’s, there was a widespread tightening in overall credit markets, devaluation of the assets underlying certain financial contracts, and increased borrowing by governmental entities. The turmoil in the capital markets resulted in constrained equity and debt capital available for investment in the real estate market, resulting in fewer buyers seeking to acquire properties, increases in capitalization rates, and lower property values. Prior to the onset of the COVID-19 pandemic, capital had been more available, and the overall economy had improved. However, the deteriorating economic conditions arising from the pandemic have disrupted the financial markets and made debt financing for real estate transactions generally less available. Future events or sustained negative conditions may also reduce the availability of financing, make financing terms less attractive, as well as impact the value of our investments in properties. If sufficient sources of external financing are not available to us on cost effective terms, we could be forced to limit our planned business activities or take other actions to fund our business activities and repayment of debt such as selling assets or reducing our cash distributions. Uncertainty in the credit markets also could negatively impact our ability to make acquisitions, make it more difficult or impossible for us to sell properties, or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing.

Market conditions could adversely affect our ability to refinance existing indebtedness on acceptable terms or at all, which could materially and adversely affect us.

We use external financing to refinance indebtedness as it matures and to partially fund our acquisitions. Credit markets may experience significant price volatility, displacement, and liquidity disruptions, including the bankruptcy, insolvency, or restructuring of certain financial institutions. As a result, we may be unable to fully refinance maturing indebtedness with new indebtedness, which could materially and adversely affect us. Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase. Higher interest rates on newly incurred debt may negatively impact us as well. If interest rates increase, our interest costs and overall costs of capital will increase, which could materially and adversely affect us and our ability to make distributions to our stockholders.

We may incur mortgage debt on a particular property, which may subject us to certain risks, and the occurrence of any such risk could materially and adversely affect us.

We may incur mortgage debt on a particular property, especially if we believe the property’s projected cash flow is sufficient to service the mortgage debt. In addition, incurring mortgage debt may increase the risk of loss

 

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since defaults on indebtedness secured by a property may result in foreclosure actions initiated by lenders and our loss of the property securing the loan that is in default. For U.S. federal income tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure but would not receive any of the proceeds. We may give full or partial guarantees to lenders to the OP or its affiliates. If we give a guaranty on behalf of the OP, we will be responsible to the lender for satisfaction of the debt if it is not paid by the OP. If any mortgages contain cross-collateralization or cross-default provisions, there is a risk that more than one of our real properties may be affected by a default. If any of our properties are foreclosed upon due to a default, we could be materially and adversely affected.

An inability to refinance existing mortgage debt as it matures could materially and adversely affect us.

Since the mortgage loans secured by certain of our properties amortize over a period longer than their maturity, we will owe substantial amounts of principal on the maturity of such loans. If we cannot refinance these loans on favorable terms, more of our cash from operations may be required to service the loans, properties may have to be sold to fund principal repayments, or properties may be lost to foreclosure, which could materially and adversely affect us.

Failure to hedge effectively against interest rate changes may materially and adversely affect us.

To reduce our exposure to variable-rate debt, we enter into interest rate swap agreements to fix the rate of interest as a hedge against interest rate fluctuations on floating-rate debt. These arrangements involve risks and may not be effective in reducing our exposure to interest rate changes. In addition, the counterparties to any hedging arrangements we enter into may not honor their obligations. Failure to hedge effectively against changes in interest rates relating to the interest expense of our future floating-rate borrowings may materially and adversely affect us.

Our Revolving Credit Facility and term loan agreements contain various covenants which, if not complied with, could accelerate our repayment obligations, thereby materially and adversely affecting us.

We are subject to various financial and operational covenants and financial reporting requirements pursuant to the agreements we have entered into governing our Revolving Credit Facility, term loans, and senior notes. These covenants require us to, among other things, maintain certain financial ratios, including leverage, fixed charge coverage, and debt service coverage, among others. As of June 30, 2020, we believe we were in compliance with all of our loan covenants. Our continued compliance with these covenants depends on many factors and could be impacted by current or future economic conditions, and thus there are no assurances that we will continue to comply with these covenants. Failure to comply with these covenants would result in a default which, if we were unable to cure or obtain a waiver from the lenders, could accelerate our repayment obligations and thereby have a material and adverse impact on us.

Further, these covenants, as well as any additional covenants to which we may be subject in the future because of additional borrowings, could cause us to forego investment opportunities, reduce or eliminate distributions to our common stockholders, or obtain financing that is more expensive than financing we could obtain if we were not subject to the covenants. Additionally, these restrictions may adversely affect our operating and financial flexibility and may limit our ability to respond to changes in our business or competitive environment, all of which may materially and adversely affect us.

Failure to maintain our current credit rating could materially and adversely affect our cost of capital, liquidity, and access to capital markets.

The spread we pay over London Interbank Offered Rate (“LIBOR”) for our unsecured credit facilities is determined based upon our credit rating. In March 2016, Moody’s assigned the OP an investment grade credit

 

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rating of Baa3 with a stable outlook, which was re-affirmed most recently in July 2020. The rating is based on a number of factors, including an assessment of our financial strength, portfolio size and diversification, credit and operating metrics, and sustainability of cash flow and earnings. If we are unable to maintain our current credit rating it could adversely affect our cost of capital, liquidity, and access to capital markets. Factors that could negatively impact our credit rating include, but are not limited to: a significant increase in our leverage on a sustained basis; a significant increase in the proportion of secured debt levels; a significant decline in our unencumbered asset base; and a significant decline in our portfolio diversification.

We may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined.

As of June 30, 2020, on a pro forma basis, we had approximately $969.8 million of debt outstanding for which the interest rate was tied to LIBOR. Additionally, as of June 30, 2020, we had entered into interest rate swaps totaling $859.8 million that fix the LIBOR component of our debt through various tenors. On July 27, 2017, the Financial Conduct Authority (the “FCA”) that regulates LIBOR announced its intention to cease sustaining LIBOR after 2021. It is not possible to predict the effect of the FCA’s announcement, and there is currently no definitive information regarding the future utilization of LIBOR, including any changes in the methods by which LIBOR is determined, the frequency in which LIBOR is determined and published, or any other reforms to the determination and publication of LIBOR, or a potential transition from LIBOR to a successor benchmark. As such, the potential effect of any such event on our cost of capital cannot yet be determined and any changes to benchmark interest rates could increase our financing costs, which could impact our results of operations and cash flows.

The Alternative Reference Rates Committee (“ARRC”) has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for USD LIBOR in derivatives and other financial contracts. We are not able to predict whether LIBOR will cease to be available after 2021 or whether SOFR will replace LIBOR as the market benchmark. Any changes adopted by FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.

We are monitoring and evaluating the related risks which arise in connection with transitioning contracts to a new alternative rate, including any resulting value transfer that may occur. While we expect LIBOR to be available in substantially its current form until the end of 2021, it is possible that it will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified. We are in the process of reviewing our long-term debt agreements and interest rate swap contracts to identify those that do not contain fallback language to identify alternate interest rate indices that could be substituted for LIBOR should it be discontinued. All but one of our variable-rate term loan agreements contain such provisions. We plan to ensure that appropriate fallback language is included in future loan and swap contracts executed between now and 2021, and to amend existing contracts that extend beyond 2021 as necessary.

Risks Related to Our Organizational Structure

Our Charter contains provisions, including ownership and transfer restrictions, that may delay, discourage, or prevent a takeover or change of control transaction that could otherwise result in a premium price to our stockholders.

Our Charter contains various provisions that are intended to facilitate our qualification as a REIT. For example, our Charter restricts the direct or indirect ownership by one person or entity to no more than 9.8% of

 

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the value of our then outstanding shares of capital stock and no more than 9.8% of the value or number of shares, whichever is more restrictive, of our then outstanding Common Stock (including our Class A Common Stock) unless exempted by our board of directors. This restriction may discourage a change of control of us and may deter individuals or entities from making tender offers for shares of our Common Stock (including our Class A Common Stock) on terms that might be financially attractive to stockholders or which may cause a change in our management. In addition to deterring potential change of control transactions that may be favorable to our stockholders, these provisions may also decrease our stockholders’ ability to sell their shares of our Common Stock (including our Class A Common Stock). As a result, these charter provisions may negatively impact the market price of our Common Stock (including our Class A Common Stock).

We may issue preferred stock or separate classes or series of Common Stock, which could adversely affect the holders of our Common Stock (including our Class A Common Stock).

Upon completion of this offering, our Charter will authorize us to issue up to 520,000,000 shares of stock, and our board of directors, without any action by our stockholders, may amend our Charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Holders of shares of our Common Stock (including our Class A Common Stock) do not have preemptive rights to acquire any shares issued by us in the future.

In addition, our board of directors may classify or reclassify any unissued shares of our Common Stock (including our Class A Common Stock) or preferred stock and establish the preferences, rights, and powers of any such stock. As a result, our board of directors could authorize the issuance of preferred stock or separate classes or series of Common Stock with terms and conditions that could have priority, with respect to distributions and amounts payable upon our liquidation, over the rights of our Common Stock (including our Class A Common Stock). The issuance of shares of such preferred or separate classes or series of Common Stock could dilute the value of an investment in shares of our Common Stock (including our Class A Common Stock). The issuance of shares of preferred stock or a separate class or series of Common Stock could provide the holders thereof with specified dividend payments and payments upon liquidation prior or senior to those of the Common Stock (including our Class A Common Stock), and could also have the effect of delaying, discouraging, or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer, or sale of all or substantially all of our assets) that might provide a premium price for holders of our Common Stock (including our Class A Common Stock).

Termination of the Employment Agreements with certain members of our senior management team could be costly.

The Employment Agreements with certain members of our senior management team provide that if their employment with us terminates under certain circumstances (including in connection with a change in control of our Company), we may be required to pay them significant amounts of severance compensation, thereby making it costly to terminate their employment.

We may experience adverse consequences as a result of the Internalization.

The Internalization closed on February 7, 2020, through which we acquired the entities that previously performed advisory and management services for us. The Internalization involved the termination of contractual arrangements with BRE, the onboarding of employees by us, and the assumption of contractual relationships and integration of services by us. There is no guarantee that the Internalization will be successful or achieve the results in the timeframe we expect or at all. In addition, as a self-managed REIT, we may encounter unforeseen costs, expenses, and difficulties associated with providing these services on a self-advised basis, which may materially adversely affect us.

 

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Our ability to recover any loss that we may suffer as a result of the Internalization may be limited.

On November 11, 2019, we, the OP, BRE, certain of BRE’s shareholders, and other related parties entered into the Merger Agreement relating to the Internalization. The Merger Agreement contained customary representations and warranties, including representations from BRE regarding, among other things, its organization, capitalization, operations, taxes, employee matters, and liabilities (including those, if any, retained by BRE in connection with the sale of the Unrelated Businesses). The representations and warranties of the parties in the Merger Agreement did not survive the closing of the Internalization and any alleged inaccuracies in or breaches of these representations and warranties, including those made by BRE to us, will not serve as the basis for any post-closing indemnification claims. We purchased a representations and warranties insurance policy against which we will be able to make claims in the event that the representations and warranties of BRE or other parties to us prove to have been inaccurate. The insurance policy is subject to exceptions and limitations, and there can be no assurance that we would be able to successfully recover any loss that we may suffer arising from a breach of a representation or warranty under the Merger Agreement, and as a result, we may be materially adversely affected.

Our board of directors may change our investment and financing policies without stockholder approval, which could materially and adversely alter the nature of an investment in us.

The methods of implementing our investment policies and strategy may vary as new real estate development trends emerge, new investment techniques are developed, and market conditions evolve. Our investment and financing policies are exclusively determined by our board of directors and senior management team. Accordingly, our stockholders do not control these policies. Further, our organizational documents do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. Although we are not required to maintain a particular leverage ratio, we generally intend to maintain on a sustained basis a level of net debt that is generally less than six times our annualized adjusted EBITDAre. However, from time to time, our ratio of net debt to our annualized adjusted EBITDAre may exceed six times. Our board of directors may alter or eliminate our current policy on borrowing at any time without stockholder approval. If this policy changed, we could become more highly leveraged, which could result in an increase in our debt service costs and obligations. Higher leverage also increases the risk of default on our obligations. In addition, a change in our investment policies, including the manner in which we allocate our resources across our portfolio or the types of assets in which we seek to invest, may increase our exposure to interest rate risk, real estate market fluctuations, and liquidity risk. Changes to our policies with regard to the foregoing could materially and adversely affect us.

Our rights and the rights of our stockholders to take action against our directors and officers are limited.

Maryland law provides that a director of a Maryland corporation will not have any liability in that capacity if he or she performs his or her duties in accordance with the applicable standard of conduct. Our Charter limits the liability of our directors and officers to us and our stockholders for money damages to the maximum extent permitted by Maryland law. Therefore, our directors and officers are subject to monetary liability resulting only from:

 

   

actual receipt of an improper benefit or profit in money, property, or services; or

 

   

active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated.

As a result, we and our stockholders have rights against our directors and officers that are more limited than might otherwise exist. Accordingly, in the event that actions taken by any of our directors or officers impede the performance of our Company, your and our ability to recover damages from such director or officer will be limited. Our Charter and Second Amended and Restated Bylaws also require us to indemnify and advance expenses to our directors and our officers for losses they may incur by reason of their service in those capacities subject to any limitations under Maryland law or in our Charter. Moreover, we have entered into separate indemnification agreements with each of our directors and executive officers. As a result, we and our

 

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stockholders may have more limited rights against these persons than might otherwise exist under common law, which could reduce our stockholders’ and our recovery against such persons. In addition, we may be obligated to fund the defense costs incurred by these persons in some cases, which would reduce the cash available for distributions.

We are a holding company with no direct operations and rely on funds received from the OP to pay liabilities.

We are a holding company and conduct substantially all of our operations through the OP. We do not have, apart from an interest in the OP, any independent operations. As a result, we rely on distributions from the OP to pay any distributions we might declare on shares of our Common Stock (including our Class A Common Stock). We will also rely on distributions from the OP to meet any of our obligations, including any tax liability on taxable income allocated to us from the OP. In addition, because we are a holding company, your claims as stockholders are structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of the OP and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation, or reorganization, our assets and those of the OP and its subsidiaries will be able to satisfy the claims of our stockholders only after all of our and the OP and its subsidiaries’ liabilities and obligations have been paid in full.

Our UPREIT structure may result in potential conflicts of interest between the interests of our stockholders and members in the OP, which may materially and adversely impede business decisions that could benefit our stockholders.

Conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and the OP or any future member thereof, on the other. Our directors and officers have duties to our Company under applicable Maryland law in connection with the management of our Company. At the same time, we, as the managing member of the OP, will have fiduciary duties and obligations to the OP and its members under New York law and the limited liability company agreement of the OP in connection with the management of the OP. Our fiduciary duties and obligations, as the managing member of the OP, and its members may come into conflict with the duties of our directors and officers to our Company.

While we intend to avoid situations involving conflicts of interest, there may be situations in which the interests of the OP may conflict with the interests of us. Our activities specifically authorized by or described in the OP Agreement may be performed by us and will not, in any case or in the aggregate, be deemed a breach of the OP Agreement or any duty owed by us to the OP or any member. In exercising our authority under the OP Agreement, we may, but are under no obligation to, take into account the tax consequences of any action we take. We and the OP have no liability to a non-managing member under any circumstances as a result of an income tax liability incurred by such non-managing member as a result of an action (or inaction) by us pursuant to our authority under the OP Agreement.

The OP Agreement provides that the managing member will not be liable to the OP, its members, or any other person bound by the OP Agreement for monetary damages for losses sustained, liabilities incurred, or benefits not derived by the OP or any member, except for liability for the member’s gross negligence or willful misconduct. Moreover, the OP Agreement provides that the OP is required to indemnify the managing member, its affiliates, and certain related persons, and any manager, officer, stockholder, director, member, employee, representative, or agent of the managing member or its affiliates from and against any and all claims that relate to the operations of the OP, except if (1) the act was committed in bad faith, (ii) the act was the result of active and deliberate dishonesty and was material to the cause of action involved, or (iii) it personally gained in fact a financial income or other advantage to which it was not entitled under law.

 

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We are an “emerging growth company,” and we cannot be certain if the reduced SEC reporting requirements applicable to emerging growth companies will make our Common Stock (including our Class A Common Stock) less attractive to investors, which could make the market price and trading volume of our Common Stock (including our Class A Common Stock) more volatile and decline significantly.

We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which we have total annual gross revenue of $1.07 billion or more (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the first sale of our common stock pursuant to an effective registration statement, (iii) the date on which we have, during the previous 3-year period, issued more than $1.0 billion in non-convertible debt, or (iv) the date on which we are deemed to be a “large accelerated filer.” We intend to take advantage of exemptions from various reporting requirements that are applicable to most other public companies, whether or not they are classified as “emerging growth companies,” including, but not limited to, an exemption from the provisions of Section 404(b) of Sarbanes-Oxley requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting. An attestation report by our auditor would require additional procedures by them that could detect problems with our internal control over financial reporting that are not detected by management. If our system of internal control over financial reporting is not determined to be appropriately designed or operating effectively, it could require us to restate financial statements, cause us to fail to meet reporting obligations, and cause investors to lose confidence in our reported financial information, all of which could lead to a significant decline in the market price of our Common Stock (including our Class A Common Stock). The JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in the Securities Act, for complying with new or revised accounting standards. However, we have chosen to “opt out” of this extended transition period and, as a result, we will comply with new or revised accounting standards on or prior to the relevant dates on which adoption of such standards is required for all public companies that are not emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. We cannot predict if investors will find our Common Stock or our Class A Common Stock, as applicable, less attractive because we intend to rely on certain of these exemptions and benefits under the JOBS Act. If some investors find our Common Stock or Class A Common Stock, as applicable, less attractive as a result, there may be a less active, liquid, and/or orderly trading market for our Common Stock (including our Class A Common Stock) and the market price and trading volume of our Common Stock (including our Class A Common Stock) may be more volatile and decline significantly.

The value of an investment in our Common Stock (including our Class A Common Stock) may be reduced if we are required to register as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”) and, if we are subject to registration under the Investment Company Act, we will not be able to continue our business.

Neither we, the OP, nor any of our subsidiaries intend to register as an investment company under the Investment Company Act. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act that would impose significant and onerous limitations on our operations, as well as require us to comply with various reporting, record keeping, voting, proxy disclosure, and other rules and regulations that would significantly alter our operations and significantly increase our operating expenses.

We believe that we, the OP, and the subsidiaries of the OP do not and will not fall within the definition of investment company under Section 3(a)(1) of the Investment Company Act as we intend to invest primarily in real property through our wholly or majority-owned subsidiaries. Accordingly, we believe that we and the OP are and will be primarily engaged in the non-investment company business of such subsidiaries and therefore will not fall within the aforementioned definition of investment company.

To ensure that neither we nor any of our subsidiaries, including the OP, are required to register as an investment company, each entity may be unable to sell assets that it would otherwise want to sell and may need

 

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to sell assets that it would otherwise wish to retain. In addition, we, the OP, or our subsidiaries may be required to acquire additional income- or loss-generating assets that we might not otherwise acquire or forego opportunities to acquire interests in companies that we would otherwise want to acquire. Although we, the OP, and our subsidiaries intend to monitor our portfolio periodically and prior to each acquisition and disposition, any of these entities may not be able to remain outside the definition of investment company or maintain an exclusion from the definition of investment company. If we, the OP, or our subsidiaries are required to register as an investment company but fail to do so, the unregistered entity would be prohibited from engaging in our business, and criminal and civil actions could be brought against such entity. In addition, the contracts of such entity would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of the entity and liquidate its business.

U.S. Federal Income Tax Risks

Failure to qualify as a REIT would materially and adversely affect us and the value of our Common Stock (including our Class A Common Stock).

We elected to qualify to be taxed as a REIT under Sections 856 through 860 of the Code and the applicable U.S. Treasury regulations, beginning with our taxable year ended December 31, 2008. We believe that we have been organized and operated in a manner to qualify for taxation as a REIT for U.S. federal income tax purposes commencing with such year, and we intend to continue operating in such a manner. However, we cannot assure you that we have qualified as a REIT, or that we will remain qualified as such in the future. If we lose our REIT status, we will face significant tax consequences that would substantially reduce our cash available for distribution to our stockholders for each of the years involved because:

 

   

we would not be allowed a deduction for distributions to stockholders in computing our taxable income and would be subject to U.S. federal income tax at the corporate rate;

 

   

we also could be subject to the federal alternative minimum tax for taxable years beginning before January 1, 2018, and increased state and local income taxes;

 

   

unless we are entitled to relief under applicable statutory provisions of the Code, we could not elect to be taxed as a REIT for four taxable years following the year during which qualification was lost; and

 

   

for the five years following re-election of REIT status, upon a taxable disposition of an asset owned as of such re-election, we would be subject to corporate level tax with respect to any built-in gain inherent in such asset at the time of re-election.

Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our operations and distributions to stockholders. In addition, if we fail to qualify as a REIT, we will not be required to make distributions to our stockholders. If this occurs, we may need to borrow funds or liquidate some of our properties in order to pay any applicable taxes. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to execute our growth strategy and raise capital, and could materially and adversely affect the trading price of our Common Stock (including our Class A Common Stock).

Qualification as a REIT involves the application of technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the ownership of our stock, requirements regarding the composition of our assets and a requirement that at least 95% of our gross income in any year must be derived from qualifying sources, such as “rents from real property.” Also, we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gains. In addition, legislation, new regulations, administrative interpretations, or court decisions may materially and adversely affect our investors, our ability to qualify as a REIT for U.S. federal income tax purposes, or the desirability of an investment in a REIT relative to other investments.

 

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Even if we remain qualified as a REIT for U.S. federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to our stockholders.

Even if we remain qualified as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state, and local income, property, and excise taxes on our income or property. For example:

 

   

In order to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income to our stockholders (computed without regard to the dividends paid deduction and our net capital gain), and to the extent that we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income (computed without regard to the dividends paid deduction and including our net capital gain), we will be subject to U.S. federal corporate income tax on the undistributed income, as well as applicable state and local income taxes.

 

   

If we should fail to distribute, or fail to be treated as having distributed, with respect to each calendar year at least the sum of (i) 85% of our REIT ordinary income for such year, (ii) 95% of our REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, we would be subject to a 4% nondeductible excise tax on the excess of such required distribution over the sum of (a) the amounts actually distributed and (b) the amounts we retained and upon which we paid U.S. federal income tax at the corporate level.

 

   

If we have (i) net income from the sale or other disposition of “foreclosure property” that is held primarily for sale to customers in the ordinary course of business or (ii) other non-qualifying net income from foreclosure property, we will be subject to tax at the U.S. federal corporate income tax rate on such income. To the extent that income from “foreclosure property” is otherwise qualifying income for purposes of the 75% gross income test, this tax is not applicable.

 

   

If we have net income from prohibited transactions (which are, in general, certain sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, other than sales of foreclosure property and sales that qualify for certain statutory safe harbors), such income will be subject to a 100% tax.

 

   

We may be subject to tax on gain recognized in a taxable disposition of assets acquired from a non-REIT C corporation by way of a carryover basis transaction, when such gain is recognized on a disposition of an asset during a 5-year period beginning on the date on which we acquired the asset. To the extent of any “built-in gain,” such gain will be subject to U.S. federal income tax at the federal corporate income tax rate. Built-in gain means the excess of (i) the fair market value of the asset as of the beginning of the applicable recognition period over (ii) our adjusted basis in such asset as of the beginning of such recognition period.

 

   

We may perform additional, non-customary services for tenants of our buildings through a taxable REIT subsidiary (“TRS”), including real estate or non-real estate related services; however, any earnings that exceed allowable limits related to such services are subject to federal and state income taxes.

In addition, TRSs will be subject to tax as regular corporations in the jurisdictions in which they operate.

If the OP fails to qualify as a partnership for U.S. federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.

We believe that the OP will be treated as a partnership for U.S. federal income tax purposes. As a partnership, the OP would generally not be subject to U.S. federal income tax on its income. Instead, for U.S. federal income tax purposes, if the OP is treated as a partnership, each of its partners, including us, would be allocated, and may be required to pay tax with respect to, such partner’s share of its income. The OP may be required to determine and pay an imputed underpayment of tax (plus interest and penalties) resulting from an adjustment of the OP’s items of income, gain, loss, deduction, or credit at the partnership level. We cannot assure

 

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you that the IRS will not challenge the status of the OP or any other subsidiary partnership in which we own an interest as a disregarded entity or partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating the OP or any such other subsidiary partnership as an entity taxable as a corporation for U.S. federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of the OP or any subsidiary partnerships to qualify as a disregarded entity or partnership could cause it to become subject to U.S. federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including us.

To satisfy the REIT distribution requirements, we may be forced to take certain actions to raise funds if we have insufficient cash flow which could materially and adversely affect us and the trading price of our Common Stock (including our Class A Common Stock).

To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, computed without regard to the dividends paid deduction and our net capital gains, and we will be subject to corporate income tax on our undistributed taxable income to the extent that we distribute less than 100% of our REIT taxable income each year, computed without regard to the dividends paid deduction. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. In order to satisfy these distribution requirements to maintain our REIT status and avoid the payment of income and excise taxes, we may need to take certain actions to raise funds if we have insufficient cash flow, such as borrowing funds, raising additional equity capital, selling a portion of our assets or finding another alternative to make distributions to our stockholders. We may be forced to take those actions even if the then-prevailing market conditions are not favorable for those actions. This situation could arise from, among other things, differences in timing between the actual receipt of cash and recognition of income for U.S. federal income tax purposes, or the effect of non-deductible capital expenditures or other non-deductible expenses, the creation of reserves, or required debt or amortization payments. Such actions could increase our costs and reduce the value of our Common Stock (including our Class A Common Stock). These sources, however, may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of factors, including the market’s perception of our growth potential, our current debt levels, the market price of our Common Stock (including our Class A Common Stock), and our current and potential future earnings. We cannot assure you that we will have access to such capital on favorable terms at the desired times, or at all, which may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, and could materially and adversely affect us and the trading price of our Common Stock (including our Class A Common Stock).

Further, to qualify as a REIT, we must also satisfy tests on an ongoing basis concerning, among other things, the sources of our income, nature of our assets, and the amounts we distribute to our stockholders. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Compliance with the REIT Requirements (as defined below in “Material U.S. Federal Income Tax Considerations—Taxation of our Company”) may hinder our ability to operate solely on the basis of maximizing profits.

The IRS may treat sale-leaseback transactions as loans, which could jeopardize our REIT status or require us to make an unexpected distribution.

We may purchase properties and lease them back to the sellers of such properties. The IRS may take the position that certain of these sale-leaseback transactions that we treat as leases are not “true leases” but are, instead, financing arrangements or loans for U.S. federal income tax purposes.

If a sale-leaseback transaction were so re-characterized, we might fail to satisfy the REIT asset tests, the income tests, or distribution requirements and consequently lose our REIT status effective with the year of

 

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re-characterization unless we elect to make an additional distribution to maintain our REIT status. The primary risk relates to the disallowance of deductions for depreciation and cost recovery relating to such property, which could affect the calculation of our REIT taxable income and could cause us to fail the REIT distribution requirement that requires a REIT to distribute at least 90% of its REIT taxable income, computed without regard to the dividends paid deduction and any net capital gain. In this circumstance, we may elect to distribute an additional dividend of the increased taxable income so as not to fail the REIT distribution test. This distribution would be paid to all stockholders at the time of declaration rather than the stockholders that held our shares in the taxable year affected by the re-characterization.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum U.S. federal income tax rate applicable to income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts, and estates is 20%. Ordinary dividends payable by REITs, however, generally are not eligible for the 20% rate applicable to “qualified dividends” except to the extent the REIT dividends are attributable to “qualified dividends” received by the REIT itself or generally attributable to income upon which we (or a predecessor) have paid U.S. federal corporate income tax. However, for non-corporate U.S. stockholders, ordinary dividends payable by REITs that are not designated as capital gain dividends or treated as “qualified dividends” generally are eligible for a deduction of 20% of the amount of such ordinary REIT dividends, for taxable years beginning before January 1, 2026. More favorable rates will nevertheless continue to apply for regular corporate “qualified dividends.” Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the 20% rate continues to apply to regular corporate qualified dividends, investors who are individuals, trusts and estates may regard investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations.

The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for U.S. federal income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors.

Complying with the REIT Requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The REIT provisions of the Code substantially limit our ability to hedge our assets and liabilities. Any income from a hedging transaction that we enter into to manage the risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets, or from certain terminations of such hedging positions, does not constitute “gross income” for purposes of the 75% or 95% gross income tests that apply to REITs, provided that certain identification requirements are met. To the extent that we enter into other types of hedging transactions or fail to properly identify such transaction as a hedge, the income is likely to be treated as non-qualifying income for purposes of the 75% and 95% gross income tests. See “Material U.S. Federal Income Tax Considerations.” As a result of these rules, we may be required to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because any TRS in which we own an interest may be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in any TRS in which we own an interest will generally not provide any tax benefit, except that such losses may only be carried forward and may only be deducted against 80% of future taxable income in such TRS. However, under the CARES Act, losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021

 

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may generally be carried back up to five taxable years preceding the tax year of such loss and the 80% limitation is eliminated for taxable years beginning before January 1, 2021, during which such losses may offset 100% of taxable income.

Complying with the REIT Requirements may force us to liquidate or forgo otherwise attractive investments.

To qualify as a REIT, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income, and the amounts we distribute to our stockholders. See “Material U.S. Federal Income Tax Considerations.” In connection with the Internalization, we were treated as having acquired substantial amounts of goodwill that may not qualify for the 75% asset test. Compliance with these limitations, particularly given the goodwill that we acquired in the Internalization, may hinder our ability to make, and, in certain cases, maintain ownership of certain attractive investments that might not qualify for the 75% asset test. If we fail to comply with the REIT asset test requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate or forgo otherwise attractive investments in order to satisfy the asset and income tests or to qualify under certain statutory relief provisions. These actions could have the effect of reducing our income, increasing our income tax liability, and reducing amounts available for distribution to our stockholders. In addition, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, and may be unable to pursue investments (or, in some cases, forego the sale of such investments) that would be otherwise advantageous to us in order to satisfy the REIT Requirements. Accordingly, satisfying the REIT Requirements could materially and adversely affect us. Moreover, if we are compelled to liquidate our investments to meet any of these asset, income, or distribution tests, or to repay obligations to our lenders, we may be unable to comply with one or more of the requirements applicable to REITs or may be subject to a 100% tax on any resulting gain if such sales constitute prohibited transactions.

In certain circumstances, we may be liable for certain tax obligations of certain of the members of the OP.

In certain circumstances, we may be liable for tax obligations of certain of the members of the OP. In connection with certain UPREIT transactions, we have entered or will enter into tax protection agreements under which we have agreed to indemnify members of the OP against adverse tax consequences if we were to sell, convey, transfer, or otherwise dispose of our assets in taxable transactions, with specific exceptions and limitations. Pursuant to the tax protection agreements, we have also agreed to ensure that such members of the OP are allocated minimum amounts of the OP’s indebtedness. If we fail to meet our obligations under the tax protection agreements, we may be required to reimburse those members of the OP for the amount of the tax liabilities they incur, subject to certain limitations. We may enter into additional tax protection agreements in the future in connection with other UPREIT transactions. Although it may be in our stockholders’ best interest that we sell a property, it may be economically disadvantageous for us to do so because of these obligations. In order to limit our exposure to a tax obligation, our use of proceeds from any sales or dispositions of certain properties will be limited. With respect to the existing tax protection agreements with property contributors (excluding the Internalization), as of June 30, 2020, our potential indemnification obligation for the taxable sale of those properties is approximately $12.3 million.

In connection with the Internalization, we entered into the Founding Owners’ Tax Protection Agreement, pursuant to which we have agreed to indemnify the Founding Owners against the applicable income tax liabilities resulting from: (1) the sale, exchange, transfer, conveyance, or other disposition of the assets of BRE that we acquired in the Internalization (the “Contributed Property”) in a taxable transaction prior to February 7, 2030; and (2) our failure to offer the Founding Owners the opportunity to guarantee specific types of the OP’s indebtedness in order to enable them to continue to defer the applicable income tax liabilities associated with the allocation of that indebtedness. Our maximum liability under the Founding Owners’ Tax Protection Agreement is capped at $10 million. The aggregate built-in gain on the Contributed Property that would be allocable to the Founding Owners is estimated to be approximately $128.6 million.

 

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The Blocker Corp Mergers may have adverse tax consequences.

As a general matter, notwithstanding that we qualify to be taxed as a REIT for U.S. federal income tax purposes, if we acquire appreciated assets from a non-REIT C corporation in a transaction in which the adjusted tax basis of the assets in its hands is determined by reference to the adjusted tax basis of the assets in the hands of the C corporation, we will be subject to entity-level tax on any gain recognized in connection with a disposition (such as a taxable sale) of any such assets during the 5-year period following such acquisition. In addition, in order to qualify as a REIT, we must not have, at the end of any taxable year, any earnings and profits accumulated in a non-REIT year.

Because each of Trident BRE Holdings I, Inc. and Trident BRE Holdings II, Inc. (the “Blocker Corps”) were taxable as a non-REIT C corporation and we acquired their appreciated assets in connection with the Internalization in transactions (the “Blocker Corp Mergers”) in which the adjusted tax basis of the assets in our hands was determined by reference to the adjusted tax basis of the assets in the hands of each of the Blocker Corps prior to the Blocker Corp Mergers, we will be subject to corporate income tax on the “built-in gain” with respect to the Blocker Corps’ assets at the time of the Blocker Corp Mergers if we dispose of those assets in a taxable transaction within five years following the Blocker Corp Mergers. This built-in gain is measured by the difference between the value of the Blocker Corps’ assets at the time of the Blocker Corp Mergers and the adjusted basis in those assets. We estimate this built-in gain to be approximately $44.6 million. The assets of the Blocker Corps we acquired in the Blocker Corp Mergers are the Blocker Corps’ interests in BRE. When BRE merged into the OP in a tax-deferred transaction and the Blocker Corps received OP Units, the built-in gain associated with the Blocker Corps’ assets became represented as part of an intangible asset on our balance sheet. The disposition of that intangible asset in a taxable transaction within five years following the Blocker Corp Mergers could trigger a corporate income tax on that built-in gain. The most likely transaction in which that intangible asset is disposed of would be a sale of the OP (or our interest in the OP) in a taxable transaction. Thus, if the OP (or our interest in the OP) is sold in a taxable transaction within five years following the Blocker Corp Mergers, we could incur a corporate income tax on approximately $44.6 million of built-in gain.

Because the Blocker Corps were each taxable as a regular C corporation, we succeeded to any earnings and profits accumulated by the Blocker Corps for taxable periods prior to and including the Blocker Corp Mergers, referred to as “C corporation earnings and profits.” To qualify as a REIT, we cannot have any C corporation earnings and profits at the end of any taxable year. We estimate the C corporation earnings and profits of the Blocker Corps to be approximately $14.2 million in total at the time of the Blocker Corp Mergers and we expect to utilize a nationally recognized accounting firm to prepare a study to assist management in confirming that calculation. During 2020, we expect to make sufficient distributions in excess of our earnings and profits (including the C corporation earnings and profits from the Blocker Corps) so we will not have to pay a special dividend to eliminate such C corporation earnings and profits. In effect, the inclusion of the C corporation earnings and profits from the Blocker Corps increased the portion of our distributions during 2020 that are taxable as dividends. However, if we were determined to succeed to more C corporation earnings and profits as a result of the Blocker Corp Mergers or we were to have less distributions than expected during 2020, we may have to pay a special dividend and/or employ applicable deficiency dividend procedures to eliminate such earnings and profits. If we need to make a special dividend or pay a deficiency dividend and do not otherwise have cash on hand to do so, we may need to (i) sell assets at unfavorable prices, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures, or repayment of debt, or (iv) make a taxable distribution of Common Stock (or Class A Common Stock, as applicable) as part of a distribution in which stockholders may elect to receive Common Stock (or Class A Common Stock, as applicable) or cash (subject to a limit measured as a percentage of the total distribution), in order to comply with REIT Requirements. These alternatives could increase our costs or reduce our equity. In addition, if we were to rely upon the remedial deficiency dividend procedures, we would be required to pay interest based on the amount of any such deficiency dividends.

In addition to the foregoing, as a result of the Blocker Corp Mergers, we inherited any liability with respect to unpaid taxes of each of the Blocker Corps for any periods prior to the Blocker Corp Mergers.

 

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Changes to the U.S. federal income tax laws, including the recent enactment of certain tax reform measures, could have a material and adverse effect on us.

The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury, which may result in revisions to regulations and interpretations in addition to statutory changes. No assurance can be given as to whether, or in what form, any proposals affecting REITs or their stockholders will be enacted.

In particular, Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “TCJA”), for which only limited guidance has been issued to date, significantly reforms the Code with respect to the taxation of both individuals and corporate entities, and there are numerous interpretive issues and ambiguities that are not yet clearly addressed, which require further guidance, including possibly in some cases, technical corrections. It is unclear if and when such guidance will be forthcoming, or in the case of technical corrections, will be enacted. Future regulatory guidance and legislation may significantly affect the impact of the TCJA. Changes to the U.S. federal tax laws and interpretations thereof could adversely affect an investment in our Common Stock (including our Class A Common Stock).

While some of the changes made by the TCJA may adversely affect us, other changes may be beneficial on a going forward basis. The TCJA made numerous other large and small changes to the tax rules that do not affect REITs directly but may affect our stockholders and may indirectly affect us. In addition, on March 27, 2020, Public Law No. 116-136, known as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act, among other things, modifies certain provisions of the TCJA. See “—Legislative or Other Actions Affecting REITs.”

There may also be future changes in U.S. federal tax laws, regulations, rules, and judicial and administrative interpretations applicable to us and our business, the effect of which cannot be predicted. Our stockholders and prospective investors are urged to consult with their own tax advisors with respect to the TCJA, the CARES Act and the status of other legislative, regulatory, or administrative developments and proposals and their potential effect on an investment in shares of our Common Stock (including our Class A Common Stock).

Risks Related to this Offering and Ownership of Our Common Stock (Including Our Class A Common Stock)

There has been no public market for our Common Stock (including our Class A Common Stock) prior to this offering and an active trading market for our Common Stock (including our Class A Common Stock) may not develop following this offering.

Prior to this offering, there has been no public market for our Common Stock or our Class A Common Stock, and there can be no assurance that an active trading market will develop or be sustained or that shares of our Class A Common Stock (or Common Stock, following the Class A Conversion) will be resold at or above the initial public offering price. Our Class A Common Stock has been approved for listing, subject to notice of issuance, on the NYSE upon completion of this offering, and our Common Stock has been approved for listing, subject to notice of issuance, effective as of the Class A Conversion. The initial public offering price of our Class A Common Stock will be determined by agreement among us and the underwriters, but there can be no assurance that our Class A Common Stock, or Common Stock, as applicable, will not trade below the initial public offering price following the completion of this offering. See “Underwriting.” The initial public offering price will not necessarily bear any relationship to our book value, assets, or financial condition; the prices at which we previously sold our Common Stock in private offerings; or any other established criteria of value and may not be indicative of the market price for our Common Stock or our Class A Common Stock after this offering. The price at which our Common Stock or our Class A Common Stock trades after the completion of this offering and the price at which our Common Stock trades following the Class A Conversion may be lower than the price at which the underwriters sell Class A Common Stock in this offering. The market value of our Common Stock or our Class A Common Stock could be substantially affected by general market conditions,

 

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including the extent to which a secondary market develops for our Common Stock or our Class A Common Stock in the future, the extent of institutional investor interest in us, the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities (including securities issued by other real estate-based companies), our financial performance, and general stock and bond market conditions. If a robust public market for our Common Stock or our Class A Common Stock does not develop, you may have difficulty selling shares of our Common Stock or our Class A Common Stock, as applicable, which could adversely affect the price that you receive for such shares.

The market price and trading volume of shares of our Common Stock (including our Class A Common Stock) may be volatile following this offering.

The market price of shares of our Class A Common Stock and Common Stock following the Class A Conversion may fluctuate. In addition, the trading volume in shares of our Common Stock and Class A Common Stock, as applicable, may fluctuate and cause significant price variations to occur. Historically, these changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our Common Stock and our Class A Common Stock, as applicable, could fluctuate based upon factors that have little or nothing to do with us in particular. If the market price of shares of our Common Stock and our Class A Common Stock, as applicable, declines significantly, you may be unable to resell your shares of our Common Stock or Class A Common Stock, as applicable, at or above the public offering price. We cannot assure you that the market price of shares of our Class A Common Stock or Common Stock following the Class A Conversion will not fluctuate or decline significantly, including a decline below the public offering price, in the future.

Some of the factors that could negatively affect our share price or result in fluctuations in the market price or trading volume of shares of our Common Stock (including our Class A Common Stock) include:

 

   

actual or anticipated declines in our quarterly operating results or distributions;

 

   

changes in government regulations;

 

   

changes in laws affecting REITs and related tax matters;

 

   

the announcement of new contracts by us or our competitors;

 

   

reductions in our FFO, AFFO, or earnings estimates;

 

   

publication of research reports about us or the real estate industry;

 

   

increases in market interest rates that lead purchasers of shares of our Common Stock or our Class A Common Stock to demand a higher yield;

 

   

the Class A Conversion, pursuant to which our existing Common Stock will become listed on the NYSE and freely tradeable, and the expiration or early release of the lock-up agreements entered into with the underwriters by certain parties described elsewhere in this prospectus under “Shares Eligible for Future Sale—Lock-up Agreements”;

 

   

future equity issuances, or the perception that they may occur, including issuances of Common Stock upon exercise or vesting of equity awards or redemption of OP Units;

 

   

changes in market valuations of similar companies;

 

   

adverse market reaction to any increased indebtedness we incur in the future;

 

   

additions or departures of key management personnel;

 

   

actions by institutional stockholders;

 

   

differences between our actual financial and operating results and those expected by investors and analysts;

 

   

changes in analysts’ recommendations or projections;

 

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speculation in the press or investment community; and

 

   

the realization of any of the other risk factors presented in this prospectus.

In the past, securities class action litigation has often been instituted against companies following periods of volatility in the price of their common stock. This type of litigation could result in substantial costs and divert our management’s attention and resources, which could have a material adverse effect on our cash flows, our ability to execute our business strategy, and our ability to make distributions to our stockholder.

We may not be able to make distributions to our stockholders at the times or in the amounts we expect, or at all.

We intend to make cash distributions to our stockholders in amounts such that all or substantially all of our taxable income in each year, subject to adjustments, is distributed. However, we may not be able to continue to generate sufficient cash flow from our properties to permit us to make the distributions we expect. Our ability to continue to make distributions in the future may be adversely affected by the risk factors described in this prospectus. We can provide no assurance that we will be able to make or maintain distributions and certain agreements relating to our indebtedness may, under certain circumstances, limit or eliminate our ability to make distributions to our common stockholders. For instance, our Revolving Credit Facility contains provisions that restrict us from paying distributions if an event of default exists, other than distributions required to maintain our REIT status. We can give no assurance that rents from our properties will increase, or that future acquisitions of real properties or other investments will increase our cash available for distributions to stockholders. In addition, any distributions will be authorized at the sole discretion of our board of directors, and their form, timing, and amount, if any, will depend upon a number of factors, including our actual and projected results of operations, FFO, AFFO, liquidity, cash flows and financial condition, the revenue we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, our REIT taxable income, the annual REIT distribution requirements, applicable law, and such other factors as our board of directors deems relevant.

Distributions are expected to be based upon our FFO, AFFO, financial condition, cash flows and liquidity, debt service requirements, and capital expenditure requirements for our properties. If we do not have sufficient cash available for distributions, we may need to fund the shortage out of working capital or borrow to provide funds for such distributions, which would reduce the amount of proceeds available for real estate investments and increase our future interest costs. Our inability to make distributions, or to make distributions at expected levels, could result in a decrease in trading price of our Class A Common Stock or Common Stock following the Class A Conversion.

We may change the dividend policy for our Common Stock (including our Class A Common Stock) in the future.

The decision to declare and pay dividends on our Common Stock (including our Class A Common Stock), as well as the form, timing, and amount of any such future dividends, will be at the sole discretion of our board of directors and will depend on our earnings, cash flows, liquidity, financial condition, capital requirements, contractual prohibitions or other limitations under our indebtedness, the annual distribution requirements under the REIT provisions of the Code, state law, and such other factors as our board of directors considers relevant. Any change in our dividend policy could have a material adverse effect on the market price of our Common Stock (including our Class A Common Stock).

Increases in market interest rates may result in a decrease in the value of shares of our Common Stock (including our Class A Common Stock).

One of the factors that will influence the price of shares of our Common Stock (including our Class A Common Stock) will be the distribution yield on shares of our Common Stock (including our Class A Common

 

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Stock) (as a percentage of the price of shares of our Common Stock (including our Class A Common Stock)) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of shares of our Common Stock (including our Class A Common Stock) to expect a higher distribution yield and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the per share trading price of our Common Stock (including our Class A Common Stock) to decrease.

This offering is expected to be dilutive to earnings, and there may be future dilution to earnings related to shares of our Common Stock (including our Class A Common Stock).

On a pro forma basis, we expect that this offering will have a dilutive effect on our expected earnings per share and FFO per share. The actual amount of dilution cannot be determined at this time and will be based upon numerous factors. The market price of shares of our Common Stock (including our Class A Common Stock) could decline as a result of issuances or sales of a large number of shares of our Common Stock (including our Class A Common Stock) in the market after this offering or the perception that such issuances or sales could occur. Additionally, future issuances or sales of substantial amounts of shares of our Common Stock (including our Class A Common Stock) may be at prices below the initial public offering price of the shares of our Class A Common Stock offered by this prospectus and may result in further dilution in our earnings and FFO per share and/or materially and adversely impact the per share trading price of our Common Stock (including our Class A Common Stock).

Future offerings of debt, which would be senior to shares of our Common Stock (including our Class A Common Stock) upon liquidation, and/or preferred equity securities that may be senior to shares of our Common Stock (including our Class A Common Stock) for purposes of distributions or upon liquidation, may materially and adversely affect the market price of shares of our Common Stock (including our Class A Common Stock).

In the future, we may attempt to increase our capital resources by making additional offerings of debt or preferred equity securities (or causing the OP to issue debt securities). Upon liquidation, holders of our debt securities and preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to our stockholders. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences, and privileges more favorable than those of our Common Stock (including our Class A Common Stock) and may result in dilution to owners of our Common Stock (including our Class A Common Stock). Our stockholders are not entitled to preemptive rights or other protections against dilution. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on distribution payments that could limit our right to make distributions to our stockholders. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of our future offerings. Our stockholders bear the risk of our future offerings reducing the per share trading price of our Common Stock (including our Class A Common Stock).

Sales of substantial amounts of our Common Stock (including our Class A Common Stock) in the public markets, or the perception that they might occur, or the pending Class A Conversion could reduce the price of our Common Stock (including our Class A Common Stock).

Upon the completion of this offering, we expect to have outstanding a total of 141,272,611 shares of our Common Stock (including our Class A Common Stock), or 146,297,611 shares if the underwriters exercise in full their option to purchase additional shares. Prior to this offering, neither our Class A Common Stock nor our Common Stock was listed on any national securities exchange and the ability of stockholders to liquidate their investments was limited. Additionally, our share redemption program was terminated as of January 10, 2020. As a result, there may be increased demand to sell shares of our Common Stock upon the Class A Conversion, at which time shares of our Common Stock owned by the continuing investors will be listed on the NYSE and

 

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freely tradable. A large volume of sales of shares (or short sales) of our Common Stock (or our Class A Common Stock prior to the Class A Conversion) could decrease the prevailing market price of our Common Stock or our Class A Common Stock and could impair our ability to raise additional capital through the sale of equity securities in the future. Even if a substantial number of sales of our Common Stock or our Class A Common Stock are not effected, the mere perception of the possibility of these sales could depress the market price of our Common Stock or our Class A Common Stock and have a negative effect on our ability to raise capital in the future.

The shares of our Class A Common Stock that we are selling in this offering may be resold immediately in the public market unless they are held by “affiliates,” as that term is defined in Rule 144 of the Securities Act. The Common Stock and OP Units issued as consideration in connection with the Internalization are “restricted securities” within the meaning of Rule 144 under the Securities Act and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemptions contained in Rule 144. The Trident Owners and the Founding Owners (as well as our directors and officers) have agreed, subject to certain exceptions, not to sell or otherwise dispose of any of their Common Stock (including any Class A Common Stock) or OP Units (which may be exchanged for our Common Stock) from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the underwriters’ prior written consent. As a result of the Registration Rights Agreement, however, all of these shares, including Common Stock that may be issued in exchange for OP Units, may be eligible for future sale without restriction, subject to applicable lock-up arrangements. See “Shares Eligible for Future Sale—Registration Rights” and “Certain Relationships and Related Transactions—Registration Rights Agreement.” Sales of a substantial number of such shares upon expiration of the lock-up agreements, the perception that such sales may occur, or early release of these agreements, could cause the market price of our Common Stock or our Class A Common Stock to fall or make it more difficult for you to sell your Class A Common Stock (or your Common Stock, as applicable) at a time and price that you deem appropriate.

Sales of substantial amounts of our capital stock in the public markets may dilute your voting power and your ownership interest in us.

Upon completion of this offering, our Charter will provide that we may issue up to 500,000,000 shares of Common Stock, of which 60,000,000 will be designated as Class A Common Stock and 440,000,000 will be shares of Common Stock without further designation, and 20,000,000 shares of preferred stock, $0.001 par value per share. Moreover, under Maryland law and as provided in our Charter, a majority of our entire board of directors has the power to amend our Charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue without stockholder approval. Future issuances of shares of our Common Stock or our Class A Common Stock, securities convertible or exchangeable into Common Stock, or shares of our preferred stock may dilute the ownership interest of our common stockholders. Because our decision to issue additional equity or convertible or exchangeable securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future issuances. In addition, we are not required to offer any such securities to existing stockholders on a preemptive basis. Therefore, it may not be possible for existing stockholders to participate in such future issuances, which may dilute the existing stockholders’ interests in us.

A lack of research analyst coverage or restrictions on the ability of analysts associated with the co-managers of this offering to publish during certain time periods, including when we report our results of operations, could materially and adversely affect the trading price and liquidity of our Common Stock or our Class A Common Stock.

We cannot assure you that research analysts, including those associated with the underwriters of this offering, will initiate or maintain research coverage of us or our Class A Common Stock or, following the Class A Conversion, our Common Stock. In addition, regulatory rules prohibit research analysts associated with the co-managers of this offering from publishing or otherwise distributing a research report or from making a

 

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public appearance regarding us for 15 days prior to and after the expiration, waiver, or termination of any lock-up agreement that we or certain of our stockholders have entered into with the underwriters of this offering. Accordingly, it could be the case that research concerning our results of operations or the possible effects on us of significant news or a significant event will not be published or will be published on a delayed basis. A lack of research or the inability of certain research analysts to publish research relating to our results of operations or significant news or a significant event in a timely manner could materially and adversely affect the trading price and liquidity of our Common Stock or our Class A Common Stock.

Certain participants in our directed share program must hold their shares for a minimum of 180 days following the date of this prospectus and, accordingly, will be subject to market risks not imposed on other investors in the offering.

At our request, the underwriters have reserved up to 5% of the shares of our Class A Common Stock to be offered by this prospectus for sale, at the initial public offering price, to our directors, officers, employees, friends, family, and business associates. Purchasers of these shares who have entered into a lockup agreement with the underwriters in connection with this offering will be required to agree that they will not, subject to certain exceptions, dispose of or hedge any of such shares of Class A Common Stock or Common Stock held by them for at least 180 days after the date of this prospectus. As a result of the lockup restriction, these purchasers may face risks not faced by other investors who have the right to sell their shares at any time following the offering. These risks include the market risk of holding our shares during the period that such restrictions are in effect. In addition, the price of our Common Stock, including shares issued upon the Class A Conversion in respect of shares of Class A Common Stock, may decrease following the expiration of the lockup period if there is an increase in the number of shares for sale in the market.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which reflect our current views regarding our business, financial performance, growth prospects and strategies, market opportunities, and market trends. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of these words or other comparable words. All of the forward-looking statements included in this prospectus are subject to various risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results, performance, and achievements could differ materially from those expressed in or by the forward-looking statements and may be affected by a variety of risks and other factors. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from such forward-looking statements. These factors include, but are not limited to, those factors described in “Risk Factors” beginning on page 33 of this prospectus. The “Risk Factors” section should not be construed as exhaustive and should be read in conjunction with other cautionary statements included elsewhere in this prospectus.

You are cautioned not to place undue reliance on any forward-looking statements included in this prospectus. All forward-looking statements are made as of the date of this prospectus and the risk that actual results, performance, and achievements will differ materially from the expectations expressed in or referenced by this prospectus will increase with the passage of time. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law. In light of the significant uncertainties inherent in the forward-looking statements included in this prospectus, the inclusion of such forward-looking statements should not be regarded as a representation by us, the underwriters, or any other person that the objectives and strategies set forth in this prospectus will be achieved.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately $561.8 million, or $646.8 million if the underwriters exercise in full their option to purchase additional shares of Class A Common Stock from us, in each case, after deducting underwriting discounts and commissions and other estimated expenses. The amount of net proceeds in each case is based on an assumed initial public offering price of $18.00 per share, which is the mid-point of the price range set forth on the front cover of this prospectus.

We intend to contribute the net proceeds from this offering to the OP in exchange for OP Units. We expect the OP to use the net proceeds received from us to repay in full our 2020 Unsecured Term Loan and our Revolving Credit Facility, in each case, including any related fees and expenses. The existing Revolving Credit Facility will then be terminated and we will enter into the new $900 million unsecured Revolving Credit Facility. We expect to use any remaining net proceeds for general business and working capital purposes, including potential future acquisitions. No acquisitions are probable as of the date of this prospectus. Any proceeds received in connection with the exercise by the underwriters of their option to purchase additional shares will be used by the OP to repay a portion of the outstanding balance under our Revolving Credit Facility or for general business and working capital purposes, including potential future acquisitions.

The following table sets forth the maturity and interest rate as of September 8, 2020, of the indebtedness to be repaid:

 

Indebtedness to be Repaid

  

Maturity Date

  

Interest Rate

2020 Unsecured Term Loan    February 2, 2021    LIBOR plus 1.25%
Revolving Credit Facility    January 21, 2022    LIBOR plus 1.20%

We entered into the 2020 Unsecured Term Loan on August 2, 2019, to partially fund our purchase of the Industrial Portfolio Acquisition.

Certain of the underwriters and/or their respective affiliates are acting as agents, arrangers, and/or lenders under or may hold positions in the indebtedness to be repaid and accordingly will receive a portion of the proceeds from this offering. See “Underwriting—Relationships.”

Pending the permanent use of the net proceeds from this offering, we intend to invest the net proceeds in interest-bearing accounts, short-term investment-grade securities, money-market accounts, or other investments that are consistent with our intention to qualify for taxation as a REIT for U.S. federal income tax purposes.

 

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DISTRIBUTION POLICY

Following completion of this offering, we intend to make regular quarterly distributions to holders of our Common Stock (including our Class A Common Stock). Prior to May 2020, we have paid distributions to holders of shares of our Common Stock on a monthly basis. In light of the economic uncertainty and rapidly evolving circumstances related to the COVID-19 pandemic and then-current tenant rent relief requests, to preserve cash, strengthen our liquidity position, and manage our leverage profile, in May 2020 our board of directors determined that we would temporarily suspend our monthly distribution. We did not pay a distribution for the months of May, June, and July 2020. We reinstated our distribution in August 2020, announcing that we would transition to quarterly distribution payments, and announced that we intend to pay a $0.54 distribution per share (on a pre-stock split basis; $0.135 per share on a post-stock split basis) on our Common Stock (including our Class A Common Stock if outstanding on the record date for the distribution) for the third quarter with a record date of September 30, 2020, and a payment date of October 15, 2020. If this offering closes on or prior to September 30, 2020 and we pay the anticipated dividend on our Common Stock for the third quarter of 2020, holders of record of the Class A Common Stock as of September 30, 2020 will be entitled to such distribution together with holders of our Common Stock.

Prior to this offering, we paid distributions that substantially exceeded the minimum amount required to maintain our REIT status. As a result, a substantial portion of our historical distributions represented a return of capital. Following the completion of this offering, we will be focused on growing our business while maintaining, on a sustained basis, a level of net debt that is generally less than six times our Annualized Adjusted EBITDAre. To achieve this, we intend to invest more in our growth and reduce the portion of our distributions after this offering that exceed the minimum amount required to maintain our REIT status.

We currently expect that the per share amount of our quarterly distributions on our Common Stock following completion of this offering will be $0.25 on a post-stock split basis, compared to the $0.33 on a post-stock split basis (equivalent to $1.32 on a pre-stock split basis) paid in the aggregate on our Common Stock in the last three months that we paid distributions prior to the suspension. On an annualized basis, this would be $1.00 per share, or an annualized distribution rate of approximately 5.6% based on the mid-point of the price range set forth on the front cover of this prospectus and on a post-stock split basis. We estimate that this initial annual distribution rate will represent approximately 84.1% of our estimated cash available for distribution to stockholders for the twelve months ending June 30, 2021, based on the mid-point of the price range set forth on the front cover of this prospectus. We do not intend to reduce the annualized distribution per share if the underwriters exercise their option to purchase additional shares. Our intended initial annual distribution rate has been established based on our estimate of cash available for distribution for the twelve months ending June 30, 2021, which we have calculated based on adjustments to our pro forma net income for the twelve months ended June 30, 2020. This estimate was based on our pro forma operating results and does not take into account our long-term business and growth strategies, nor does it take into account any unanticipated expenditures we may have to make or any financings for such expenditures. In estimating our cash available for distribution for the twelve months ending December 31, 2020, we have made certain assumptions as reflected in the table and footnotes below.

Our estimate of cash available for distribution does not include the effect of any changes in our working capital resulting from changes in our working capital accounts. It also does not reflect the amount of cash estimated to be used for investing activities, financing activities, or other activities. Any such investing and/or financing activities may have a material and adverse effect on our estimate of cash available for distribution. Because we have made the assumptions described herein in estimating cash available for distribution, we do not intend this estimate to be a projection or forecast of our actual results of operations, FFO, AFFO, liquidity, or financial condition, and we have estimated cash available for distribution for the sole purpose of determining our estimated initial annual distribution amount. Our estimate of cash available for distribution should not be considered as an alternative to cash flow from operating activities (computed in accordance with GAAP) or as an indicator of our liquidity or our ability to make distributions. In addition, the methodology upon which we made the adjustments described herein is not necessarily intended to be a basis for determining future distributions.

 

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We intend to maintain our initial distribution rate for the 12 months following the completion of this offering unless our results of operations, FFO, AFFO, liquidity, cash flows, financial condition, prospects, economic conditions, or other factors differ materially from the assumptions used in projecting our initial distribution rate. We believe that our estimate of cash available for distribution constitutes a reasonable basis for setting the initial distribution rate. However, we cannot assure you that our estimate will prove accurate, and actual distributions may therefore be significantly below the expected distributions. Our actual results of operations will be affected by a number of factors, including the revenue received from our properties, our operating expenses, interest expense, and unanticipated capital expenditures. We may, from time to time, be required, or elect, to borrow under our Revolving Credit Facility or otherwise to pay distributions.

We cannot assure you that our estimated distributions will be made or sustained or that our board of directors will not change our distribution policy in the future. Any distributions will be at the sole discretion of our board of directors, and their form, timing, and amount, if any, will depend upon a number of factors, including our actual and projected results of operations, FFO, AFFO, liquidity, cash flows and financial condition, the revenue we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, our REIT taxable income, the annual REIT distribution requirements, applicable law, including restrictions on distributions under Maryland law, and such other factors as our board of directors deems relevant. For more information regarding risk factors that could materially and adversely affect us and our ability to make cash distributions, see “Risk Factors—We may not be able to make distributions to our stockholders at the times or in the amounts we expect, or at all.” If our operations do not generate sufficient cash flow to enable us to pay our intended or required distributions, we may be required either to fund distributions from working capital, borrow, or raise equity or reduce such distributions. In addition, our Charter allows us to issue preferred stock that could have a preference on distributions and could limit our ability to make distributions to our stockholders. Additionally, under certain circumstances, agreements relating to our indebtedness could limit our ability to make distributions to our stockholders.

U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, and that it pay tax at the corporate rate to the extent that it annually distributes less than 100% of its REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains. In addition, a REIT will be required to pay a 4% nondeductible excise tax on the amount, if any, by which the distributions it makes in a calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income, and 100% of its undistributed income from prior years. For more information, see “Material U.S. Federal Income Tax Considerations.” We anticipate that our estimated cash available for distribution will be sufficient to enable us to meet the annual distribution requirements applicable to REITs and to avoid or minimize the imposition of corporate and excise taxes. However, under some circumstances, we may be required to make distributions in excess of cash available for distribution in order to meet these distribution requirements or to avoid or minimize the imposition of tax and we may need to borrow funds to make certain distributions.

 

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The following table sets forth calculations relating to the estimated initial distribution based on our pro forma net income for the twelve months ended June 30, 2020 and is provided solely for the purpose of illustrating the estimated initial distribution and is not intended to be a basis for future distributions. Dollar amounts are in thousands except per share amounts:

 

(in thousands)                      

Pro forma net income for the year ended December 31, 2019

   $ 122,890  

Less: Pro forma net income for the six months ended June 30, 2019

     (53,571

Add: Pro forma net income for the six months ended June 30, 2020

     36,386  
  

 

 

 

Pro forma net income for the twelve months ended June 30, 2020

     105,705  

Add: Estimated net increases in contractual lease revenues (1)

     6,000  

Add: Real estate depreciation and amortization

     137,402  

Add: Non-cash impairment charges (2)

     5,102  

Add: Cost of debt extinguishment (3)

     477  

Add: Non-cash interest expense (4)

     2,934  

Less: Net decreases in contractual lease revenues due to tenant lease expirations, dispositions, and other vacancies (5)

     (8,900

Less: Estimated recurring capital expenditures (6)

     (1,234

Less: Gain on sale of real estate (7)

     (35,915

Less: Straight-line rent adjustment (8)

     (20,174

Less: Amortization of lease intangibles (9)

     (2,340
  

 

 

 

Estimated cash flows from operating activities for the twelve months ending June 30, 2021

     189,057  

Less: Scheduled principal payments on debt (10)

     (3,100
  

 

 

 

Estimated cash available for distribution for the twelve months ending June 30, 2021

   $ 185,957  
  

 

 

 

Our stockholders’ share of estimated cash available for distribution (11)(16)

     169,215  

Non-controlling interests’ share of estimated cash available for distribution (12)(16)

     16,742  

Estimated initial annual distribution per share of Common Stock and per OP Unit

     1.00  

Total estimated initial annual distribution to stockholders (13)(16)

     142,362  

Total estimated initial annual distribution to non-controlling interests (14)(16)

     14,085  

Total estimated initial annual distribution to stockholders and non-controlling interests

     156,447  

Payout ratio (15)(16)

     84.1

 

(1)

Represents contractual increases in lease revenue from:

   

Scheduled fixed rent increases;

   

Contractual increases based on changes in the CPI (including (a) increases that have already occurred but were not in effect for the entire twelve months ended June 30, 2020 and (b) actual increases that have occurred from July 1, 2020 to September 1, 2020);

   

Net increases from new leases or renewals that were not in effect for the entire twelve months ended June 30, 2020 or that will go into effect during the twelve months ending June 30, 2021 based upon leases entered into through September 1, 2020.

(2)

Represents non-cash impairment charges during the twelve months ended June 30, 2020 on a pro forma basis.

(3)

Represents non-cash cost of debt extinguishment during the twelve months ended June 30, 2020 on a pro forma basis.

(4)

Represents non-cash amortization of debt issuance costs and net mortgage premiums, non-cash gain on interest rate swaps, and other non-cash interest expense recognized during the twelve months ended June 30, 2020 on a pro forma basis.

(5)

Represents decreases in lease revenue due to leases that (a) expired, terminated, or were disposed of during the twelve months ended June 30, 2020 or the period from July 1, 2020 to September 1, 2020, in each case that were not re-leased as of September 1, 2020 or (b) will expire during the twelve months ending June 30 2021.

(6)

Represents estimated recurring capital expenditures to be made during the twelve months ending June 30, 2021. Substantially all of our properties are triple-net leased to tenants who are required to pay all property-level operating expenses. As a result, we historically have had limited capital expenditure requirements.

(7)

Represents the non-cash gain on sale of real estate during the twelve months ended June 30, 2020 on a pro forma basis.

(8)

Represents the difference between the straight-line lease revenue recognized for GAAP purposes, and the contractual amounts due under our long-term net leases during the twelve months ended June 30, 2020 on a pro forma basis.

(9)

Represents non-cash amortization of lease intangibles through revenue during the twelve months ended June 30, 2020 on a pro forma basis.

(10)

Represents scheduled principal amortization during the twelve months ending June 30, 2021 for pro forma debt outstanding as of June 30, 2020.

 

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(11)

Based on estimated ownership by our Company of approximately 91.0% of the general and limited partnership interests in the OP, based on the mid-point of the price range set forth on the cover page of this prospectus.

(12)

Represents the share of our estimated cash available for distribution for the twelve months ending June 30, 2021 attributable to the holders of limited partnership interests in the OP other than our Company, based on the mid-point of the price range set forth on the cover page of this prospectus.

(13)

Based on a total of 142,361,611 shares of our Class A Common Stock and Common Stock expected to be outstanding upon completion of this offering, based on the mid-point of the price range set forth on the cover page of this prospectus.

(14)

Based on a total of 14,085,480 OP Units expected to be outstanding upon completion of this offering (excluding OP Units held by our Company), based on the mid-point of the price range set forth on the cover page of this prospectus.

(15)

Calculated as total estimated initial annual distribution to stockholders divided by our stockholders’ share of estimated cash available for distribution for the twelve months ending June 30, 2021. If the underwriters exercise in full their option to purchase additional shares, our total estimated initial annual distribution to stockholders would be $147.4 million and our payout rate would be 86.8%.

(16) 

Ownership percentages are calculated on a pro forma basis to include 1,089,000 shares of Common Stock and 1,859,273 OP Units, representing the maximum potential contingent consideration payable in connection with the Internalization.

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2020:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the (i) Internalization (assuming the earnout consideration in the Internalization is paid in full) and (ii) Recapitalization; and

 

   

on a pro forma as adjusted basis to give effect to the transactions described in the preceding bullet and the issuance by us of 33,500,000 shares of Class A Common Stock in this offering at an assumed initial public offering price of $18.00, the mid-point of the price range set forth on the cover page of this prospectus, and the use of proceeds therefrom as described under “Use of Proceeds.”

 

    As of June 30, 2020  
(in thousands, except share and per share amounts)   Actual     Pro Forma     Pro Forma
As Adjusted
 

Cash and Cash Equivalents:

     

Total Cash and Cash Equivalents

  $ 9,241     $ 9,241     $ 82,761  
 

 

 

   

 

 

   

 

 

 

Debt:

     

Revolving Credit Facility (1)

    248,300       248,300        

Mortgage and notes payable, net

    109,512       109,512       109,512  

Unsecured term notes, net

    1,673,092       1,673,092       1,433,195  
 

 

 

   

 

 

   

 

 

 

Total debt

    2,030,904    

 

 

 

2,030,904

 

 

 

 

 

 

1,542,707

 

 

 

 

 

   

 

 

   

 

 

 

Mezzanine Equity:

     

Common Stock, 780,893 shares issued and outstanding

    66,376       —         —    

Non-controlling interests

    112,159       —         —    
 

 

 

   

 

 

   

 

 

 

Total mezzanine equity

    178,535       —         —    
 

 

 

   

 

 

   

 

 

 

Equity:

     

Preferred stock, $0.001 par value per share; 20,000,000 shares authorized, no shares issued and outstanding, actual; 20,000,000 shares authorized, no shares issued and outstanding, pro forma

    —         —         —    

Common Stock, $0.001 par value per share, actual, $0.00025 par value per share, pro forma and pro forma as adjusted; 80,000,000 shares authorized, 26,077,449 shares issued and outstanding, actual; 440,000,000 shares authorized, 108,520,636 shares issued and outstanding, pro forma; and 440,000,000 shares authorized, 108,520,636 shares issued and outstanding, respectively, pro forma as adjusted (2)

    26       27       27  

Class A Common Stock, $0.00025 par value per share; no shares authorized, issued, or outstanding, actual; 60,000,000 shares authorized, and no shares issued and outstanding, respectively, pro forma; and 60,000,000 shares authorized, and 33,500,000 shares issued and outstanding, respectively, pro forma as adjusted (2)

    —         —         8  

Additional paid-in capital

    1,899,751       1,997,846       2,558,376  

Cumulative distributions in excess of retained earnings

    (229,531     (229,531     (229,626

Accumulated other comprehensive loss

    (78,613     (78,613     (78,613
 

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

    1,591,633       1,689,729       2,250,172  

Non-controlling interest (3)

    106,479       218,638       218,630  
 

 

 

   

 

 

   

 

 

 

Total Capitalization

  $ 3,907,551     $ 3,939,271     $ 4,011,509  
 

 

 

   

 

 

   

 

 

 
(1) 

Upon completion of this offering, we expect our Revolving Credit Facility to have $900.0 million of availability.

(2) 

Pro forma Common Stock outstanding assumes 4,212,576 shares of Common Stock issued (and potentially issuable) in connection with the Internalization, which represents the full amount, including both the base consideration paid and the maximum potential contingent consideration payable, in the form of Common Stock in connection with the Internalization.

 

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Pro forma and pro forma as adjusted Common Stock shares authorized includes 60,000,000 shares of Common Stock designated as Class A Common Stock and pro forma shares issued and outstanding excludes 33,500,000 shares of Class A Common Stock to be issued in this offering.

Pro forma as adjusted Common Stock Shares outstanding assumes (a) 33,500,000 shares of our Class A Common Stock to be issued in this offering and (b) 4,212,576 shares of Common Stock issued (or potentially issuable) in connection with the Internalization, which represents the full amount, including both the base consideration paid and the maximum potential contingent consideration payable, in the form of Common Stock in connection with the Internalization. Excludes (i) 5,025,000 shares of our Class A Common Stock issuable upon the exercise in full of the underwriters’ option to purchase additional shares of Class A Common Stock and (ii) 9,000,000 shares of our Common Stock issuable in the future under our 2020 Equity Incentive Plan, as more fully described in “Executive Compensation—Material Terms of the 2020 Equity Incentive Plan.”

 

(3) 

Pro forma and pro forma as adjusted non-controlling interest includes 7,137,323 OP Units issued in connection with the Internalization, which represents the full amount, including both base consideration paid and the maximum potential contingent consideration payable, in the form of OP Units in connection with the Internalization.

 

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SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA

Our historical consolidated balance sheet data as of December 31, 2019, 2018, and 2017 and consolidated results of operations for the years ended December 31, 2019, 2018, and 2017 have been derived from our audited historical consolidated financial statements included elsewhere in this prospectus. The financial information below also includes our unaudited condensed consolidated balance sheet data as of June 30, 2020 and our unaudited condensed consolidated results of operations for the six months ended June 30, 2020 and 2019, which have been derived from our historical unaudited condensed consolidated financial statements contained elsewhere in this prospectus. The condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and Article 10 of Regulation S-X. The Company believes all adjustments necessary for a fair presentation have been included in these interim condensed consolidated financial statements (which include only normal recurring adjustments). Our historical consolidated financial data included below and set forth elsewhere in this prospectus are not necessarily indicative of our future performance.

Our unaudited selected pro forma consolidated operating and balance sheet data as of and for the six months ended June 30, 2020, and for the year ended December 31, 2019, is presented (i) with respect to statements of operations data, giving effect to the Industrial Portfolio Acquisition; the Internalization; the Recapitalization; and the completion of this offering and the use of proceeds described herein, based on the mid-point of the price range set forth on the front cover of this prospectus, assuming each of the transactions was completed on January 1, 2019, and (ii) with respect to balance sheet data, giving effect to the Internalization, assuming the earnout consideration in the Internalization is paid in full; the Recapitalization; and the completion of this offering and the use of proceeds described herein, based on the mid-point of the price range set forth on the front cover of this prospectus, assuming that each of the transactions was completed on June 30, 2020, in each case, giving effect to the other adjustments described in the unaudited pro forma consolidated financial statements included elsewhere in this prospectus. Our pro forma financial information is not necessarily indicative of what our actual financial position and results of operations would have been as of the date and for the periods indicated, nor does it purport to represent our future financial position or results of operations.

 

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You should read the following summary financial and other data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business and Properties,” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

    For the six months ended June 30,     For the years ended December 31,  
(in thousands, except per share data)   2020
(Pro forma)
(Unaudited)
    2020
(Historical)
(Unaudited)
    2019
(Historical)
(Unaudited)
    2019
(Pro forma)
(Unaudited)
    2019
(Historical)
    2018
(Historical)
    2017
(Historical)
 

Operating Data

             

Revenues

             

Lease revenues

  $ 158,602     $ 158,602     $ 137,483     $ 334,819     $ 298,815     $ 237,479     $ 181,563  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

             

Depreciation and amortization

    71,151       71,140       49,597       122,878       108,818       83,994       62,263  

Asset management fees

    —         2,461       10,438       —         21,863       18,173       14,754  

Property management fees

    —         1,275       3,820       —         8,256       6,529       4,988  

Property and operating expense

    8,305       8,305       7,642       16,993       15,990       11,157       6,505  

General and administrative

    14,447       11,542       2,492       24,643       5,456       6,162       4,939  

Provision for impairment of investment in rental properties

    2,667       2,667       1,017       3,452       3,452       2,061       2,608  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    96,570       97,390       75,006       167,966       163,835       128,076       96,057  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expenses)

             

Preferred distribution income

    —         —         —         —         —         440       737  

Interest income

    20       20       1       9       9       179       467  

Interest expense

    (33,795     (40,504     (32,560     (71,821     (72,534     (52,855     (34,751

Cost of debt extinguishment

    (22     (22     (721     (1,238     (1,176     (101     (5,151

Gain on sale of real estate

    8,774       8,665       4,187       31,679       29,914       10,496       12,992  

Income taxes

    (951     (951     (748     (2,586     (2,415     (857     (624

Gain on sale of investment in related party

    —         —         —         —         —         8,500       —    

Internalization expenses

    —         (1,594     (272     —         (3,658     —         —    

Change in fair value of earnout liability

    352       2,144       —         —         —         —         —    

Other (losses) gains

    (24     (24     —         (6     (6     (100     379  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    36,386       28,946       32,364       122,890       85,114       75,105       59,555  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to non-controlling interests

    (2,905     (2,777     (2,292     (10,257     (5,720     (5,730     (4,756
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Broadstone Net Lease, Inc.

  $ 33,481     $ 26,169   $ 30,072     $ 112,633     $ 79,394     $ 69,375     $ 54,799  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma weighted average number of shares of Common Stock outstanding

             

Basic

    140,892           133,908        
 

 

 

       

 

 

       

Diluted

    153,116           146,136        
 

 

 

       

 

 

       

Pro forma net earnings per share of Common Stock

             

Basic

  $ 0.24         $ 0.84        
 

 

 

       

 

 

       

Diluted

  $ 0.24         $ 0.84        
 

 

 

       

 

 

       

 

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     As of June 30,      As of December 31,  
(In thousands)    2020
(Pro forma)
(Unaudited)
     2020
(Historical)
(Unaudited)
     2019
(Historical)
     2018
(Historical)
     2017
(Historical)
 

Balance Sheet Data

              

Investment in rental property, at cost

   $ 3,690,679      $ 3,690,679      $ 3,728,334      $ 2,890,735      $ 2,376,141  

Investment in rental property, net

     3,377,745        3,377,745        3,457,290        2,683,746        2,227,758  

Cash and cash equivalents

     82,761        9,241        12,455        18,612        9,355  

Total assets

     4,216,293        4,144,055        3,917,858        3,096,797        2,578,756  

Unsecured revolving credit facility

     —          248,300        197,300        141,100        273,000  

Mortgage and notes payable, net

     109,512        109,512        111,793        78,952        67,832  

Unsecured term notes, net

     1,433,195        1,673,092        1,672,081        1,225,773        836,912  

Total liabilities

     1,747,491        2,267,408        2,138,838        1,567,877        1,294,555  

Total mezzanine equity

     —          178,535        —          —          —    

Total Broadstone Net Lease, Inc. stockholders’ equity

     2,250,172        1,591,633        1,667,614        1,417,099        1,186,825  

Total equity

     2,468,802        1,698,112        1,779,020        1,528,920        1,284,201  

 

     For the six months ended June 30,      For the years ended December 31,  
(In thousands, except per share
amounts)
   2020
(Pro forma)
(Unaudited)
     2020
(Historical)
(Unaudited)
     2019
(Historical)
(Unaudited)
     2019
(Pro forma)
(Unaudited)
     2019
(Historical)
     2018
(Historical)
     2017
(Historical)
 

Other Data

                    

Dividend declared

   $ 51,659      $ 51,659      $ 65,214      $ 136,280      $ 136,280      $ 112,969      $ 92,768  

Dividends declared per common share

     0.44        1.76        2.63        1.32        5.27        5.15        4.975  

FFO (1)

     101,388        94,057        78,791        217,462        167,470        150,664        111,434  

AFFO (1)

     95,069        87,124        68,806        191,298        149,197        124,065        99,952  

EBITDA (1)

     142,283        141,541        115,269        320,175        268,881        212,811        157,193  

EBITDARE (1)

     136,176        135,543        112,099        291,948        242,419        204,376        146,809  

 

     As of June 30,     As of December 31,  
(dollars in thousands)    2020
(Pro forma)
(Unaudited)
    2020
(Historical)
(Unaudited)
    2019
(Historical)
    2018
(Historical)
    2017
(Historical)
 

Net Debt (1)

   $ 1,466,510     $ 2,028,330     $ 1,969,140     $ 1,431,562     $ 1,171,371  

Number of properties

     633       633       646       621       528  

Occupancy at period end

     99.5     99.5     99.7     99.7     99.6

 

(1) 

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for definitions of these metrics and reconciliations of these metrics to net income, the most directly comparable GAAP measure.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read together with the “Prospectus Summary—Summary Consolidated Historical and Pro Forma Financial and Other Data,” “Selected Consolidated Historical and Pro Forma Financial and Other Data,” “Business and Properties,” and consolidated financial statements and related notes that are included elsewhere in this prospectus. Where appropriate, the following discussion includes the effects of the Industrial Portfolio Acquisition, Internalization, and this offering and the use of the net proceeds therefrom on a pro forma basis. These effects are reflected in our pro forma consolidated financial statements included elsewhere in this prospectus. This discussion contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Forward-Looking Statements,” “Risk Factors,” or in other parts of this prospectus.

Overview

We acquire, own, and manage primarily single-tenant commercial real estate properties that are net leased on a long-term basis to a diversified group of tenants. Since our inception in 2007, we have selectively invested in net leased assets in the industrial, healthcare, restaurant, office, and retail property types, and as of June 30, 2020, our portfolio has grown to 632 properties in 41 U.S. states and one property in Canada.

We derive substantially all of our revenue from rents received from single tenants of each of our net lease properties in our portfolio. We typically lease our properties pursuant to long-term net leases with initial terms of 10 years or more that often have renewal options. As of June 30, 2020, leases contributing 98.2% of our ABR provided for periodic rent escalations, generally ranging from 1.5% to 2.5% annually, with an ABR weighted average annual minimum increase of 2.1%. As of June 30, 2020, our properties were occupied by approximately 182 different commercial tenants who operate 168 different brands that are diversified across 54 differing industries, with no single tenant accounting for more than 2.5% of our ABR.

In order to benefit from increasing economies of scale as we continue to grow, and as part of our evolution toward entering the public markets, our board of directors made the decision to internalize our management structure, which was completed on February 7, 2020. In connection with the Internalization, we terminated our management agreements with BRE, entered into Employment Agreements with each of our named executive officers, and began directly employing 71 former employees of BRE. Our historical results of operations through February 6, 2020, include the payment of management fees that we will no longer pay following the Internalization and do not include the direct compensation expense associated with our current 73 employees, or certain professional fees, consulting, portfolio servicing costs, and other general and administrative expenses not previously incurred based upon our externally managed structure. See “Selected Consolidated Historical and Pro Forma Financial and Other Data.”

As of June 30, 2020, on a pro forma basis, we had $1,549.9 million of total debt outstanding, Net Debt of $1,466.5 million, and a ratio of Net Debt to Annualized Adjusted EBITDAre of 5.23x. We have historically maintained higher leverage than we intend to maintain as a publicly traded REIT following this offering. In the future, we will seek to maintain on a sustained basis a level of Net Debt that is generally less than six times our Annualized Adjusted EBITDAre. We intend to repay $488.3 million of our debt with the net proceeds of this offering. See “Use of Proceeds.” After giving effect to this offering and the use of proceeds therefrom, we expect to have $900.0 million of borrowing capacity under our Revolving Credit Facility and $82.8 million of cash and cash equivalents, as well as potential access to other sources of debt capital, including the public unsecured bond and private placement debt markets, with the benefit of our investment grade credit rating.

 

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Factors that Affect Our Results of Operations and Financial Condition

Key factors that typically impact our results of operations and financial condition, some of which may be adversely impacted by the COVID-19 pandemic, include rental rates and collections, property dispositions, lease renewals and occupancy, acquisition volume, net lease terms, interest expense, general and administrative expenses, inflation, tenant bankruptcies, and impairments.

The rapidly evolving circumstances related to the COVID-19 pandemic have resulted in deep economic uncertainty and far-reaching impacts on almost every business and industry. In response to the COVID-19 pandemic, many countries and U.S. states, including the areas in which we operate, adopted certain measures to mitigate the ongoing public health crises. Such measures included “shelter in place” or “stay at home” rules, restrictions on travel, and restrictions on the types of businesses that may continue to operate in many countries and U.S. states. Although such restrictions have been or are in the process of being lifted in several locations, the recent resurgence of reported COVID-19 cases has led to a reinstatement or partial reinstatement of restrictions in other locations. We cannot predict whether and to what extent the restrictions will be reinstated, whether additional states and cities will implement similar restrictions or when restrictions currently in place will expire. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including industries in which our tenants operate. Further, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, and consumer spending, as well as other unanticipated consequences, remain unknown. For more discussion on the risks associated with the COVID-19 outbreak, see “Risk Factors” contained elsewhere in this prospectus.

Rental Rates and Collections

Our ability to grow rental revenue from our existing portfolio will depend on our ability to realize the rental escalations built into our leases. As of June 30, 2020, leases contributing 98.2% of our ABR provided for increases in future annual base rent, generally ranging from 1.5% to 2.5% annually, with an ABR weighted average minimum increase of 2.1% of base rent. Generally, our rent escalators increase rent on specified dates by a fixed percentage. Approximately 15.7% of our rent escalators are based on an increase in the CPI over a specified period and 1.8% of our leases are flat leases, meaning they do not provide for rent increases during their terms. During periods of low inflation, small increases in the CPI will result in limited increases in rental revenue from our leases that contain rent escalators based on CPI increases. However, when the CPI decreases or does not change over the relevant period, our rental revenue from such leases is not reduced and will remain the same.

Our financial results depend on our ability to timely collect contractual rents due under our long-term net leases. The COVID-19 pandemic’s impact on us has primarily manifested through tenant requests for rent relief, which we started to receive in late March 2020. Although the requests ranged in scope, the most common request was for a full or partial rent deferment for three months, with repayment over a six- to twelve-month period following the reinstatement of regular rent payments. As of June 30, 2020, we had resolved all active outstanding requests for rent relief as of that time. In total, we granted partial rent relief requests to 15 tenants related to 93 properties whose total base contractual rents represent 9.7% of June ABR, compared with total requests received from 59 tenants related to 295 properties whose total base contractual rents represented 33.7% of June ABR.

We evaluated each request for rent relief as a unique situation, employing a rigorous credit and business analysis focusing on, among other things, industry circumstances, the tenant’s financial performance, liquidity position, lease structure, geographic location, and regulatory impacts on the tenant’s operations (e.g., stay-at-home orders, essential v. nonessential designations). Based on our analyses, we granted relief on a select basis only to those tenants we determined to be most in need. In cases where we granted rent relief, we focused on negotiating the shortest possible repayment period and, when possible, lease enhancements (e.g., extensions of term). There were several tenants who requested rent relief that we believed were well positioned to continue making rent payments during the pandemic. Many of those tenants had strong balance sheets and liquidity

 

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positions, had applied for or received Paycheck Protection Program loan funding under the CARES Act, or are designated as essential and can continue to operate despite restrictions on other businesses. We declined to agree to any rent relief in those circumstances, and in all such cases the tenants continued to pay all rents due as of June 30, 2020.

The rent relief requests we granted included the partial deferral of payment of rent with 14 tenants, and a partial abatement of rent with one tenant. The partial rent deferrals ranged in length between two and six months, with a weighted average deferral of 3.4 months. Amounts deferred will be repaid over periods ranging between three months to one year, with a weighted average repayment period of 5.6 months beginning in July 2020. The partial abatement represents a portion of rents due over a nine-month period, with the minimum required rent payable increasing during the abatement period. In exchange, we negotiated a three-year lease term extension and an upside percentage rent clause during the abatement period, which we expect to provide us with long-term value accretion. As of June 30, 2020, we had received payment for the base amounts due for the second and third quarters of 2020 under the rent abatement agreement.

In circumstances where we agreed to a rent deferral that is repaid over a period of time, and where the terms of the lease and amounts paid under the lease are substantially the same, we will continue to recognize the same amount of GAAP lease revenue each period to the extent the amounts are probable of collection. The amounts we agreed to defer will impact our cash flows from operations.

Other than for one tenant that had declared bankruptcy, all but one tenant paid their rent due for the second quarter, either in full or in accordance with the terms of the agreed-upon rent relief agreements. Uncollected base rent not subject to deferment, abatement, or bankruptcy, represents less than 0.02% of base rents due for the three months ended June 30, 2020. The following chart and tables summarize our second quarter 2020 rent collection, in total and by tenant industry and property type as of the date of this prospectus:

 

LOGO

 

1 

Relates to post-petition rents due from one tenant who had filed for bankruptcy.

 

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          % Base Rent Collected     % Q2 Base Rent Not Collected  

Tenant Industry

  % of June
ABR
    April     May     June     Q2     Deferred     Abated     Bankruptcy  

Restaurants

    15.8     97.0     84.0     83.9     88.7     4.4     6.9     0.0

Home Furnishing Retail

    3.3     91.2     26.9     26.9     48.3     4.8     0.0     46.9

Specialty Stores

    2.2     68.3     68.3     68.3     68.3     31.7     0.0     0.0

Industrial Machinery

    1.9     84.6     84.6     84.6     84.6     15.4     0.0     0.0

Home Furnishings

    1.8     72.9     72.9     72.9     72.9     27.1     0.0     0.0

Life Sciences Tools & Services

    1.4     81.8     81.8     81.8     81.8     18.2     0.0     0.0

Movies & Entertainment (1)

    1.1     100.0     50.0     50.0     66.7     33.3     0.0     0.0

All Other

    72.5     100.0     100.0     100.0     100.0     0.0     0.0     0.0
 

 

 

               

Grand Total

    100.0     97.4     92.1     92.1     93.9     3.0     1.1     2.0
 

 

 

               

 

(1) 

Industrial tenant.

 

          % Base Rent Collected     % Q2 Base Rent Not Collected  

Property Type

  % of June
ABR
    April     May     June     Q2     Deferred     Abated     Bankruptcy  

Industrial

    44.1     96.2     95.0     95.0     95.4     4.6     0.0     0.0

Healthcare

    19.9     98.6     98.6     98.6     98.6     1.4     0.0     0.0

Restaurant

    15.5     97.0     83.8     83.7     88.4     4.5     7.1     0.0

Office

    10.0     100.0     100.0     100.0     100.0     0.0     0.0     0.0

Retail

    8.8     98.2     69.9     69.9     79.3     0.0     0.0     20.7

Other

    1.7     100.0     100.0     100.0     100.0     0.0     0.0     0.0
 

 

 

               

Grand Total

    100.0     97.4     92.1     92.1     93.9     3.0     1.1     2.0
 

 

 

               

Rent collections have remained strong during the third quarter to date. As of the date of this prospectus, we had collected 96.5% of rents due for July 2020 and 98.2% of rents due for August 2020, as well as 100% of amounts that were due to be repaid in July and August 2020 under deferral agreements. Despite our continued strong rent collections subsequent to the outbreak of COVID-19, including collection of amounts deferred, the duration of the pandemic and our tenants’ ability to return to business after governmental restrictions are fully lifted, could have a significant negative impact on our ability to continue to collect future rents.

Property Dispositions

From time to time, we will strategically dispose of properties, primarily where we believe the risk profile has changed and become misaligned with our then current risk-adjusted return objectives. The resulting gains or losses on dispositions may materially impact our operating results, and the recognition of a gain or loss on the sale of real estate varies from transaction to transaction based on fluctuations in asset prices and demand in the real estate market at the time a property is listed for sale. As a result of the COVID-19 pandemic, we have seen a significant slowdown in real estate transactions. In the short term, the slowdown in market activity may inhibit our ability to dispose of properties we have identified for disposition, including those that experience significant credit deterioration as a result of the COVID-19 pandemic, and the price at which we are able to sell the properties may be negatively impacted. We were able to dispose of certain properties at the end of the first quarter and early in the second quarter of 2020 that were already under contract and substantially along in the disposition process, and we used the proceeds to bolster our liquidity position. We also disposed of a property subsequent to June 30, 2020 that had been vacant as of June 30, 2020. While we successfully disposed of these properties at advantageous prices, we will continue to monitor the pandemic’s impact and continue to selectively dispose of properties when advantageous to do so.

 

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Lease Renewals and Occupancy

As of June 30, 2020, the ABR weighted average remaining term of our leases was approximately 11.0 years, excluding renewal options. As of June 30, 2020, approximately 8.4% of our leases (based on ABR) will expire prior to January 1, 2025. See “Business and Properties—Our Real Estate Investment Portfolio—Lease Maturity Schedule, by % of ABR.” The stability of the rental revenue generated by our properties depends principally on our tenants’ ability to pay rent and our ability to collect rents, renew expiring leases or re-lease space upon the expiration or other termination of leases, lease currently vacant properties, and maintain or increase rental rates at our leased properties. To the extent our properties become vacant, we would forego rental income while remaining responsible for the payment of property taxes and maintaining the property until it is re-leased, which could negatively impact our operating results. However, given our historically strong occupancy rates (since our inception, occupancy has generally been above 99%), we do not anticipate that such impact will be significant. Our occupancy rates have remained strong during the COVID-19 pandemic, standing at 99.5% as of June 30, 2020 based on rentable square footage. Additionally, when negotiating COVID-19 related rent relief agreements, we have sought to extend the lease terms, where possible, to preserve the continuity of tenants and long-term cash flows derived from our portfolio. We continue to monitor the impact the COVID-19 pandemic is having on our lease renewals and occupancy.

Acquisition Volume

Our historical growth in revenues and earnings has been achieved through rent escalations associated with existing in-place leases, coupled with rental income generated from accretive property acquisitions. Our ability to grow revenue will depend, to a significant degree, on our ability to identify and complete acquisitions that meet our investment criteria. Changes in capitalization rates, interest rates, or other factors may impact our acquisition opportunities in the future. Market conditions may also impact the total returns we can achieve on our investments. Our acquisition volume also depends on our ability to access third-party debt and equity financing. The COVID-19 pandemic has caused a slowdown in acquisition volume and we have not acquired any new properties in the first six months of 2020. We will continue to monitor the pandemic’s impact on capitalization rates, interest rates, and access and cost of equity and debt capital, and return to our focus on growth through acquisitions when it is prudent to do so.

Net Lease Terms

Substantially all of our leases are net leases pursuant to which our tenant generally is obligated to pay all expenses associated with the leased property including real estate taxes, insurance, maintenance, repairs, and capital costs. A limited number of leases require us to pay some or all of the property expenses such as the cost of environmental liabilities, roof and structure repairs, real estate taxes, insurance, or certain non-structural repairs and maintenance. Additionally, we seek to use master lease structures where it fits market practice in the particular property type, pursuant to which we seek to lease multiple properties to a single tenant on an all or none basis. Master leases strengthen our ability to preserve rental revenue and prevent costs associated with vacancies for underperforming properties. We believe the master lease structure is most prevalent and applicable to leases in our restaurant and retail property types, while less relevant to our other property types, such as healthcare and industrial. As of June 30, 2020, master leases contributed approximately 34.4% of our overall ABR (our largest master lease by ABR related to 24 properties and contributed 2.5% of our ABR, and our smallest master lease by ABR related to two properties and contributed 0.1% of our ABR), 72.9% of our restaurant property ABR (161 of our 243 restaurant properties), and 52.8% of our retail property ABR (79 of our 128 retail properties).

In instances where we granted rent relief, we generally preserved the rights afforded to us pursuant to our leases. We continue to monitor the impact of the ongoing COVID-19 pandemic, which presents certain risks of modifications to our lease terms. These lease terms include certain rights we have under master leases and the risk of tenants’ failure to meet their lease obligations, including the risk that the prolonged economic downturn forces tenants into bankruptcy. An increase in the number of leases under which we are responsible for some or all of these expenses could negatively influence our operating results.

 

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Interest Expense

Upon completion of this offering, we expect to have pro forma total debt outstanding of $1,549.9 million, with a weighted average annual interest rate of 2.94% (excluding the effects of interest rate swaps) and a weighted average maturity of 5.5 years, 92.9% of which is fixed rate debt or hedged through interest rate swaps. We anticipate that we will continue to incur debt in the future in order to fund future acquisition activity, which will increase the amount of interest expense we incur. In addition, although we attempt to limit our total floating-rate debt exposure, changes in the interest rate environment could either increase or decrease our weighted average interest rate in the future. Any changes to our debt structure, including borrowings under the Revolving Credit Facility that we expect to have on a pro forma basis, or debt financing associated with property acquisitions, could materially influence our operating results depending on the terms of any such debt. A downgrade in our credit rating could also increase the amount of interest we pay under our debt agreements.

Interest rates declined during the first six months of 2020, as the U.S. federal government attempts to combat the economic impacts of the COVID-19 pandemic. We benefited from this dynamic to the extent our floating rate borrowings were unhedged during the second quarter. Our floating rate borrowings bear interest at variable rates equal to LIBOR plus a margin based on our credit rating. The one-month LIBOR rate decreased from 1.76% at December 31, 2019, to 0.16% at June 30, 2020. Additionally, as of July 31, 2020, the one-month LIBOR rate was approximately 0.15%. Restrictions in credit markets have simultaneously resulted in an increase in borrowing spreads across the debt capital markets as compared to the end of 2019, although they narrowed during the second quarter of 2020. We have strategically staggered our debt maturities as part of our active management of an investment grade balance sheet, with no borrowings maturing prior to 2022 on a pro forma basis. As market conditions evolve and we return to executing against our growth strategy, additional changes in interest rates and our borrowing spreads could negatively influence our operating results.

Property Management and Asset Management Fees

Following completion of the Internalization in February 2020, we no longer pay property management and asset management fees, which had historically increased in correlation to the size of our portfolio.

General and Administrative Expenses

Following completion of the Internalization, our general and administrative expenses primarily consist of direct employee compensation costs for our 73 employees. In addition, our general and administrative expenses include certain professional fees, consulting, portfolio servicing costs, and other general and administrative expenses not previously incurred based upon our externally managed structure. Given our current team and structure, we expect that as our portfolio grows, we will experience limited increases in general and administrative expenses in the next few years after 2020, such that those expenses will grow at a significantly slower rate than the overall portfolio and corresponding lease revenues.

As a result of the COVID-19 pandemic, we transitioned to a work from home policy effective on March 16, 2020, successfully migrating our employees out of the office. As of the date of this filing, the policy remains in effect. Given our limited headcount, we have not incurred a material amount of cash outlays on information technology or infrastructure to facilitate our remote workforce, and we do not believe we will incur significant costs in the future. We expect a significant decrease in travel and entertainment expenses in 2020, as social distancing guidelines and restrictions have limited corporate travel. These benefits, however, may be outweighed by incremental third party legal, accounting, and consulting costs if the impacts of the COVID-19 pandemic worsen.

Impact of Inflation

Our rental revenues may be impacted by inflation. Many of our leases contain rent escalators that increase rent at a fixed amount and may not be sufficient during periods of high inflation. Leases that contributed

 

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approximately 15.7% of our ABR as of June 30, 2020, contained rent escalators based on increases in CPI and the associated increases in rental revenue may be limited during periods of low inflation. The impact of inflation on our property and operating expenses is limited since substantially all of our leases are net leases, and property-level expenses are generally paid by our tenants. To the extent we bear the cost of such expense, we attempt to limit our exposure to inflation through the use of warranties and other remedies that reduce the likelihood of a significant capital outlay. Inflation and increased costs may also have an adverse impact to our tenants and their creditworthiness if the increase in property-level expenses is greater than their increase in revenues.

Tenant Bankruptcies

Adverse economic conditions, particularly those that affect the markets in which our properties are located, or downturns in our tenants’ industries could impair our tenants’ ability to meet their lease obligations to us and our ability to renew expiring leases or re-lease space. In particular, the bankruptcy of one or more of our tenants could adversely affect our ability to collect rents from such tenant and maintain our portfolio’s occupancy. At June 30, 2020, one of our tenants, representing less than 0.5% of June ABR, was subject to bankruptcy proceedings. To mitigate the negative impact of these bankruptcy proceedings, we successfully re-leased the majority of properties leased to this tenant at the end of the second quarter. We have yet to see the long-term effects of the pandemic and the extent to which it may impact our tenants in the future. A prolonged exposure to the negative economic impacts of the pandemic may result in additional tenant bankruptcies.

Impairments

We review long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If and when such events or changes in circumstances are present, an impairment exists to the extent the carrying value of the asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition. Such cash flows include expected future operating income, as adjusted for trends and prospects, as well as the effects of demand, competition, and other factors. Significant judgment is made as to if and when impairment should be taken. If our strategy, or one or more of the assumptions described above were to change in the future, an impairment may need to be recognized. Indications of a tenant’s inability to continue as a going concern, changes in our view or strategy relative to a tenant’s business or industry as a result of the COVID-19 pandemic, or changes in our long-term hold strategies, could each be indicative of an impairment triggering event. For the six months ended June 30, 2020, we recognized $0.5 million of impairment associated with a lease modification as the result of a tenant’s request for rent relief. We face the risk of additional impairments depending on the long-term effects of the pandemic and the extent to which it may impact our tenants in the future.

Results of Operations

Our historical results of operations for the six months ended June 30, 2020 and six months ended June 30, 2019, discussed below, include the payment of asset and property management fees that we will no longer pay following the Internalization, and do not include the expected direct compensation expense associated with 73 employees employed by us following the Internalization or incremental general and administrative expenses.

Discussion of our Results of Operations for the year ended December 31, 2018 compared to the year ended December 31, 2017 was previously filed in our Annual Report on Form 10-K for the year ended December 31, 2018. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Results of Operations—Year Ended December 31, 2018 Compared to Year Ended December 31, 2017.

 

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Comparison of the Six Months Ended June 30, 2020 and the Six Months Ended June 30, 2019

Lease Revenues

 

     For the six months ended  
     June 30,     Increase/(Decrease)  
(in thousands)            2020                   &nbs