10-Q 1 ck0001424182-10q_20180630.htm 10-Q ck0001424182-10q_20180630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2018, or 

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

Commission File Number 000-55774

 

BROADSTONE NET LEASE, INC.

(Exact name of registrant as specified in its charter)

 

 

Maryland

26-1516177

(State or other jurisdiction of
incorporation or organization)

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

 

800 Clinton Square

Rochester, New York

14604

(Address of principal executive offices)

(Zip Code)

(585) 287-6500

(Registrant’s telephone number, including area code)

  

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

 

  

Smaller reporting company

 

Emerging growth company  

 

 

 

 

 

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

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

There were 20,524,162.468 shares of the Registrant’s common stock, $0.001 par value per share, outstanding as of August 10, 2018.

 

 

 

 


BROADSTONE NET LEASE, INC.

TABLE OF CONTENTS

 

 

Page

Part I - FINANCIAL INFORMATION

1

Item 1.

Financial Statements

1

 

Condensed Consolidated Balance Sheets (Unaudited)

1

 

Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)

2

 

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

3

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

4

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

5

Item 2.

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

26

 

Cautionary Note Regarding Forward-Looking Statements

26

 

Overview

26

 

Liquidity and Capital Resources

36

 

Impact of Inflation

40

 

Off-Balance Sheet Arrangements

40

 

Contractual Obligations

40

 

Results of Operations

41

 

Net Income and Non-GAAP Measures (FFO and AFFO)

45

 

Critical Accounting Policies

48

 

Impact of Recent Accounting Pronouncements

48

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

49

Item 4.

Controls and Procedures

50

Part II - OTHER INFORMATION

51

Item 1.

Legal Proceedings

51

Item 1A.

Risk Factors

51

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 3.

Defaults upon Senior Securities

52

Item 4.

Mine Safety Disclosures

52

Item 5.

Other Information

52

Item 6.

Exhibits

53

 

 


 

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except per share amounts)

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Assets

 

 

 

 

 

 

 

 

Accounted for using the operating method, net of accumulated depreciation

 

$

2,373,376

 

 

$

2,186,141

 

Accounted for using the direct financing method

 

 

42,023

 

 

 

41,617

 

Investment in rental property, net

 

 

2,415,399

 

 

 

2,227,758

 

Cash and cash equivalents

 

 

13,765

 

 

 

9,355

 

Restricted cash

 

 

7,057

 

 

 

744

 

Accrued rental income

 

 

60,857

 

 

 

52,018

 

Tenant and other receivables, net

 

 

95

 

 

 

897

 

Tenant and capital reserves

 

 

1,041

 

 

 

943

 

Prepaid expenses and other assets

 

 

1,837

 

 

 

267

 

Notes receivable

 

 

 

 

 

6,527

 

Investment in related party

 

 

10,000

 

 

 

10,000

 

Interest rate swap, assets

 

 

30,169

 

 

 

11,008

 

Intangible lease assets, net

 

 

258,294

 

 

 

242,659

 

Debt issuance costs – unsecured revolver, net

 

 

2,644

 

 

 

3,026

 

Leasing fees, net

 

 

14,100

 

 

 

13,554

 

Total assets

 

$

2,815,258

 

 

$

2,578,756

 

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

Unsecured revolver

 

$

272,500

 

 

$

273,000

 

Mortgages and notes payable, net

 

 

86,242

 

 

 

67,832

 

Unsecured term notes, net

 

 

927,364

 

 

 

836,912

 

Interest rate swap, liabilities

 

 

184

 

 

 

5,020

 

Accounts payable and other liabilities

 

 

22,492

 

 

 

20,345

 

Due to related parties

 

 

915

 

 

 

722

 

Tenant improvement allowances

 

 

4,292

 

 

 

5,669

 

Accrued interest payable

 

 

3,008

 

 

 

3,311

 

Intangible lease liabilities, net

 

 

85,442

 

 

 

81,744

 

Total liabilities

 

 

1,402,439

 

 

 

1,294,555

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (See Note 16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Broadstone Net Lease, Inc. stockholders' equity:

 

 

 

 

 

 

 

 

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

   or outstanding

 

 

 

 

 

 

Common stock, $0.001 par value; 80,000 shares authorized, 20,239 and 18,909 shares

   issued and outstanding at June 30, 2018 and December 31, 2017, respectively

 

 

20

 

 

 

19

 

Additional paid-in capital

 

 

1,409,541

 

 

 

1,301,979

 

Subscriptions receivable

 

 

(500

)

 

 

(15

)

Cumulative distributions in excess of retained earnings

 

 

(135,829

)

 

 

(120,280

)

Accumulated other comprehensive income

 

 

27,310

 

 

 

5,122

 

Total Broadstone Net Lease, Inc. stockholders’ equity

 

 

1,300,542

 

 

 

1,186,825

 

Non-controlling interests

 

 

112,277

 

 

 

97,376

 

Total equity

 

 

1,412,819

 

 

 

1,284,201

 

Total liabilities and equity

 

$

2,815,258

 

 

$

2,578,756

 

 

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

 

 

1


 

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income

(Unaudited)

(in thousands, except per share amounts)

 

 

 

For the three months ended

June 30,

 

 

For the six months ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income from operating leases

 

$

53,590

 

 

$

41,256

 

 

$

105,422

 

 

$

80,657

 

Earned income from direct financing leases

 

 

953

 

 

 

1,074

 

 

 

1,919

 

 

 

2,207

 

Operating expenses reimbursed from tenants

 

 

2,486

 

 

 

1,296

 

 

 

5,235

 

 

 

2,913

 

Other income from real estate transactions

 

 

3

 

 

 

45

 

 

 

45

 

 

 

78

 

Total revenues

 

 

57,032

 

 

 

43,671

 

 

 

112,621

 

 

 

85,855

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

20,232

 

 

 

14,733

 

 

 

39,434

 

 

 

29,326

 

Asset management fees

 

 

4,313

 

 

 

3,629

 

 

 

8,456

 

 

 

6,822

 

Property management fees

 

 

1,595

 

 

 

1,218

 

 

 

3,112

 

 

 

2,386

 

Property and operating expense

 

 

2,530

 

 

 

1,124

 

 

 

5,149

 

 

 

2,701

 

General and administrative

 

 

1,456

 

 

 

1,162

 

 

 

2,787

 

 

 

2,125

 

State and franchise tax

 

 

510

 

 

 

160

 

 

 

753

 

 

 

210

 

Total operating expenses

 

 

30,636

 

 

 

22,026

 

 

 

59,691

 

 

 

43,570

 

Operating income

 

 

26,396

 

 

 

21,645

 

 

 

52,930

 

 

 

42,285

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred distribution income

 

 

187

 

 

 

182

 

 

 

375

 

 

 

363

 

Interest income

 

 

52

 

 

 

115

 

 

 

162

 

 

 

227

 

Interest expense

 

 

(12,454

)

 

 

(7,860

)

 

 

(23,631

)

 

 

(15,802

)

Cost of debt extinguishment

 

 

(51

)

 

 

(3,567

)

 

 

(51

)

 

 

(3,615

)

Gain on sale of real estate

 

 

4,256

 

 

 

5,477

 

 

 

7,595

 

 

 

6,280

 

Net income

 

 

18,386

 

 

 

15,992

 

 

 

37,380

 

 

 

29,738

 

Net income attributable to non-controlling interests

 

 

(1,412

)

 

 

(1,265

)

 

 

(2,834

)

 

 

(2,418

)

Net income attributable to Broadstone Net Lease, Inc.

 

$

16,974

 

 

$

14,727

 

 

$

34,546

 

 

$

27,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,829

 

 

 

16,623

 

 

 

19,498

 

 

 

16,102

 

Diluted

 

 

21,478

 

 

 

18,051

 

 

 

21,098

 

 

 

17,530

 

Net earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.86

 

 

$

0.89

 

 

$

1.77

 

 

$

1.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

18,386

 

 

$

15,992

 

 

$

37,380

 

 

$

29,738

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swaps

 

 

7,042

 

 

 

(4,291

)

 

 

23,997

 

 

 

(1,731

)

Realized loss on interest rate swaps

 

 

 

 

 

(873

)

 

 

 

 

 

(873

)

Comprehensive income

 

 

25,428

 

 

 

10,828

 

 

 

61,377

 

 

 

27,134

 

Comprehensive income attributable to non-controlling interests

 

 

(1,951

)

 

 

(857

)

 

 

(4,643

)

 

 

(2,224

)

Comprehensive income attributable to Broadstone Net Lease, Inc.

 

$

23,477

 

 

$

9,971

 

 

$

56,734

 

 

$

24,910

 

 

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

 

 

2


 

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands, except per share amounts)

 

 

 

Common

Stock

 

 

Additional

Paid-in Capital

 

 

Subscriptions

Receivable

 

 

Cumulative

Distributions in Excess of Retained Earnings

 

 

Accumulated Other

Comprehensive

Income

 

 

Non-controlling

Interests

 

 

Total

 

Balance, January 1, 2017

 

$

15

 

 

$

1,009,431

 

 

$

(9,790

)

 

$

(89,960

)

 

$

2,092

 

 

$

86,749

 

 

$

998,537

 

Net income

 

 

 

 

 

 

 

 

 

 

 

27,320

 

 

 

 

 

 

2,418

 

 

 

29,738

 

Issuance of 2,169 shares of common stock, net

 

 

2

 

 

 

170,679

 

 

 

9,790

 

 

 

 

 

 

 

 

 

 

 

 

180,471

 

Other offering costs

 

 

 

 

 

(802

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(802

)

Issuance of 103 membership units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,278

 

 

 

8,278

 

Distributions declared ($0.410 per share January

   2017, $0.415 per share February through June 2017)

 

 

 

 

 

 

 

 

 

 

 

(40,071

)

 

 

 

 

 

(3,733

)

 

 

(43,804

)

Change in fair value of interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,606

)

 

 

(125

)

 

 

(1,731

)

Realized loss on interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(804

)

 

 

(69

)

 

 

(873

)

Conversion of one membership unit to one share of common stock

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

 

 

 

(27

)

 

 

 

Redemption of 39 shares of common stock

 

 

 

 

 

(3,016

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,016

)

Balance, June 30, 2017

 

$

17

 

 

$

1,176,319

 

 

$

 

 

$

(102,711

)

 

$

(318

)

 

$

93,491

 

 

$

1,166,798

 

 

 

 

Common

Stock

 

 

Additional

Paid-in Capital

 

 

Subscriptions

Receivable

 

 

Cumulative

Distributions in Excess of Retained Earnings

 

 

Accumulated Other

Comprehensive

Income

 

 

Non-controlling

Interests

 

 

Total

 

Balance, January 1, 2018

 

$

19

 

 

$

1,301,979

 

 

$

(15

)

 

$

(120,280

)

 

$

5,122

 

 

$

97,376

 

 

$

1,284,201

 

Net income

 

 

 

 

 

 

 

 

 

 

 

34,546

 

 

 

 

 

 

2,834

 

 

 

37,380

 

Issuance of 1,405 shares of common stock, net

 

 

1

 

 

 

114,040

 

 

 

(485

)

 

 

 

 

 

 

 

 

 

 

 

113,556

 

Other offering costs

 

 

 

 

 

(525

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(525

)

Issuance of 194 membership units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,797

 

 

 

15,797

 

Distributions declared ($0.415 per share January 2018, $0.43 per

   share February through June 2018)

 

 

 

 

 

 

 

 

 

 

 

(50,095

)

 

 

 

 

 

(4,855

)

 

 

(54,950

)

Change in fair value of interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,188

 

 

 

1,809

 

 

 

23,997

 

Conversion of eight membership units to eight shares of common stock

 

 

 

 

 

684

 

 

 

 

 

 

 

 

 

 

 

 

(684

)

 

 

 

Redemption of 74 shares of common stock

 

 

 

 

 

(5,889

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,889

)

Cancellation of nine shares of common stock

 

 

 

 

 

(748

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(748

)

Balance, June 30, 2018

 

$

20

 

 

$

1,409,541

 

 

$

(500

)

 

$

(135,829

)

 

$

27,310

 

 

$

112,277

 

 

$

1,412,819

 

 

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

 

 

3


 

Broadstone Net Lease, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

For the six months

ended June 30,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

37,380

 

 

$

29,738

 

Adjustments to reconcile net income including non-controlling interest to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization including intangibles associated with investment in rental property

 

 

39,901

 

 

 

29,714

 

Amortization of debt issuance costs charged to interest expense

 

 

862

 

 

 

787

 

Straight-line rent and financing lease adjustments

 

 

(10,303

)

 

 

(8,068

)

Cost of debt extinguishment

 

 

51

 

 

 

3,615

 

Gain on sale of real estate

 

 

(7,595

)

 

 

(6,280

)

Settlement of interest rate swap, liability

 

 

 

 

 

(1,965

)

Leasing fees paid

 

 

(1,177

)

 

 

(1,796

)

Non-cash interest

 

 

 

 

 

(1,349

)

Other non-cash items

 

 

329

 

 

 

237

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Tenant and other receivables

 

 

54

 

 

 

(18

)

Prepaid expenses and other assets

 

 

(1,570

)

 

 

(941

)

Accounts payable and other liabilities

 

 

1,046

 

 

 

797

 

Accrued interest payable

 

 

(303

)

 

 

837

 

Net cash provided by operating activities

 

 

58,675

 

 

 

45,308

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Acquisition of rental property accounted for using the operating method, net of mortgage assumed

   of $20,845 and $0 in 2018 and 2017, respectively

 

 

(216,036

)

 

 

(185,179

)

Acquisition of rental property accounted for using the direct financing method

 

 

(430

)

 

 

(3,546

)

Capital expenditures and improvements

 

 

(1,445

)

 

 

(3,871

)

Proceeds from disposition of rental property, net

 

 

30,289

 

 

 

28,929

 

Increase in tenant and capital reserves

 

 

(98

)

 

 

(81

)

Net cash used in investing activities

 

 

(187,720

)

 

 

(163,748

)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net

 

 

88,701

 

 

 

161,435

 

Redemptions of common stock

 

 

(5,889

)

 

 

(3,016

)

Borrowings on mortgages, notes payable and unsecured term notes, net of mortgages assumed of

   $20,845 and $0 in 2018 and 2017, respectively

 

 

90,000

 

 

 

400,000

 

Principal payments on mortgages and notes payable

 

 

(2,442

)

 

 

(374,023

)

Borrowings on unsecured revolver

 

 

115,000

 

 

 

175,000

 

Repayments on unsecured revolver

 

 

(115,500

)

 

 

(187,000

)

Cash distributions paid to stockholders

 

 

(25,245

)

 

 

(21,091

)

Cash distributions paid to non-controlling interests

 

 

(4,785

)

 

 

(3,727

)

Debt issuance costs paid

 

 

(72

)

 

 

(8,470

)

Net cash provided by financing activities

 

 

139,768

 

 

 

139,108

 

Net increase in cash and cash equivalents and restricted cash

 

 

10,723

 

 

 

20,668

 

Cash and cash equivalents and restricted cash at beginning of period

 

 

10,099

 

 

 

23,103

 

Cash and cash equivalents and restricted cash at end of period

 

$

20,822

 

 

$

43,771

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash and cash equivalents and restricted cash

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$

9,355

 

 

$

21,635

 

Restricted cash at beginning of period

 

 

744

 

 

 

1,468

 

Cash and cash equivalents and restricted cash at beginning of period

 

$

10,099

 

 

$

23,103

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

13,765

 

 

$

35,752

 

Restricted cash at end of period

 

 

7,057

 

 

 

8,019

 

Cash and cash equivalents and restricted cash at end of period

 

$

20,822

 

 

$

43,771

 

 

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

 

 

4


 

Broadstone Net Lease, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements (Unaudited)

(in thousands)

1. Business Description

Broadstone Net Lease, Inc. (the “Corporation”) is a Maryland corporation formed on October 18, 2007, that elected to be taxed as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2008. The Corporation focuses on investing in income-producing, net leased commercial properties. The Corporation leases properties to retail, healthcare, industrial, office, and other commercial businesses under long-term lease agreements. Properties are generally leased on a triple-net basis such that tenants pay all operating expenses relating to the property, including, but not limited to, property taxes, insurance, maintenance, repairs, and capital costs, during the lease term. As of June 30, 2018, the Corporation owned a diversified portfolio of 558 individual net leased commercial properties located in 42 states throughout the continental United States.

Broadstone Net Lease, LLC (the “Operating Company”), is the entity through which the Corporation conducts its business and owns (either directly or through subsidiaries) all of the Corporation’s properties. The Corporation is the sole managing member and primary owner of the economic interest of the Operating Company. The remaining interests in the Operating Company, which are referred to as non-controlling interests, are held by members who acquired their interest by contributing property to the Operating Company in exchange for membership units of the Operating Company. As the Corporation conducts substantially all of its operations through the Operating Company, it is structured as what is referred to as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”). The following table summarizes the economic ownership interest in the Operating Company as of June 30, 2018 and December 31, 2017:

 

Percentage of shares owned by

 

June 30,

2018

 

 

December 31,

2017

 

Corporation

 

 

92.1

%

 

 

92.4

%

Non-controlling interests

 

 

7.9

%

 

 

7.6

%

 

 

 

100.0

%

 

 

100.0

%

The Corporation operates under the direction of its board of directors (the “Board of Directors”), which is responsible for the management and control of the Company’s (as defined below) affairs. The Corporation is externally managed and its board of directors has retained the Corporation’s sponsor, Broadstone Real Estate, LLC (the “Manager”) and Broadstone Asset Management, LLC (the “Asset Manager”) to manage the Corporation’s day-to-day affairs, to implement the Corporation’s investment strategy, and to provide certain property management services for the Corporation’s properties, subject to the Board of Directors’ direction, oversight, and approval. The Asset Manager is a wholly-owned subsidiary of the Manager and all of the Corporation’s officers are employees of the Manager. Accordingly, both the Manager and the Asset Manager are related parties of the Company. Refer to Note 3 for further discussion over related parties and related party transactions.

2. Summary of Significant Accounting Policies

Interim Information

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and Article 10 of the Securities and Exchange Commission’s (“SEC”) Regulation S-X. Accordingly, the Corporation has omitted certain footnote disclosures which would substantially duplicate those contained within the audited consolidated financial statements for the year ended December 31, 2017, included in the Company’s 2017 Annual Report on Form 10-K, filed with the SEC on March 15, 2018. Therefore, the readers of this quarterly report should refer to those audited consolidated financial statements, specifically Note 2, Summary of Significant Accounting Policies, for further discussion of significant accounting policies and estimates. The Corporation believes all adjustments necessary for a fair presentation have been included in these interim Condensed Consolidated Financial Statements (which include only normal recurring adjustments).

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts and operations of the Corporation, the Operating Company and its consolidated subsidiaries, all of which are wholly owned by the Operating Company (collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.

5


 

To the extent the Corporation has a variable interest in entities that are not evaluated under the variable interest entity (“VIE”) model, the Corporation evaluates its interests using the voting interest entity model. The Corporation holds a 92.1% interest in the Operating Company at June 30, 2018, and is the sole managing member of the Operating Company, which gives the Corporation exclusive and complete responsibility for the day-to-day management, authority to make decisions, and control of the Operating Company. Based on consolidation guidance, the Corporation concluded that the Operating Company is a VIE as the members in the Operating Company do not possess kick-out rights or substantive participating rights. Accordingly, the Corporation consolidates its interest in the Operating Company. However, as the Corporation holds the majority voting interest in the Operating Company, it qualifies for the exemption from providing certain disclosure requirements associated with investments in VIEs.

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

Basis of Accounting

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

Use of Estimates

The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include, but are not limited to, the allocation of purchase price between investment in rental property and intangible assets acquired and liabilities assumed, the value of long-lived assets, the provision for impairment, the depreciable lives of rental property, the amortizable lives of intangible assets and liabilities, the allowance for doubtful accounts, the fair value of assumed debt and notes payable, the fair value of the Company’s interest rate swap agreements, and the determination of any uncertain tax positions. Accordingly, actual results may differ from those estimates.

Restricted Cash

Restricted cash includes escrow funds the Company maintains pursuant to the terms of certain mortgage and notes payable and lease agreements, and undistributed proceeds from the sale of properties under Section 1031 of the Internal Revenue Code.

Revenue Recognition

At the inception of a new lease arrangement, including new leases that arise from amendments, the Company assesses the terms and conditions to determine the proper lease classification. A lease arrangement is classified as an operating lease if none of the following criteria are met: (i) ownership transfers to the lessee prior to or shortly after the end of the lease term, (ii) lessee has a bargain purchase option during or at the end of the lease term, (iii) the lease term is greater than or equal to 75% of the underlying property’s estimated useful life, or (iv) the present value of the future minimum lease payments (excluding executory costs) is greater than or equal to 90% of the fair value of the leased property. If one or more of these criteria are met, and the minimum lease payments are determined to be reasonably predictable and collectible, the lease arrangement is generally accounted for as a direct financing lease. Consistent with Financial Accounting Standards Board (“FASB”) ASC 840, Leases, if the fair value of the land component is 25% or more of the total fair value of the leased property, the land is considered separately from the building for purposes of applying the lease term and minimum lease payments criterion in (iii) and (iv) above.

Revenue recognition methods for operating leases and direct financing leases are described below:

Rental property accounted for under operating leases – Revenue is recognized as rents are earned on a straight-line basis over the non-cancelable terms of the related leases. In most cases, revenue recognition under operating leases begins when the lessee takes possession of, or controls, the physical use of the leased asset. Generally, this occurs on the lease commencement date. For leases that have fixed and measurable rent escalations, the difference between such rental income earned and the cash rent due under the provisions of the lease is recorded as Accrued rental income on the Condensed Consolidated Balance Sheets.

Rental property accounted for under direct financing leases – The Company utilizes the direct finance method of accounting to record direct financing lease income. For a lease accounted for as a direct financing lease, the net investment in the direct financing lease represents receivables for the sum of future minimum lease payments and the estimated residual value of the leased property, less the unamortized unearned income. Unearned income is deferred and amortized into income over the lease terms so as to produce a constant periodic rate of return on the Company’s net investment in the leases.

6


 

Adoption of ASU 2014-09, described further in Recently Adopted Accounting Standards elsewhere in Note 2, did not have an impact on the nature, amount or timing of revenue recognized for operating leases and direct financing leases as revenue from these sources is derived from lease contracts and therefore falls outside the scope of this guidance.  

Sales of Real Estate

As described further in Recently Adopted Accounting Standards elsewhere in Note 2, the Company adopted ASU 2017-05, effective January 1, 2018. Under ASU 2017-05, the Company’s sales of real estate are generally considered to be sales to non-customers, requiring the Company to identify each distinct non-financial asset promised to the buyer. The Company determines whether the buyer obtains control of the non-financial assets, achieved through the transfer of the risks and rewards of ownership of the non-financial assets. If control is transferred to the buyer, the Company derecognizes the asset.

If the Company determines that it did not transfer control of the non-financial assets to the buyer, the Company will analyze the contract for separate performance obligations and allocate a portion of the sales price to each performance obligation. As performance obligations are satisfied, the Company will recognize the respective income in the Condensed Consolidated Statements of Income and Comprehensive Income.

The Company accounts for discontinued operations if disposals of properties represent a strategic shift in operations. Those strategic shifts would need to have a major effect on the Company’s operations and financial results in order to meet the definition.

Rent Received in Advance

Rent received in advance represents tenant payments received prior to the contractual due date and are included in Accounts payable and other liabilities on the Condensed Consolidated Balance Sheets. Rents received in advance at June 30, 2018 and December 31, 2017 are as follows:

 

(in thousands)

 

June 30,

2018

 

 

December 31,

2017

 

Rents received in advance

 

$

8,253

 

 

$

8,585

 

Allowance for Doubtful Accounts

Management periodically reviews the sufficiency of the allowance for doubtful accounts, taking into consideration its historical losses and existing economic conditions, and adjusts the allowance as it considers necessary.  Uncollected tenant receivables are written off against the allowance when all possible means of collection have been exhausted.  

The following table summarizes the changes in the allowance for doubtful accounts for the six months ended June 30, 2018 and the year ended December 31, 2017:

 

(in thousands)

 

June 30,

2018

 

 

December 31,

2017

 

Beginning balance

 

$

742

 

 

$

323

 

Provision for doubtful accounts

 

 

586

 

 

 

419

 

Write-offs

 

 

(177

)

 

 

 

Ending balance

 

$

1,151