10-Q 1 ck0001424182-10q_20180930.htm 10-Q ck0001424182-10q_20180930.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 September 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 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 21,367,936.807 shares of the Registrant’s common stock, $0.001 par value per share, outstanding as of November 5, 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

28

 

Cautionary Note Regarding Forward-Looking Statements

28

 

Overview

28

 

Liquidity and Capital Resources

38

 

Impact of Inflation

42

 

Off-Balance Sheet Arrangements

42

 

Contractual Obligations

43

 

Results of Operations

43

 

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

48

 

Critical Accounting Policies

52

 

Impact of Recent Accounting Pronouncements

52

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53

Item 4.

Controls and Procedures

54

Part II - OTHER INFORMATION

55

Item 1.

Legal Proceedings

55

Item 1A.

Risk Factors

55

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

Item 3.

Defaults upon Senior Securities

57

Item 4.

Mine Safety Disclosures

57

Item 5.

Other Information

57

Item 6.

Exhibits

58

 

 


 

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)

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Assets

 

 

 

 

 

 

 

 

Accounted for using the operating method, net of accumulated depreciation

 

$

2,449,438

 

 

$

2,186,141

 

Accounted for using the direct financing method

 

 

42,012

 

 

 

41,617

 

Investment in rental property, net

 

 

2,491,450

 

 

 

2,227,758

 

Cash and cash equivalents

 

 

17,301

 

 

 

9,355

 

Restricted cash

 

 

10,727

 

 

 

744

 

Accrued rental income

 

 

65,689

 

 

 

52,018

 

Tenant and other receivables, net

 

 

214

 

 

 

897

 

Tenant and capital reserves

 

 

1,087

 

 

 

943

 

Prepaid expenses and other assets

 

 

2,932

 

 

 

267

 

Notes receivable

 

 

 

 

 

6,527

 

Investment in related party

 

 

 

 

 

10,000

 

Interest rate swap, assets

 

 

35,525

 

 

 

11,008

 

Intangible lease assets, net

 

 

264,038

 

 

 

242,659

 

Debt issuance costs – unsecured revolver, net

 

 

2,453

 

 

 

3,026

 

Leasing fees, net

 

 

13,929

 

 

 

13,554

 

Total assets

 

$

2,905,345

 

 

$

2,578,756

 

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

Unsecured revolver

 

$

 

 

$

273,000

 

Mortgages and notes payable, net

 

 

79,762

 

 

 

67,832

 

Unsecured term notes, net

 

 

1,225,473

 

 

 

836,912

 

Interest rate swap, liabilities

 

 

 

 

 

5,020

 

Accounts payable and other liabilities

 

 

21,453

 

 

 

20,345

 

Due to related parties

 

 

47

 

 

 

722

 

Tenant improvement allowances

 

 

2,920

 

 

 

5,669

 

Accrued interest payable

 

 

7,018

 

 

 

3,311

 

Intangible lease liabilities, net

 

 

86,301

 

 

 

81,744

 

Total liabilities

 

 

1,422,974

 

 

 

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, 21,077 and 18,909 shares

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

 

 

21

 

 

 

19

 

Additional paid-in capital

 

 

1,479,339

 

 

 

1,301,979

 

Subscriptions receivable

 

 

(1,690

)

 

 

(15

)

Cumulative distributions in excess of retained earnings

 

 

(141,117

)

 

 

(120,280

)

Accumulated other comprehensive income

 

 

33,114

 

 

 

5,122

 

Total Broadstone Net Lease, Inc. stockholders’ equity

 

 

1,369,667

 

 

 

1,186,825

 

Non-controlling interests

 

 

112,704

 

 

 

97,376

 

Total equity

 

 

1,482,371

 

 

 

1,284,201

 

Total liabilities and equity

 

$

2,905,345

 

 

$

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

September 30,

 

 

For the nine months ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income from operating leases

 

$

58,189

 

 

$

43,233

 

 

$

163,611

 

 

$

123,890

 

Earned income from direct financing leases

 

 

1,017

 

 

 

968

 

 

 

2,936

 

 

 

3,175

 

Operating expenses reimbursed from tenants

 

 

2,529

 

 

 

1,995

 

 

 

7,764

 

 

 

4,908

 

Other income from real estate transactions

 

 

29

 

 

 

39

 

 

 

74

 

 

 

117

 

Total revenues

 

 

61,764

 

 

 

46,235

 

 

 

174,385

 

 

 

132,090

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

21,869

 

 

 

15,643

 

 

 

61,303

 

 

 

44,969

 

Asset management fees

 

 

4,663

 

 

 

3,844

 

 

 

13,119

 

 

 

10,666

 

Property management fees

 

 

1,680

 

 

 

1,249

 

 

 

4,792

 

 

 

3,635

 

Property and operating expense

 

 

2,777

 

 

 

2,009

 

 

 

7,926

 

 

 

4,710

 

General and administrative

 

 

1,664

 

 

 

1,173

 

 

 

4,451

 

 

 

3,297

 

State and franchise tax

 

 

58

 

 

 

301

 

 

 

811

 

 

 

511

 

Provision for impairment of investment in rental properties

 

 

2,061

 

 

 

2,608

 

 

 

2,061

 

 

 

2,608

 

Total operating expenses

 

 

34,772

 

 

 

26,827

 

 

 

94,463

 

 

 

70,396

 

Operating income

 

 

26,992

 

 

 

19,408

 

 

 

79,922

 

 

 

61,694

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred distribution income

 

 

65

 

 

 

187

 

 

 

440

 

 

 

550

 

Interest income

 

 

16

 

 

 

127

 

 

 

178

 

 

 

354

 

Interest expense

 

 

(14,484

)

 

 

(9,380

)

 

 

(38,115

)

 

 

(25,182

)

Cost of debt extinguishment

 

 

(50

)

 

 

(1,404

)

 

 

(101

)

 

 

(5,019

)

Gain on sale of real estate

 

 

2,025

 

 

 

4,052

 

 

 

9,620

 

 

 

10,332

 

Gain on sale of investment in related party

 

 

8,500

 

 

 

 

 

 

8,500

 

 

 

 

Net income

 

 

23,064

 

 

 

12,990

 

 

 

60,444

 

 

 

42,729

 

Net income attributable to non-controlling interests

 

 

(1,797

)

 

 

(1,042

)

 

 

(4,631

)

 

 

(3,460

)

Net income attributable to Broadstone Net Lease, Inc.

 

$

21,267

 

 

$

11,948

 

 

$

55,813

 

 

$

39,269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

20,554

 

 

 

17,617

 

 

 

19,850

 

 

 

16,607

 

Diluted

 

 

22,291

 

 

 

19,147

 

 

 

21,496

 

 

 

18,069

 

Net earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

1.03

 

 

$

0.68

 

 

$

2.81

 

 

$

2.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

23,064

 

 

$

12,990

 

 

$

60,444

 

 

$

42,729

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swaps

 

 

6,299

 

 

 

283

 

 

 

30,296

 

 

 

(1,448

)

Realized (gain) loss on interest rate swaps

 

 

(4

)

 

 

 

 

 

(4

)

 

 

(873

)

Comprehensive income

 

 

29,359

 

 

 

13,273

 

 

 

90,736

 

 

 

40,408

 

Comprehensive income attributable to non-controlling interests

 

 

(2,288

)

 

 

(1,046

)

 

 

(6,931

)

 

 

(3,271

)

Comprehensive income attributable to Broadstone Net Lease, Inc.

 

$

27,071

 

 

$

12,227

 

 

$

83,805

 

 

$

37,137

 

 

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 (Loss)

 

 

Non-

controlling

Interests

 

 

Total

 

Balance, January 1, 2017

 

$

15

 

 

$

1,009,431

 

 

$

(9,790

)

 

$

(89,960

)

 

$

2,092

 

 

$

86,749

 

 

$

998,537

 

Net income

 

 

 

 

 

 

 

 

 

 

 

39,269

 

 

 

 

 

 

3,460

 

 

 

42,729

 

Issuance of 3,163 shares of common stock, net

 

 

3

 

 

 

249,942

 

 

 

9,320

 

 

 

 

 

 

 

 

 

 

 

 

259,265

 

Other offering costs

 

 

 

 

 

(1,144

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,144

)

Issuance of 103 membership units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,278

 

 

 

8,278

 

Distributions declared ($0.410 per share January 2017,

   $0.415 per share February through September 2017)

 

 

 

 

 

 

 

 

 

 

 

(62,034

)

 

 

 

 

 

(5,719

)

 

 

(67,753

)

Change in fair value of interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,328

)

 

 

(120

)

 

 

(1,448

)

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 62 shares of common stock

 

 

 

 

 

(4,825

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,825

)

Balance, September 30, 2017

 

$

18

 

 

$

1,253,431

 

 

$

(470

)

 

$

(112,725

)

 

$

(40

)

 

$

92,552

 

 

$

1,232,766

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

55,813

 

 

 

 

 

 

4,631

 

 

 

60,444

 

Issuance of 2,275 shares of common stock, net

 

 

2

 

 

 

186,810

 

 

 

(1,675

)

 

 

 

 

 

 

 

 

 

 

 

185,137

 

Other offering costs

 

 

 

 

 

(822

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(822

)

Issuance of 194 membership units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,797

 

 

 

15,797

 

Distributions declared ($0.415 per share January 2018,

   $0.43 per share February through September 2018)

 

 

 

 

 

 

 

 

 

 

 

(76,650

)

 

 

 

 

 

(6,716

)

 

 

(83,366

)

Change in fair value of interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,995

 

 

 

2,301

 

 

 

30,296

 

Realized gain on interest rate swap agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

(1

)

 

 

(4

)

Conversion of eight membership units to eight shares of

   common stock

 

 

 

 

 

684

 

 

 

 

 

 

 

 

 

 

 

 

(684

)

 

 

 

Redemption of 106 shares of common stock

 

 

 

 

 

(8,564

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,564

)

Cancellation of nine shares of common stock

 

 

 

 

 

(748

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(748

)

Balance, September 30, 2018

 

$

21

 

 

$

1,479,339

 

 

$

(1,690

)

 

$

(141,117

)

 

$

33,114

 

 

$

112,704

 

 

$

1,482,371

 

 

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 nine months

ended September 30,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

60,444

 

 

$

42,729

 

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

 

 

61,515

 

 

 

45,456

 

Provision for impairment of investment in rental properties

 

 

2,061

 

 

 

2,608

 

Amortization of debt issuance costs charged to interest expense

 

 

1,303

 

 

 

1,478

 

Straight-line rent and financing lease adjustments

 

 

(15,640

)

 

 

(12,505

)

Cost of debt extinguishment

 

 

101

 

 

 

5,019

 

Gain on sale of real estate

 

 

(9,620

)

 

 

(10,332

)

Settlement of interest rate swap

 

 

760

 

 

 

(1,965

)

Gain on sale of investment in related party

 

 

(8,500

)

 

 

 

Leasing fees paid

 

 

(1,325

)

 

 

(2,597

)

Non-cash interest

 

 

(4

)

 

 

(1,349

)

Other non-cash items

 

 

472

 

 

 

325

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Tenant and other receivables

 

 

(65

)

 

 

(237

)

Prepaid expenses and other assets

 

 

(799

)

 

 

(440

)

Accounts payable and other liabilities

 

 

(893

)

 

 

897

 

Accrued interest payable

 

 

3,707

 

 

 

3,278

 

Net cash provided by operating activities

 

 

93,517

 

 

 

72,365

 

 

 

 

 

 

 

 

 

 

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

 

 

(329,664

)

 

 

(345,789

)

Acquisition of rental property accounted for using the direct financing method

 

 

(430

)

 

 

(3,546

)

Capital expenditures and improvements

 

 

(4,182

)

 

 

(3,871

)

Proceeds from sale of investment in related party

 

 

18,500

 

 

 

 

Proceeds from disposition of rental property, net

 

 

41,330

 

 

 

55,296

 

Increase in tenant and capital reserves

 

 

(144

)

 

 

(130

)

Net cash used in investing activities

 

 

(274,590

)

 

 

(298,040

)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net

 

 

146,791

 

 

 

229,698

 

Redemptions of common stock

 

 

(8,564

)

 

 

(4,825

)

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

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

 

 

415,000

 

 

 

400,000

 

Principal payments on mortgages and notes payable

 

 

(33,930

)

 

 

(384,087

)

Borrowings on unsecured revolver

 

 

189,500

 

 

 

220,000

 

Repayments on unsecured revolver

 

 

(462,500

)

 

 

(195,500

)

Cash distributions paid to stockholders

 

 

(38,410

)

 

 

(32,533

)

Cash distributions paid to non-controlling interests

 

 

(6,630

)

 

 

(5,669

)

Debt issuance costs paid

 

 

(2,255

)

 

 

(9,889

)

Net cash provided by financing activities

 

 

199,002

 

 

 

217,195

 

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

 

 

17,929

 

 

 

(8,480

)

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

 

$

28,028

 

 

$

14,623

 

 

 

 

 

 

 

 

 

 

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

 

$

17,301

 

 

$

13,698

 

Restricted cash at end of period

 

 

10,727

 

 

 

925

 

Cash and cash equivalents and restricted cash at end of period

 

$

28,028

 

 

$

14,623

 

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 net lease agreements. As of September 30, 2018, the Corporation owned a diversified portfolio of 583 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 September 30, 2018 and December 31, 2017:

 

Percentage of shares owned by

 

September 30,

2018

 

 

December 31,

2017

 

Corporation

 

 

92.4

%

 

 

92.4

%

Non-controlling interests

 

 

7.6

%

 

 

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 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 92.4% interest in the Operating Company at September 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 cer