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Investments

6 Months Ended

Jun. 30, 2020

As of June 30, 2020, the Company had investments in 1,060 properties, including six developments in progress and one undeveloped land parcel. Of these 1,060 properties, 960 represented owned properties (of which 11 were subject to leases accounted for as direct financing leases or loans), 8 represented ground lease interests (of which one building was subject to a lease accounted for as a direct financing lease) and 92 represented properties which secure the Company’s investments in nine mortgage loans receivable. The Company’s gross investment portfolio totaled $2.2 billion as of June 30, 2020 and consisted of gross acquisition cost of real estate investments (including transaction costs) totaling $2.1 billion, and loans and direct financing lease receivables, net, with an aggregate carrying amount of $101.0 million. As of June 30, 2020, 255 of these investments, comprising $364.8 million of net investments, were assets of consolidated special purpose entity subsidiaries and were pledged as collateral under the non-recourse obligations of the Company’s Master Trust Funding Program. (See Note 6—Secured Borrowings.)

As of December 31, 2019, the Company had investments in 1,000 property locations, including eight developments in progress and one undeveloped land parcel. Of these 1,000 property locations, 897 represented owned properties (of which eight were subject to leases accounted for as direct financing leases or loans), 12 represented ground lease interests (of which one building was subject to a lease accounted for as a direct financing lease) and 91 represented properties which secure the Company’s investments in six mortgage loans receivable. The Company’s gross investment portfolio totaled $2.0 billion as of December 31, 2019 and consisted of gross acquisition cost of real estate investments (including transaction costs) totaling $1.9 billion and loans and direct financing lease receivables, net, with an aggregate carrying amount of $92.2 million. As of December 31, 2019, 355 of these investments, comprising $601.3 million of net investments, were assets of consolidated special purpose entity subsidiaries and were pledged as collateral under the non-recourse obligations of these special purpose entities.

Acquisitions in 2020

During the six months ended June 30, 2020, the Company did not have any acquisitions that individually represented more than 5% of the Company’s total investment activity as of June 30, 2020. The following table presents information about the Company’s acquisition activity during the six months ended June 30, 2020:


(Dollar amounts in thousands)	Total Investments
Ownership type	Fee Interest
Number of properties acquired	73

Allocation of Purchase Price:
Land and improvements	$	63,100
Building and improvements	114,469
Construction in progress ⁽¹⁾	9,641
Intangible lease assets	3,094
Assets acquired	190,304

Intangible lease liabilities	—
Liabilities assumed	—
Purchase price (including acquisition costs)	$	190,304

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(1)Represents amounts incurred at and subsequent to acquisition and includes $0.2 million of capitalized interest expense.

Acquisitions in 2019

During the six months ended June 30, 2019, the Company did not complete any acquisitions that individually represented more than 5% of the Company’s total investment activity as of June 30, 2019. The following table presents information about the Company’s acquisition activity during the six months ended June 30, 2019:


(Dollar amounts in thousands)	Total Investments
Ownership type	Fee Interest
Number of properties acquired	137

Allocation of Purchase Price:
Land and improvements	$	96,418
Building and improvements	175,074
Construction in progress ⁽¹⁾	5,754
Intangible lease assets	10,338
Assets acquired	287,584

Intangible lease liabilities	(117)
Liabilities assumed	(117)
Purchase price (including acquisition costs)	$	287,467

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(1)Represents amounts incurred at and subsequent to acquisition and includes $0.1 million of capitalized interest.

Gross Investment Activity

During the six months ended June 30, 2020 and 2019, the Company had the following gross investment activity:


(Dollar amounts in thousands)	Number of Investment Locations	Dollar Amount of Investments
Gross investments, January 1, 2019	677	$	1,394,549
Acquisitions of and additions to real estate investments ⁽¹⁾	137	290,943
Sales of investments in real estate	(18)	(35,383)
Relinquishment of properties at end of ground lease term	(1)	(241)
Provisions for impairment of real estate ⁽²⁾		(1,921)
Investments in loans receivable	5	23,566
Principal collections on direct financing lease receivables	(11)	(10,412)
Other		(866)
Gross investments, June 30, 2019		1,660,235
Less: Accumulated depreciation and amortization ⁽³⁾		(69,010)
Net investments, June 30, 2019	789	$	1,591,225

Gross investments, January 1, 2020	1,000	$	2,002,314
Acquisitions of and additions to real estate investments	73	207,774
Sales of investments in real estate	(13)	(21,882)
Relinquishment of properties at end of ground lease term	(3)	(1,931)
Provisions for impairment of real estate ⁽⁴⁾		(1,859)
Investments in loans receivable	3	9,656
Principal collections on loans and direct financing lease receivables		(130)
Other		(1,328)
Gross investments, June 30, 2020		2,192,614
Less: Accumulated depreciation and amortization ⁽³⁾		(113,235)
Net investments, June 30, 2020	1,060	$	2,079,379

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(1)During the six months ended June 30, 2019, the Company acquired nine properties that had secured one of its loans receivable for an aggregate purchase price of $8.2 million. This loan receivable had a carrying value of $5.7 million prior to our acquisition of the mortgaged properties.

(2)During the six months ended June 30, 2019, the Company identified and recorded provisions for impairment at 1 vacant and 5 tenanted properties.

(3)Includes $92.9 million and $53.0 million of accumulated depreciation as of June 30, 2020 and 2019, respectively.

(4)During the six months ended June 30, 2020, the Company identified and recorded provisions for impairment at 4 vacant properties and 1 tenanted property.

Real Estate Investments

The Company’s investment properties are leased to tenants under long-term operating leases that typically include one or more renewal options. See Note 10—Leases for more information about the Company’s leases.

Loans and Direct Financing Lease Receivables

As of June 30, 2020 and December 31, 2019, the Company had ten and seven loans receivable with an aggregate carrying amount of $99.2 million and $89.6 million, respectively. During the three and six months ended June 30, 2020, the borrowers partially repaid $0.1 million in principal on loans receivable. The Company entered into three arrangements accounted for as loans receivable during the six months ended June 30, 2020 with an aggregate carrying value of $8.6 million as of June 30, 2020. The maximum amount of loss due to credit risk is our current principal balance of $99.2 million.

During the six months ended June 30, 2019, the Company entered into three loan receivable arrangements.

The Company’s loans receivable as of June 30, 2020 and December 31, 2019 are summarized as follows (dollar amounts in thousands):


					Principal Balance Outstanding
Loan Type	Monthly Payment	Number of Secured Properties	Interest Rate	Maturity Date	June 30, 2020		December 31, 2019
Mortgage ⁽¹⁾⁽²⁾	Interest only	2	8.80%	2039	$	12,000	$	12,000
Mortgage ⁽²⁾	Principal + Interest	2	8.10%	2059	6,125		5,125
Mortgage ⁽¹⁾	Interest only	2	8.53%	2039	7,300		7,300
Mortgage ⁽¹⁾	Interest only	69	8.16%	2034	28,000		28,000
Mortgage ⁽¹⁾	Interest only	18	8.05%	2034	34,604		34,604
Mortgage ⁽¹⁾	Interest only	1	8.42%	2040	5,300		—
Leasehold interest ⁽³⁾	Principal + Interest	2	10.69%	2039	1,435		1,435
Leasehold interest ⁽⁴⁾	Principal + Interest	1	2.25%	2034	1,137		1,164
Leasehold interest ⁽⁴⁾	Principal + Interest	1	2.41%	2034	1,685		—
Leasehold interest ⁽⁴⁾	Principal + Interest	1	4.97%	2038	$	1,625	—
Net investment					$	99,211	$	89,628

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(1)Loan requires monthly payments of interest only with a balloon payment due at maturity.

(2)Loan allows for prepayments in whole or in part without penalty.

(3)This leasehold interest is accounted for as a loan receivable, as the lease for two land parcels contains an option for the lessee to repurchase the leased parcels in 2024 or 2025.

(4)These leasehold interests are accounted for as loans receivable, as the leases for each property contain an option for the relevant lessee to repurchase the leased property in the future.

Scheduled principal payments due under the Company’s loans receivable as of June 30, 2020 were as follows:


(in thousands)	Loans Receivable
July 1 - December 31, 2020	$	98
2021	207
2022	220
2023	236
2024	252
Thereafter	98,198
Total	$	99,211

As of June 30, 2020 and December 31, 2019, the Company had $2.5 million and $2.6 million, respectively, of net investments accounted for as direct financing lease receivables. The components of the investments accounted for as direct financing lease receivables were as follows:


(in thousands)	June 30, 2020		December 31, 2019
Minimum lease payments receivable	$	3,698	$	3,866
Estimated unguaranteed residual value of leased assets	270		270
Unearned income from leased assets	(1,467)		(1,581)
Net investment	$	2,501	$	2,555

Scheduled future minimum non-cancelable base rental payments due to be received under the direct financing lease receivables as of June 30, 2020 were as follows:


(in thousands)	Future Minimum Base Rental Payments
July 1 - December 31, 2020	$	169
2021	340
2022	345
2023	347
2024	289
Thereafter	2,208
Total	$	3,698

Allowance for Loan Losses

As discussed in Note 2, the Company utilizes the RELEM model which estimates losses on loans and direct financing lease receivables for purposes of calculating an allowance for loan losses. As of June 30, 2020, the Company recorded an allowance for loan losses of $0.7 million. Changes in the Company’s allowance for loan losses are presented within provision for loan losses in the Company’s consolidated statements of operations.

For the six months ended June 30, 2020, the changes to allowance for loan losses were as follows:


(in thousands)	Loans and Direct Financing Lease Receivables
Balance at December 31, 2019	$	—
Cumulative-effect adjustment upon adoption of ASC 326	188
Current period provision for expected credit losses ⁽¹⁾	516
Write-offs charged	—
Recoveries	—
Balance at June 30, 2020	$	704

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(1)The increase in expected credit losses is due to the changes in assumptions regarding current macroeconomic factors related to COVID-19.

The significant credit quality indicators for the Company’s loans and direct financing lease receivables measured at amortized cost, were as follows as of June 30, 2020:


	Amortized Cost Basis by Origination Year
(in thousands)	2020		2019		2018		2017		2016		Total Amortized Costs Basis
Credit Quality Indicator:
LTV <60%	$	—	$	28,000	$	—	$	—	$	832	$	28,832
LTV 60%-70%	—		34,604		—		—		1,100		35,704
LTV >70%	8,611		27,997		—		—		883		37,491
	$	8,611	$	90,601	$	—	$	—	$	2,815	$	102,027

Real Estate Investments Held for Sale

The Company continually evaluates its portfolio of real estate investments and may elect to dispose of investments considering criteria including, but not limited to, tenant concentration, tenant credit quality, tenant operation type (e.g., industry, sector or concept), unit-level financial performance, local market conditions and lease rates, associated indebtedness and asset location. Real estate investments held for sale are expected to be sold within twelve months.

The following table shows the activity in real estate investments held for sale and intangible lease liabilities held for sale during the six months ended June 30, 2020 and 2019.


(Dollar amounts in thousands)	Number of Properties	Real Estate Investments		Intangible Lease Liabilities			Net Carrying Value
Held for sale balance, December 31, 2018	—	$	—	$	—		$	—
Transfers to held for sale classification	2	3,765		—			3,765
Sales	—	—		—		%	—
Transfers to held and used classification	—	—		—		%	—
Held for sale balance, June 30, 2019	2	$	3,765	$	—		$	3,765

Held for sale balance, December 31, 2019	1	$	1,211	$	—		$	1,211
Transfers to held for sale classification	2	1,792		—			1,792
Sales	(1)	$	(1,211)	$	—		$	(1,211)
Transfers to held and used classification	—	—		—			—
Held for sale balance, June 30, 2020	2	$	1,792	$	—		$	1,792

Significant Concentrations

The Company did not have any tenants (including for this purpose, all affiliates of such tenants) whose rental revenue for the three and six months ended June 30, 2020 or 2019 represented 10% or more of total rental revenue in the Company’s consolidated statements of operations.

The following table lists the states where the rental revenue from the properties in that state during the periods presented represented 10% or more of total rental revenue in the Company’s consolidated statements of operations:


	Three months ended June 30,			Six months ended June 30,
State	2020	2019	2020	2019
Texas	12.9%	12.2%	12.6%	12.4%
Georgia	10.5%	11.3%	10.7%	11.2%

Intangible Assets and Liabilities

Intangible assets and liabilities consisted of the following as of the dates presented:


	June 30, 2020										December 31, 2019
(in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Intangible assets:
In-place leases	$	66,533	$	16,659	$	49,874	$	64,828	$	14,195	$	50,633
Intangible market lease assets	12,644		3,944		8,700		14,094		4,228		9,866
Total intangible assets	$	79,177	$	20,603	$	58,574	$	78,922	$	18,423	$	60,499

Intangible market lease liabilities	$	11,866	$	2,737	$	9,129	$	12,054	$	2,490	$	9,564

The remaining weighted average amortization periods for the Company’s intangible assets and liabilities as of June 30, 2020, by category and in total, were as follows:


			Years Remaining
In-place leases			10.1
Intangible market lease assets			15.4
Total intangible assets			10.8

Intangible market lease liabilities			15.4

The following table discloses amounts recognized within the consolidated statements of operations related to amortization of in-place leases, amortization and accretion of above- and below-market lease assets and liabilities, net and the amortization and accretion of above- and below-market ground leases for the periods presented:


	Three months ended June 30,						Six months ended June 30,
(in thousands)	2020		2019		2020		2019
Amortization of in-place leases ⁽¹⁾	$	1,846	$	1,551	$	3,525	$	2,883
Amortization (accretion) of market lease intangibles, net ⁽²⁾	517		200		597		444
Amortization (accretion) of above- and below-market ground lease intangibles, net ⁽³⁾	91		—		213		—

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(1)Reflected within depreciation and amortization expense.

(2)Reflected within rental revenue.

(3)Reflected within property expenses.

The following table provides the projected amortization of in-place lease assets to depreciation and amortization expense and net amortization of above- and below-market lease intangibles to rental revenue for the next five years:


(in thousands)	July 1 - December 31, 2020		2021		2022		2023		2024
In-place lease assets	$	1,661	$	3,197	$	3,095	$	2,987	$	2,736
Adjustment to amortization expense	$	1,661	$	3,197	$	3,095	$	2,987	$	2,736

Above-market lease assets	$	(402)	$	(796)	$	(795)	$	(764)	$	(731)
Below-market lease liabilities	264		530		531		485		483
Net adjustment to rental revenue	$	(138)	$	(266)	$	(264)	$	(279)	$	(248)