UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________________________________________________________________________

FORM 10-Q

_____________________________________________________________________________________________________________

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to          

Commission File Number 001-38530

______________________________________________________________________________________________________

Essential Properties Realty Trust, Inc.

(Exact name of Registrant as specified in its Charter)

______________________________________________________________________________________________________

Maryland	82-4005693
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
902 Carnegie Center Blvd., Suite 520
Princeton, New Jersey	08540
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (609) 436-0619

______________________________________________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $0.01 par value	EPRT	New York Stock Exchange

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 x No o 

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 x No o

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	x	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	o
Emerging growth company	o

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. o 

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

As of July 27, 2022, the registrant had 133,622,148 shares of common stock, $0.01 par value per share, outstanding.

Table of Contents

PART I.	FINANCIAL INFORMATION	Page
Item 1.	Financial Statements
	Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021	2
	Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021 (unaudited)	3
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021 (unaudited)	4
	Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021 (unaudited)	5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65
Item 4.	Controls and Procedures	66
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	67
Item 1A.	Risk Factors	67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 3.	Defaults Upon Senior Securities	67
Item 4.	Mine Safety Disclosures	67
Item 5.	Other Information	67
Item 6.	Exhibits	68
Signatures		69

i

ESSENTIAL PROPERTIES REALTY TRUST, INC.

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets

(In thousands, except share and per share data)

	June 30, 2022		December 31, 2021
	(Unaudited)
ASSETS
Investments:
Real estate investments, at cost:
Land and improvements	$	1,124,147	$	1,004,154
Building and improvements	2,212,212		2,035,919
Lease incentives	14,005		13,950
Construction in progress	22,147		8,858
Intangible lease assets	86,575		87,959
Total real estate investments, at cost	3,459,086		3,150,840
Less: accumulated depreciation and amortization	(238,402)		(200,152)
Total real estate investments, net	3,220,684		2,950,688
Loans and direct financing lease receivables, net	194,963		189,287
Real estate investments held for sale, net	21,787		15,434
Net investments	3,437,434		3,155,409
Cash and cash equivalents	17,993		59,758
Restricted cash	8,221		—
Straight-line rent receivable, net	70,741		57,990
Derivative assets	27,645		—
Rent receivables, prepaid expenses and other assets, net	25,442		25,638
Total assets (1)	$	3,587,476	$	3,298,795
LIABILITIES AND EQUITY
Unsecured term loans, net of deferred financing costs	$	628,209	$	626,983
Senior unsecured notes, net	395,005		394,723
Revolving credit facility	218,000		144,000
Intangible lease liabilities, net	12,305		12,693
Dividend payable	36,066		32,610
Derivative liabilities	123		11,838
Accrued liabilities and other payables	29,794		32,145
Total liabilities (1)	1,319,502		1,254,992
Commitments and contingencies (see Note 11)	—		—
Stockholders' equity:
Preferred stock, $0.01 par value; 150,000,000 authorized; none issued and outstanding as of June 30, 2022 and December 31, 2021	—		—
Common stock, $0.01 par value; 500,000,000 authorized; 132,669,947 and 124,649,053 issued and outstanding as of June 30, 2022 and December 31, 2021, respectively	1,327		1,246
Additional paid-in capital	2,346,037		2,151,088
Distributions in excess of cumulative earnings	(110,969)		(100,982)
Accumulated other comprehensive income (loss)	24,134		(14,786)
Total stockholders' equity	2,260,529		2,036,566
Non-controlling interests	7,445		7,237
Total equity	2,267,974		2,043,803
Total liabilities and equity	$	3,587,476	$	3,298,795

__________________________________________________

(1)The Company’s consolidated balance sheets include assets and liabilities of consolidated variable interest entities (“VIEs”). See Note 2—Summary of Significant Accounting Policies. As of June 30, 2022 and December 31, 2021, all of the assets and liabilities of the Company were held by its operating partnership, Essential Properties, L.P., a consolidated VIE, with the exception of $35.9 million and $32.5 million, respectively, of dividends payable.

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

2

ESSENTIAL PROPERTIES REALTY TRUST, INC.

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Operations

(Unaudited, in thousands, except share and per share data)

	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Revenues:
Rental revenue	$	67,089	$	53,150	$	133,201	$	98,582
Interest on loans and direct financing lease receivables	3,949		3,879		7,771		6,984
Other revenue, net	408		37		595		52
Total revenues	71,446		57,066		141,567		105,618
Expenses:
General and administrative	7,026		6,470		15,089		12,901
Property expenses	828		1,174		1,837		2,588
Depreciation and amortization	22,074		17,184		42,387		32,830
Provision for impairment of real estate	6,258		398		10,193		6,120
Change in provision for loan losses	107		(166)		167		(128)
Total expenses	36,293		25,060		69,673		54,311
Other operating income:
Gain on dispositions of real estate, net	10,094		3,710		11,752		7,498
Income from operations	45,247		35,716		83,646		58,805
Other (expense)/income:
Loss on debt extinguishment	—		(4,461)		(2,138)		(4,461)
Interest expense	(9,190)		(7,811)		(18,350)		(15,489)
Interest income	30		17		48		37
Income before income tax expense	36,087		23,461		63,206		38,892
Income tax expense	275		61		576		117
Net income	35,812		23,400		62,630		38,775
Net income attributable to non-controlling interests	(159)		(116)		(278)		(196)
Net income attributable to stockholders	$	35,653	$	23,284	$	62,352	$	38,579
Basic weighted average shares outstanding	131,271,882		116,318,386		129,068,197		111,678,562
Basic net income per share	$	0.27	$	0.20	$	0.48	$	0.34
Diluted weighted average shares outstanding	132,019,501		117,513,344		129,983,198		112,770,501
Diluted net income per share	$	0.27	$	0.20	$	0.48	$	0.34

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

3

ESSENTIAL PROPERTIES REALTY TRUST, INC.

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)

	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Net income	$	35,812	$	23,400	$	62,630	$	38,775
Other comprehensive income (loss):
Deferred loss on cash flow hedges	—		(4,824)		—		(4,824)
Unrealized income (loss) on cash flow hedges	8,637		(4,793)		35,100		10,783
Cash flow hedge losses reclassified to interest expense	1,547		2,510		4,046		4,957
Total other comprehensive income (loss)	10,184		(7,107)		39,146		10,916
Comprehensive income (loss)	45,996		16,293		101,776		49,691
Net income attributable to non-controlling interests	(159)		(116)		(278)		(196)
Adjustment for other comprehensive income (loss) attributable to non-controlling interests	44		(28)		(225)		62
Comprehensive income attributable to stockholders	$	45,881	$	16,149	$	101,273	$	49,557

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

4

ESSENTIAL PROPERTIES REALTY TRUST, INC.

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Stockholders’ Equity

(Unaudited, in thousands, except share data)

	Common Stock			Additional Paid In Capital		Distributions in Excess of Cumulative Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity		Non-controlling Interests		Total Equity
	Number of Shares	Par Value
Balance at December 31, 2021	124,649,053	$	1,246	$	2,151,088	$	(100,982)	$	(14,786)	$	2,036,566	$	7,237	$	2,043,803
Common stock issuance	6,382,994	66		159,577		—		—		159,643		—		159,643
Common stock withheld related to net share settlement of equity awards	—	—		—		(2,235)		—		(2,235)		—		(2,235)
Costs related to issuance of common stock	—	—		(1,582)		—		—		(1,582)		—		(1,582)
Other comprehensive income	—	—		—		—		28,780		28,780		181		28,961
Equity based compensation expense	119,646	—		2,835		—		—		2,835		—		2,835
Dividends declared on common stock and OP Units	—	—		—		(34,188)		—		(34,188)		(145)		(34,333)
Net income	—	—		—		26,699		—		26,699		119		26,818
Balance at March 31, 2022	131,151,693	1,312		2,311,918		(110,706)		13,994		2,216,518		7,392		2,223,910
Common stock issuance	1,501,489	15		32,632		—		—		32,647		—		32,647
Costs related to issuance of common stock	—	—		(701)		—		—		(701)		—		(701)
Other comprehensive income	—	—		—		—		10,140		10,140		44		10,184
Equity based compensation expense	16,765	—		2,188		—		—		2,188		—		2,188
Dividends declared on common stock and OP Units	—	—		—		(35,916)		—		(35,916)		(150)		(36,066)
Net income	—	—		—		35,653		—		35,653		159		35,812
Balance at June 30 , 2022	132,669,947	$	1,327	$	2,346,037	$	(110,969)	$	24,134	$	2,260,529	$	7,445	$	2,267,974

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

5

ESSENTIAL PROPERTIES REALTY TRUST, INC.

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Stockholders’ Equity (continued)

(Unaudited, in thousands, except share data)

	Common Stock			Additional Paid-In Capital		Distributions in Excess of Cumulative Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity		Non-controlling Interests		Total Equity
	Number of Shares	Par Value
Balance at December 31, 2020	106,361,524	$	1,064	$	1,688,540	$	(77,665)	$	(37,181)	$	1,574,758	$	7,190	$	1,581,948
Common stock issuance	2,796,805	28		64,900		—		—		64,928		—		64,928
Costs related to issuance of common stock	—	—		(1,188)		—		—		(1,188)		—		(1,188)
Other comprehensive income	—	—		—		—		17,933		17,933		90		18,023
Equity based compensation expense	13,310	—		1,595		—		—		1,595		—		1,595
Dividends declared on common stock and OP Units	—	—		—		(26,265)		—		(26,265)		(133)		(26,398)
Net income	—	—		—		15,295		—		15,295		80		15,375
Balance at March 31, 2021	109,171,639	1,092		1,753,847		(88,635)		(19,248)		1,647,056		7,227		1,654,283
Common stock issuance	8,784,537	89		208,133		—		—		208,222		—		208,222
Costs related to issuance of common stock	—	—		(8,386)		—		—		(8,386)		—		(8,386)
Other comprehensive income	—	—		—		—		(7,079)		(7,079)		(28)		(7,107)
Equity based compensation expense	26,817	—		1,856		—		—		1,856		—		1,856
Dividends declared on common stock and OP Units	—	—		—		(29,560)		—		(29,560)		(138)		(29,698)
Net income	—	—		—		23,284		—		23,284		116		23,400
Balance at June 30, 2021	117,982,993	$	1,181	$	1,955,450	$	(94,911)	$	(26,327)	$	1,835,393	$	7,177	$	1,842,570

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

6

ESSENTIAL PROPERTIES REALTY TRUST, INC.

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

	Six months ended June 30,
	2022		2021
Cash flows from operating activities:
Net income	$	62,630	$	38,775
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	42,387		32,830
Amortization of lease incentive	576		2,530
Amortization of above/below market leases and right of use assets, net	373		68
Amortization of deferred financing costs and other non-cash interest expense	1,471		1,274
Loss on debt extinguishment	2,138		4,461
Provision for impairment of real estate	10,193		6,120
Change in provision for loan losses	167		(128)
Gain on dispositions of real estate, net	(11,752)		(7,498)
Straight-line rent receivable, net	(12,269)		(9,909)
Share-based compensation expense	5,023		3,451
Adjustment to rental revenue for tenant credit	(415)		(3,020)
Payments made in settlement of cash flow hedges	—		(4,836)
Changes in other assets and liabilities:
Rent receivables, prepaid expenses and other assets	(48)		(671)
Accrued liabilities and other payables	1,513		5,838
Net cash provided by operating activities	101,987		69,285
Cash flows from investing activities:
Proceeds from sales of real estate, net	44,514		43,819
Principal collections on loans and direct financing lease receivables	35,460		1,025
Investments in loans receivable	(63,982)		(85,365)
Deposits for prospective real estate investments	(570)		(2,686)
Investment in real estate, including capital expenditures	(322,707)		(339,278)
Investment in construction in progress	(18,455)		(386)
Lease incentives paid	(108)		(2,366)
Net cash used in investing activities	(325,848)		(385,237)
Cash flows from financing activities:
Repayments of secured borrowings	—		(175,780)
Borrowings under revolving credit facility	264,000		167,000
Repayments under revolving credit facility	(190,000)		(185,000)
Proceeds from issuance of Senior Unsecured Notes	—		396,600
Proceeds from issuance of common stock, net	190,577		264,422
Payments for taxes related to net settlement of equity awards	(2,235)		—
Payment of debt extinguishment costs	(467)		—
Deferred financing costs	(4,045)		(1,656)
Offering costs	(570)		(846)
Dividends paid	(66,943)		(52,101)
Net cash provided by financing activities	190,317		412,639
Net (decrease) increase in cash and cash equivalents and restricted cash	(33,544)		96,687
Cash and cash equivalents and restricted cash, beginning of period	59,758		32,990
Cash and cash equivalents and restricted cash, end of period	$	26,214	$	129,677
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents	$	17,993	$	126,465
Restricted cash	8,221		3,212
Cash and cash equivalents and restricted cash, end of period	$	26,214	$	129,677

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

7

ESSENTIAL PROPERTIES REALTY TRUST, INC.

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Cash Flows (continued)

(Unaudited, in thousands)

	Six months ended June 30,
	2022		2021
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized	$	8,777	$	14,668
Cash paid for income taxes	1,050		419
Non-cash operating, investing and financing activities:
Reclassification from construction in progress upon project completion	$	5,332	$	—
Non-cash investments in real estate and loan receivable activity	22,679		960
Unrealized gains on cash flow hedges	(35,100)		(34,137)
Accrued deferred debt restructuring costs	191		—
Discounts and fees on capital raised through issuance of common stock	1,713		8,728
Discounts and fees on issuance of senior unsecured notes	—		3,400
Dividends declared	36,066		29,698

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

8

ESSENTIAL PROPERTIES REALTY TRUST, INC.

CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

June 30, 2022

1. Organization

Description of Business

Essential Properties Realty Trust, Inc. (the “Company”) is an internally managed real estate company that acquires, owns and manages primarily single-tenant properties that are net leased on a long-term basis to middle-market companies operating service-oriented or experience-based businesses. The Company generally invests in and leases freestanding, single-tenant commercial real estate facilities where a tenant services its customers and conducts activities that are essential to the generation of the tenant’s sales and profits.

The Company was organized on January 12, 2018 as a Maryland corporation. It elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes beginning with the year ended December 31, 2018, and it believes that its current organizational and operational status and intended distributions will allow it to continue to so qualify. Substantially all of the Company’s business is conducted directly and indirectly through its operating partnership, Essential Properties, L.P. (the “Operating Partnership”).

On June 25, 2018, the Company completed the initial public offering (“IPO”) of its common stock. The common stock of the Company is listed on the New York Stock Exchange under the ticker symbol “EPRT”.

COVID-19 Pandemic

For much of 2020, the COVID-19 pandemic (“COVID-19”) created significant uncertainty and economic disruption that adversely affected the Company and its tenants. The adverse impact of the pandemic moderated during 2021 and has significantly diminished during 2022. However, the continuing impact of the COVID-19 pandemic and its duration are unclear, and various factors could erode the progress that has been made against the virus to date. If conditions similar to those experienced in 2020, at the height of the pandemic, were to reoccur, they would adversely impact the Company and its tenants. The Company continues to closely monitor the impact of COVID-19 on all aspects of its business. For further information regarding the impact of COVID-19 on the Company, see Part I, Item 1A titled "Risk Factors" of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

2. Summary of Significant Accounting Policies

Basis of Accounting

The accompanying unaudited consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”).

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and subsidiaries in which the Company has a controlling financial interest. All intercompany accounts and transactions have been eliminated in consolidation. As of June 30, 2022 and December 31, 2021, the Company, directly and indirectly, held a 99.6% ownership interest in the Operating Partnership and the consolidated financial statements include the financial statements of the Operating Partnership as of these dates. See Note 7—Equity for changes in the ownership interest in the Operating Partnership.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

9

Reportable Segments

ASC Topic 280, Segment Reporting, establishes standards for the manner in which enterprises report information about operating segments. Substantially all of the Company’s investments, at acquisition, are comprised of real estate owned that is leased to tenants on a long-term basis or real estate that secures the Company's investment in loans and direct financing lease receivables. Therefore, the Company aggregates these investments for reporting purposes and operates in one reportable segment.

Real Estate Investments

Investments in real estate are carried at cost less accumulated depreciation and impairment losses. The cost of investments in real estate reflects their purchase price or development cost. The Company evaluates each acquisition transaction to determine whether the acquired asset meets the definition of a business. Under Accounting Standards Update (“ASU”) 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business, an acquisition does not qualify as a business when there is no substantive process acquired or substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets or the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. Transaction costs related to acquisitions that are asset acquisitions are capitalized as part of the cost basis of the acquired assets, while transaction costs for acquisitions that are deemed to be acquisitions of a business are expensed as incurred. Improvements and replacements are capitalized when they extend the useful life or improve the productive capacity of the asset. Costs of repairs and maintenance are expensed as incurred.

The Company allocates the purchase price of acquired properties accounted for as asset acquisitions to tangible and identifiable intangible assets or liabilities based on their relative fair values. Tangible assets may include land, site improvements and buildings. Intangible assets may include the value of in-place leases and above- and below-market leases and other identifiable intangible assets or liabilities based on lease or property specific characteristics.

The Company incurs various costs in the leasing and development of its properties. Amounts paid to tenants that incentivize them to extend or otherwise amend an existing lease or to sign a new lease agreement are capitalized to lease incentives on the Company’s consolidated balance sheets. Tenant improvements are capitalized to building and improvements within the Company’s consolidated balance sheets. Costs incurred which are directly related to properties under development, which include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs and real estate taxes and insurance, are capitalized during the period of development as construction in progress. After the determination is made to capitalize a cost, it is allocated to the specific component of a project that benefited. Determination of when a development project commences, and capitalization begins, and when a development project has reached substantial completion, and is available for occupancy and capitalization must cease, involves a degree of judgment. The Company does not engage in speculative real estate development. The Company does, however, opportunistically agree to reimburse certain of its tenants for development costs at its properties in exchange for contractually specified rent that generally increases proportionally with its funding.

The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases based on the specific characteristics of each tenant’s lease. The Company estimates the cost to execute leases with terms similar to the remaining lease terms of the in-place leases, including leasing commissions, legal and other related expenses. Factors the Company considers in this analysis include an estimate of the carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses, and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from six to 12 months. The fair value of above- or below-market leases is recorded based on the net present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between the contractual amount to be paid pursuant to the in-place lease and the Company’s estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining non-cancelable term of the lease including any below-market fixed rate renewal options for below-market leases.

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In making estimates of fair values for purposes of allocating purchase price, the Company uses a number of sources, including real estate valuations prepared by independent valuation firms. The Company also considers information and other factors including market conditions, the industry that the tenant operates in, characteristics of the real estate (e.g., location, size, demographics, value and comparative rental rates), tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business. Additionally, the Company considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. The Company uses the information obtained as a result of its pre-acquisition due diligence as part of its consideration of the accounting standard governing asset retirement obligations and, when necessary, will record an asset retirement obligation as part of the purchase price allocation.

Real estate investments that are intended to be sold are designated as “held for sale” on the consolidated balance sheets at the lesser of carrying amount and fair value less estimated selling costs. Real estate investments are no longer depreciated when they are classified as held for sale. If the disposal, or intended disposal, of certain real estate investments represents a strategic shift that has had or will have a major effect on the Company’s operations and financial results, the operations of such real estate investments would be presented as discontinued operations in the consolidated statements of operations for all applicable periods.

Depreciation and Amortization

Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings and 15 years for site improvements. The Company recorded the following amounts of depreciation expense on its real estate investments during the periods presented:

	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021		2022		2021
Depreciation on real estate investments	$	20,264	$	14,754	$	38,819	$	28,493

Lease incentives are amortized on a straight-line basis as a reduction of rental income over the remaining non-cancellable terms of the respective leases. If a tenant terminates its lease, the unamortized portion of the lease incentive is charged to rental revenue. Construction in progress is not depreciated until the development has reached substantial completion. Tenant improvements are depreciated over the non-cancellable term of the related lease or their estimated useful life, whichever is shorter.

Capitalized above-market lease intangibles are amortized on a straight-line basis as a reduction of rental revenue over the remaining non-cancellable terms of the respective leases. Capitalized below-market lease intangibles are accreted on a straight-line basis as an increase to rental revenue over the remaining non-cancellable terms of the respective leases including any below-market fixed rate renewal option periods.

Capitalized above-market ground lease values are accreted as a reduction of property expenses over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property expenses over the remaining terms of the respective leases and any expected below-market renewal option periods where renewal is considered probable.

The value of in-place leases, exclusive of the value of above-market and below-market lease intangibles, is amortized to depreciation and amortization expense on a straight-line basis over the remaining periods of the respective leases.

If a tenant terminates its lease, the unamortized portion of each intangible, including in-place lease values, is charged to depreciation and amortization expense, while above- and below-market lease adjustments are recorded within rental revenue in the consolidated statements of operations.

Loans Receivable

The Company holds its loans receivable for long-term investment. Loans receivable are carried at amortized cost, including related unamortized discounts or premiums, if any, less the Company's estimated allowance for loan losses calculated in accordance with ASC 326. The Company recognizes interest income on loans receivable using the effective-interest method applied on a loan-by-loan basis. Direct costs associated with originating loans are offset against any related fees received and the balance, along with any premium or discount,

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is deferred and amortized as an adjustment to interest income over the term of the related loan receivable using the effective-interest method.

Direct Financing Lease Receivables

Certain of the Company’s real estate investment transactions are accounted for as direct financing leases. The Company records the direct financing lease receivables at their net investment, determined as the aggregate minimum lease payments and the estimated non-guaranteed residual value of the leased property less unearned income and less the estimated allowance for loan losses calculated in accordance with ASC 326. The unearned income is recognized over the term of the related lease so as to produce a constant rate of return on the net investment in the asset. The Company’s investment in direct financing lease receivables is reduced over the applicable lease term to its non-guaranteed residual value by the portion of rent allocated to the direct financing lease receivables. Subsequent to the adoption of ASC 842, Leases (“ASC 842”) in January 2019, the Company's existing direct financing lease receivables have been accounted for in the same manner, unless the underlying contracts have been modified.

Impairment of Long-Lived Assets

If circumstances indicate that the carrying value of a property may not be recoverable, the Company reviews the property for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends, and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. Impairment losses, if any, are recorded directly within our consolidated statement of operations.

The Company recorded the following provisions for impairment of long lived assets during the periods presented:

	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021		2022		2021
Provision for impairment of real estate	$	6,258	$	398	$	10,193	$	6,120

Cash and Cash Equivalents

Cash and cash equivalents includes cash in the Company’s bank accounts. The Company considers all cash balances and highly liquid investments with original maturities of three months or less to be cash and cash equivalents. The Company deposits cash with high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to an insurance limit.

As of June 30, 2022 and December 31, 2021, the Company had deposits of $18.0 million and $59.8 million, respectively, of which $17.7 million and $59.5 million, respectively, were in excess of the amount insured by the FDIC. Although the Company bears risk with respect to amounts in excess of those insured by the FDIC, it does not anticipate any losses as a result.

Restricted Cash

Restricted cash primarily consists of cash proceeds from the sale of assets held by a qualified intermediary to facilitate tax-deferred exchange transactions under Section 1031 of the Internal Revenue Code.

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Forward Equity Sales

The Company occasionally enters into forward sale agreements for the sale and issuance of shares of its common stock, either through its 2022 ATM Program (as defined herein) or through an underwritten public offering. These agreements may be physically settled in stock, settled in cash or net share settled at the Company’s election.

The Company evaluated the forward sale agreements and concluded they meet the conditions to be classified within stockholders’ equity. Prior to settlement, a forward sale agreement will be reflected in the diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of the Company’s common stock used in diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares of the Company’s common stock that would be issued upon full physical settlement of such forward sale agreement over the number of shares of the Company’s common stock that could be purchased by the Company in the market (based on the average market price during the period) using the proceeds receivable upon full physical settlement (based on the adjusted forward sale price at the end of the reporting period). Consequently, prior to settlement of a forward sale agreement, there will be no dilutive effect on the Company’s earnings per share except during periods when the average market price of the Company’s common stock is above the adjusted forward sale price. However, upon settlement of a forward sales agreement, if the Company elects to physically settle or net share settle such forward sale agreement, delivery of the Company’s shares will result in dilution to the Company’s earnings per share.

Deferred Financing Costs

Financing costs related to establishing the Company’s 2018 Credit Facility and Revolving Credit Facility (as defined below) were deferred and are being amortized as an increase to interest expense in the consolidated statements of operations over the term of the facility and are reported as a component of rent receivables, prepaid expenses and other assets, net on the consolidated balance sheets.

Financing costs related to the issuance of the Company’s 2024 Term Loan, the 2027 Term Loan and the 2031 Notes (each as defined below) were deferred and are being amortized as an increase to interest expense in the consolidated statements of operations over the term of the related debt instrument and are reported as a reduction of the related debt balance on the consolidated balance sheets.

Derivative Instruments

In the normal course of business, the Company uses derivative financial instruments, which may include interest rate swaps, caps, options, floors and other interest rate derivative contracts, to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows on a portion of the Company’s floating-rate debt. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. The Company records all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may also enter into derivative contracts that are intended to economically hedge certain risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designed and qualifies for hedge accounting treatment. If a derivative is designated and qualifies for cash flow hedge accounting treatment, the change in the estimated fair value of the derivative is recorded in other comprehensive income in the consolidated statements of comprehensive income to the extent that it is effective. Any ineffective portion of a change in derivative fair value is immediately recorded in earnings. If the Company elects not to apply hedge accounting treatment (or for derivatives that do not qualify as hedges), any change in the fair value of such derivative instruments would be recognized immediately as a gain or loss on derivative instruments in the consolidated statements of operations.

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Fair Value Measurement

The Company estimates fair value of financial and non-financial assets and liabilities based on the framework established in fair value accounting guidance. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The hierarchy described below prioritizes inputs to the valuation techniques used in measuring the fair value of assets and liabilities. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs to be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

•Level 1—Quoted prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date.

•Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

•Level 3—Unobservable inputs that reflect the Company’s own assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

Revenue Recognition

The Company’s rental revenue is primarily rent received from tenants. Rent from tenants is recorded in accordance with the terms of each lease on a straight-line basis over the non-cancellable initial term of the lease from the later of the date of the commencement of the lease and the date of acquisition of the property subject to the lease. Rental revenue recognition begins when the tenant controls the space and continues through the term of the related lease. Because substantially all of the leases provide for rental increases at specified intervals, the Company records a straight-line rent receivable and recognizes revenue on a straight-line basis through the expiration of the non-cancelable term of the lease. The Company considers whether the collectability of rents is reasonably assured in determining the amount of straight-line rent to record.

Generally, the Company’s leases provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions provided under the initial lease term, including rent increases. If economic incentives make it reasonably certain that an option period to extend the lease will be exercised, the Company will include these options in determining the non-cancelable term of the lease.

The Company defers rental revenue related to lease payments received from tenants in advance of their due dates. These amounts are presented within accrued liabilities and other payables on the Company’s consolidated balance sheets.

Certain properties in the Company’s investment portfolio are subject to leases that provide for contingent rent based on a percentage of the tenant’s gross sales. For these leases, the Company recognizes contingent rental revenue when the threshold upon which the contingent lease payment is based is actually reached.

The Company recorded the following amounts as contingent rent, which are included as a component of rental revenue in the Company's consolidated statements of operations, during the periods presented:

	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021		2022		2021
Contingent rent	$	159	$	62	$	315	$	231

Adjustment to Rental Revenue for Tenant Credit

The Company continually reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located.

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If the assessment of the collectability of substantially all payments due under a lease changes from probable to not probable, any difference between the rental revenue recognized to date and the lease payments that have been collected is recognized as a current period reduction of rental revenue in the consolidated statements of operations.

The Company recorded the following adjustments as increases to or reductions of rental revenue for tenant credit during the periods presented:

	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021		2022		2021
Adjustment to (decrease) increase rental revenue for tenant credit	$	(154)	$	3,105	$	415	$	3,020

Offering Costs

In connection with the completion of equity offerings, the Company incurs legal, accounting and other offering-related costs. Such costs are deducted from the gross proceeds of each equity offering when the offering is completed. As of June 30, 2022 and December 31, 2021, the Company capitalized a total of $81.6 million and $79.3 million, respectively, of such costs, which are presented as a reduction of additional paid-in capital in the Company’s consolidated balance sheets.

Income Taxes

The Company elected and qualified to be taxed as a REIT under sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year ended December 31, 2018. REITs are subject to a number of organizational and operational requirements, including a requirement that 90% of ordinary “REIT taxable income” (as determined without regard to the dividends paid deduction or net capital gains) be distributed. As a REIT, the Company will generally not be subject to U.S. federal income tax to the extent that it meets the organizational and operational requirements and its distributions equal or exceed REIT taxable income. For the period subsequent to the effective date of its REIT election, the Company continues to meet the organizational and operational requirements and expects distributions to exceed REIT taxable income. Accordingly, no provision has been made for U.S. federal income taxes. Even though the Company has elected and qualifies for taxation as a REIT, it may be subject to state and local income and franchise taxes, and to federal income and excise tax on its undistributed income. Franchise taxes and federal excise taxes on the Company’s undistributed income, if any, are included in general and administrative expenses on the accompanying consolidated statements of operations. Additionally, taxable income from non-REIT activities managed through the Company's taxable REIT subsidiary is subject to federal, state, and local taxes.

The Company analyzes its tax filing positions in all of the U.S. federal, state and local tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in such jurisdictions. The Company follows a two-step process to evaluate uncertain tax positions. Step one, recognition, occurs when an entity concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Step two, measurement, determines the amount of benefit that is more-likely-than-not to be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when the Company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. The use of a valuation allowance as a substitute for derecognition of tax positions is prohibited.

As of June 30, 2022 and December 31, 2021, the Company had no accruals recorded for uncertain tax positions. The Company’s policy is to classify interest expense and penalties relating to taxes in general and administrative expense in the consolidated statements of operations. During the three and six months ended June 30, 2022 and 2021, the Company recorded de minimis interest or penalties relating to taxes, and there were no interest or penalties with respect to taxes accrued as of June 30, 2022 or December 31, 2021. The 2021, 2020, 2019 and 2018 taxable years remain open to examination by federal and/or state taxing jurisdictions to which the Company is subject.

Equity-Based Compensation

The Company grants shares of restricted common stock and restricted share units (“RSUs”) to its directors, executive officers and other employees that vest over specified time periods, subject to the recipient’s continued

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service. The Company also grants performance-based RSUs to members of its senior management team, the final number of which is determined based on objective and subjective performance conditions and which vest over a multi-year period, subject to the recipient’s continued service. The Company accounts for the restricted common stock and RSUs in accordance with ASC 718, Compensation – Stock Compensation, which requires that such compensation be recognized in the financial statements based on its estimated grant-date fair value. The value of such awards is recognized as compensation expense in general and administrative expenses in the accompanying consolidated statements of operations over the applicable service periods.

The Company recognizes compensation expense for equity-based compensation using the straight-line method based on the terms of the individual grant. Forfeitures of equity-based compensation awards, if any, are recognized when they occur.

Variable Interest Entities

The Financial Accounting Standards Board (“FASB”) provides guidance for determining whether an entity is a variable interest entity (a “VIE”). VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. A VIE is required to be consolidated by its primary beneficiary, which is the party that (i) has the power to control the activities that most significantly impact the VIE’s economic performance; and (ii) has the obligation to absorb losses, or the right to receive benefits, of the VIE that could potentially be significant to the VIE.

The Company has concluded that the Operating Partnership is a VIE of which the Company is the primary beneficiary, as the Company has the power to direct the activities that most significantly impact the economic performance of the Operating Partnership. Substantially all of the Company’s assets and liabilities are held by the Operating Partnership. The assets and liabilities of the Operating Partnership are consolidated and reported as assets and liabilities on the Company’s consolidated balance sheets as of June 30, 2022 and December 31, 2021.

Additionally, the Company has concluded that certain entities to which it has provided mortgage loans are VIEs because the entities' equity was not sufficient to finance their activities without additional subordinated financial support. The following table presents information about the Company’s mortgage loan-related VIEs as of the dates presented:

(dollar amounts in thousands)	June 30, 2022		December 31, 2021
Number of VIEs	23		23
Aggregate carrying value	$	160,217	$	140,851

The Company was not the primary beneficiary of any of these entities because the Company did not have the power to direct the activities that most significantly impact the entities’ economic performance as of June 30, 2022 and December 31, 2021. The Company’s maximum exposure to loss in these entities is limited to the carrying amount of its investment. The Company had no liabilities associated with these VIEs as of June 30, 2022 and December 31, 2021.

Recent Accounting Developments

In July 2021, the FASB issued ASU 2021-05, Lease (Topic 842): Lessors - Certain Leases with Variable Lease Payments ("ASU 2021-05"). The guidance in ASU 2021-05 amends the lease classification requirements for the lessors under certain leases containing variable payments to align with practice under ASC 840. The lessor should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met: 1) the lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in ASC 842-10-25-2 through 25-3; and 2) the lessor would have otherwise recognized a day-one loss. The amendments in ASU 2021-05 are effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The adoption of ASU 2021-05 did not have a material impact on the Company's consolidated financial statements.

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3. Investments

The following table presents information about the number of properties or investments in the Company’s real estate investment portfolio as of each date presented:

	June 30, 2022	December 31, 2021
Owned properties (1)	1,389	1,315
Properties securing investments in mortgage loans (2)	162	126
Ground lease interests (3)	10	10
Total number of investments	1,561	1,451

_____________________________________

(1)Includes 8 and 11 properties which are subject to leases accounted for as direct financing leases or loans as of June 30, 2022 and December 31, 2021, respectively.

(2)Properties secure 18 and 17 mortgage loans receivable as of June 30, 2022 and December 31, 2021, respectively.

(3)Includes one building which is subject to a lease accounted for as a direct financing lease as of December 31, 2021.

The following table presents information about the gross investment value of the Company’s real estate investment portfolio as of each date presented:

(in thousands)	June 30, 2022		December 31, 2021
Real estate investments, at cost	$	3,459,086	$	3,150,840
Loans and direct financing lease receivables, net	194,963		189,287
Real estate investments held for sale, net	21,787		15,434
Total gross investments	$	3,675,836	$	3,355,561

Investments in 2022 and 2021

The following table presents information about the Company’s investment activity during the six months ended June 30, 2022 and 2021:

	Six months ended June 30,
(in thousands)	2022		2021
Ownership type	Fee Interest		Fee Interest
Number of properties	85		125
Purchase price allocation
Land and improvements	$	137,240	$	103,979
Building and improvements	204,800		223,205
Construction in progress (1)	18,455		386
Intangible lease assets	—		6,650
Total purchase price	360,495		334,220
Intangible lease liabilities	—		(586)
Purchase price (including acquisition costs)	$	360,495	$	333,634

_____________________________________

(1)Represents amounts incurred at and subsequent to acquisition and includes $0.1 million and approximately $35,000 of capitalized interest expense for the six months ended June 30, 2022 and 2021, respectively.

During the six months ended June 30, 2022 and 2021, the Company did not make any new investments that individually represented more than 5% of the Company’s total real estate investment portfolio.

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Gross Investment Activity

During the six months ended June 30, 2022 and 2021, the Company had the following gross investment activity:

(Dollar amounts in thousands)	Number of Investment Locations	Dollar Amount of Investments
Gross investments, January 1, 2021	1,181	$	2,528,673
Acquisitions of and additions to real estate investments	125	341,878
Sales of investments in real estate