424B4 1 ny20036129x12_424b4.htm 424B4

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Filed Pursuant to Rule 424b4
Registration File No. 333-282015
13,200,000 Shares

Common Stock
FrontView REIT, Inc. is an internally-managed net-lease REIT that acquires, owns and manages primarily outparcel properties that are net leased on a long-term basis to a diversified group of tenants.
We are offering 13,200,000 shares of our Common Stock. All of the shares of Common Stock offered by this prospectus are being sold by us. This is our initial public offering, and no public market currently exists for our Common Stock. The initial public offering price of our Common Stock is $19.00 per share.
The shares of our Common Stock are listed on the NYSE under the symbol “FVR”.
We intend to elect to qualify to be taxed as a REIT under the Code, commencing with our short taxable year ending December 31, 2024. We believe that as of such date we will have been organized and will have operated in a manner to qualify for taxation as a REIT for U.S. federal income tax purposes. We intend to continue to be organized and operate as a REIT in the future. Shares of our capital stock (including our Common Stock) are subject to limitations on ownership and transfer that are primarily intended to assist us in maintaining our qualification as a REIT. Subject to certain exceptions, our charter restricts the direct or indirect ownership by one person or entity to no more than 9.8% of the value of our then outstanding shares of capital stock and no more than 9.8% of the value or number of shares, whichever is more restrictive, of our then outstanding shares of Common Stock. See “Description of Our Capital Stock—Restrictions on Ownership and Transfer” for a detailed description of the ownership and transfer restrictions applicable to our Common Stock.
We are an “emerging growth company” under the U.S. federal securities laws and, as such, have elected to comply with certain reduced disclosure requirements in this prospectus and in future filings that we make with the SEC. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”
Investing in our Common Stock involves risks. See “Risk Factors” beginning on page 22 for factors you should consider before investing in our Common Stock.
 
Per Share
Total
Initial public offering price
$​19.00
$250,800,000
Underwriting discounts and commissions(1)
$1.2825
$16,929,000
Proceeds, before expenses, to us
$17.7175
$233,871,000
(1)
See “Underwriting” for additional information regarding underwriting compensation.
We have granted the underwriters an option to purchase up to 1,980,000 additional shares of our Common Stock from us at the initial public offering price, less the underwriting discounts and commissions, within 30 days from the date of this prospectus to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
We expect to deliver the shares of our Common Stock to purchasers on or about October 3, 2024.
JOINT BOOK-RUNNING MANAGERS
MORGAN STANLEY
J.P. MORGAN
WELLS FARGO SECURITIES
BofA SECURITIES
CO-MANAGERS
CAPITAL ONE SECURITIES
CIBC CAPITAL MARKETS
The date of this prospectus is October 1, 2024.


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We have not, and the underwriters have not, authorized anyone to provide you with information other than what is contained in this prospectus or in any free writing prospectus prepared by us. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus and any free writing prospectus prepared by us is accurate only as of their respective dates or on the date or dates which are specified in these documents. Our business, financial condition, liquidity, results of operations, and prospects may have changed since those dates.
We use market data and industry forecasts and projections throughout this prospectus and, in particular, in the sections entitled “Prospectus Summary,” “Market Opportunity,” and “Business and Properties.” We have obtained substantially all of this information from a market study prepared for us in connection with this offering by RCG. Such information is included in this prospectus in reliance on RCG’s authority as an expert on such matters. Any forecasts prepared by RCG are based on data (including third party data), models, and experience of various professionals and are based on various assumptions, all of which are subject to change without notice. See “Experts.” In addition, we have obtained certain market and industry data from publicly available industry publications. The forecasts and projections are based on industry surveys and the preparers’ experience in the industry, and there is no assurance that any of the projected amounts will be achieved. We have not independently verified this information.
The historical operations described in this prospectus refer to the historical operations of our predecessor. We have generally described the business operations in this prospectus as if the historical operations of our predecessor were conducted by us.
Contemporaneously with the closing of this offering, we will complete the REIT Contribution Transactions and Internalization. Unless the context requires otherwise, all information set forth herein assumes the completion of the REIT Contribution Transactions and Internalization. For further information on the REIT Contribution Transactions and Internalization, refer to the section entitled “REIT Contribution Transactions and Internalization Transactions.”
Unless otherwise indicated, the information contained in this prospectus assumes that the underwriters’ option to purchase additional shares of our Common Stock is not exercised.
Non-GAAP Financial Measures
We use certain financial measures in this prospectus that are not calculated in accordance with GAAP. These non-GAAP financial measures include FFO, AFFO, EBITDA, EBITDAre, adjusted EBITDAre and annualized adjusted EBITDAre are in addition to, and not a substitute for, measures of financial performance prepared in accordance with GAAP. These measures should be read together with the corresponding GAAP measures. For definitions and reconciliations of these non-GAAP financial measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”
Certain Terms Used in This Prospectus
Unless the context otherwise requires, the following terms and phrases are used throughout this prospectus as described below:
“2024 Equity Incentive Plan” means our 2024 Omnibus Equity and Incentive Plan, which we expect to adopt concurrently with the closing of this offering;
“50/50 Joint Venture” means the joint venture previously held by our predecessor and entities representing certain Canadian investors for the ownership of 54 properties;
“50/50 Joint Venture Acquisition” means our predecessor’s acquisition, for cash, of the remaining 50% interest held indirectly by our predecessor in the 50/50 Joint Venture;
“ABS Notes” means the $253.8 million in aggregate principal amount outstanding of our net-lease mortgage notes;
“ACM” means asbestos-containing materials;
“ADA” means the Americans with Disabilities Act, as amended;
“adjusted EBITDAre” means EBITDAre for the applicable period, as further adjusted to (i) reflect all investment and disposition activity that took place during the applicable period as if each transaction had been completed on the first day of the period, (ii) exclude certain GAAP income and expense amounts that
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we believe are infrequent and unusual in nature because they relate to unique circumstances or transactions that had not previously occurred and which we do not anticipate occurring in the future, (iii) eliminate the impact of lease termination fees from certain of our tenants, and (iv) exclude non-cash stock-based compensation expense;
“AFFO” means adjusted funds from operations, which is a modification of FFO to include other adjustments to GAAP net income related to certain non-cash or non-recurring revenues and expenses, including straight-line rents, cost of debt extinguishments, amortization of lease intangibles, amortization of debt issuance costs, amortization of net mortgage premiums, (gain) loss on interest rate swaps and other non-cash interest expense, realized gains or losses on foreign currency transactions, Internalization expenses, structuring and public company readiness costs, extraordinary items, and other specified non-cash items;
“annualized adjusted EBITDAre” means adjusted EBITDAre for the applicable period divided by the number of months in the period multiplied by 12;
“annualized base rent” or “ABR” means the annualized contractual cash rent due for the last month of the reporting period, and adjusted to remove rent from properties sold during the month and to include a full month of contractual cash rent for properties acquired during the last month of the reporting period;
“Awards” means, collectively, under the 2024 Equity Incentive Plan, any of the following types of awards to an Eligible Individual: nonqualified stock options (“NQSO”); SARs; Restricted Stock; RSUs; Performance Awards; dividend equivalent rights; Share Awards; LTIP Units; and Cash-Based Awards; and, to certain Eligible Individuals in accordance with Section 422 of the Code, incentive stock options (“ISOs”);
“bankruptcy proceeding” means any legal or equitable proceeding under any bankruptcy, insolvency, receivership, or other debtor’s relief statute or law;
“Canadian Investment Entities” means the intermediate entities through which Canadian investors will hold interests in the OP that will be issued pursuant to the REIT Contribution Transactions;
“Change in Control” means, for purposes of the 2024 Equity Incentive Plan, the occurrence of any of the following events with respect to the Company: (i) any person (other than directly from the Company) first acquires securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding voting securities, other than an acquisition by certain employee benefit plans, the Company or a related entity, or any person in connection with a non-control transaction; (ii) a majority of the members of the board of directors is replaced by directors whose appointment or election is not endorsed by a majority of the members of the board of directors serving immediately prior to such appointment or election; (iii) any merger, consolidation, or reorganization, other than in a non-control transaction; (iv) a complete liquidation or dissolution; or (v) sale or disposition of all or substantially all of the assets;
“Code” means the Internal Revenue Code of 1986, as amended;
“Code of Ethics” means our Code of Business Conduct and Ethics adopted by our board of directors, which applies to our directors, officers, and employees;
“Common Stock” means shares of our common stock, $0.01 par value per share;
“Contribution Agreements” means (i) the Contribution Agreement, to be dated as of the closing date of this offering, by and between certain individual investors in our predecessor and the OP, (ii) the Contribution Agreement, to be dated as of the closing date of this offering, by and between the individual investors in one of the Subsidiary REITs and the OP, (iii) the Contribution Agreement, to be dated as of October 2, 2024, by and between one of the Canadian Investment Entities and the OP, and (iv) the Contribution Agreement, to be dated as of October 2, 2024, by and between the other Canadian Investment Entity and the OP;
“Corporate Transactions” means, for purposes of the 2024 Equity Incentive Plan, a merger, consolidation, reorganization, recapitalization, or other similar change in the capital stock of the Company, or a liquidation or dissolution of the Company or a Change in Control;
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“Covered Person” means, under the terms of the OP Agreement, any current or a former general partner of the OP, a member of such general partner, an affiliate of a current or former general partner of the OP, any officer, director, stockholder, partner, member, advisor, representative or agent of the OP or of a current or former general partner of the OP or any of their respective affiliates;
“CPI” means the Consumer Price Index for All Urban Consumers (CPI-U): U.S. City Average, All Items, as published by the U.S. Bureau of Labor Statistics, or other similar index which is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services;
“Credit Agreement” means the Credit Agreement, dated as of September 6, 2024, among the OP, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto;
“Dodd-Frank Act” means the Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended;
“EBITDA” means earnings before interest, income taxes, depreciation and amortization;
“EBITDAre” means EBITDA, as adjusted to exclude gains (losses) on sales of depreciable property and provisions for impairment on investment in real estate;
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended;
“ERISA Plan” means a Plan subject to Title I of ERISA or Section 4975 of the Code;
“ESG” means environmental, social and governance;
“Exchange Act” means the Securities and Exchange Act of 1934, as amended;
“FATCA” means the Foreign Account Tax Compliance Act;
“FASB” means the Financial Accounting Standards Board;
“FCA” means the Financial Conduct Authority;
“FCCR” means fixed charge coverage ratio;
“FFO” means funds from operations, which is computed in accordance with the standards established by the Board of Governors of the Nareit. Nareit defines FFO as GAAP net income or loss adjusted to exclude net gains (losses) from sales of certain depreciated real estate assets, depreciation and amortization expense from real estate assets, gains and losses from change in control, and impairment charges related to certain previously depreciated real estate assets;
“FINRA” means the Financial Industry Regulatory Authority, Inc.;
“Founder” means Stephen Preston;
“Fried Frank” means Fried, Frank, Harris, Shriver & Jacobson LLP;
“fully diluted basis” means after the exchange of all outstanding OP Units for shares of our Common Stock on a one-for-one basis;
“GAAP” means accounting principles generally accepted in the United States of America;
“Interest Purchase Agreement” means the definitive purchase agreement, dated as of August 18, 2023, between one of our predecessor’s subsidiaries and our predecessor’s former 50/50 Joint Venture partner;
“Internalization” means the internalization of the external management team, assets and functions previously performed for our predecessor by our external manager (controlled by our Founder) and its affiliates, pursuant to the terms of the Internalization Agreement, which will close contemporaneously with the closing of this offering;
“Internalization Agreement” means the Amended and Restated Internalization Agreement, dated as of July 10, 2024, by and among the Company, the OP, NARS and certain affiliates of NARS;
“Investment Company Act” means the Investment Company Act of 1940, as amended;
“IRS” means the Internal Revenue Service;
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“JOBS Act” means the Jumpstart Our Business Startups Act;
“LIBOR” means the London Interbank Offered Rate;
“LTIP Units” means a special class of units in the OP that are structured to qualify as “profits interests” for U.S. federal income tax purposes;
“Market Value” means the average of the closing trading price of our Common Stock on the NYSE for the 10 trading days before the day on which we received an OP Unit redemption notice;
“MGCL” means the Maryland General Corporation Law;
“MSAs” means metropolitan statistical areas in the United States;
“NADG” means North American Development Group;
“named executive officers” means Stephen Preston, Randall Starr, Timothy Dieffenbacher and Drew Ireland;
“Nareit” means National Association of Real Estate Investment Trusts;
“NARS” means North American Realty Services, LLLP, a Florida limited liability limited partnership, which is our predecessor’s external manager;
“net debt” means debt less cash and cash equivalents and restricted cash;
“net leases” or “net leased” means, collectively, triple net leases and non-triple net leases;
“New Delayed Draw Term Loan” means our $200 million unsecured delayed draw term loan under the Credit Agreement that will become effective concurrently with the completion of this offering;
“New Revolving Credit Facility” means our $250 million unsecured revolving credit facility under the Credit Agreement that will become effective concurrently with the completion of this offering;
“NOL” means net operating loss;
“non-control transaction” generally means, for purposes of the 2024 Equity Incentive Plan, any transaction in which (i) stockholders immediately before such transaction continue to own at least a majority of the combined voting power of such resulting entity following the transaction; (ii) a majority of the members of the board of directors immediately before such transaction continue to constitute at least a majority of the board of the surviving entity following such transaction, or (iii) with certain exceptions, no person other than any person who had beneficial ownership of more than 50% of the combined voting power of the Company’s then outstanding voting securities immediately prior to such transaction has beneficial ownership of more than 50% of the combined voting power of the surviving entity’s outstanding voting securities immediately after such transaction;
“non-triple net leases” means leases for which the landlord responsibilities include one or more property operating expenses in addition to the limited landlord responsibilities included in our triple net leases;
“NYSE” means the New York Stock Exchange;
“occupancy” or a specified percentage of our portfolio that is “occupied” or “leased” means as of a specified date (i) the number of properties that are subject to a signed lease divided by (ii) the total number of properties in our portfolio;
“OP” means FrontView Operating Partnership LP, a Delaware limited partnership;
“OP Units” means the units of limited partnership of the OP, other than LTIP Units;
“outparcel properties” or “outparcels” means individual building properties (small or large formats) leased to one or more tenants that are in locations with direct frontage on high-traffic roads that are visible to consumers;
“PCAOB” means The Public Company Accounting Oversight Board;
“Plan” means any entity whose underlying assets are considered to include “plan assets” (within the meaning of Section 3(42) of ERISA) of any such plan, account, or arrangement;
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“plan asset regulations” means the regulations issued by the U.S. Department of Labor concerning the definition of what constitutes the assets of an employee benefit plan;
“predecessor” means NADG NNN Property Fund LP, a Delaware limited partnership, and its subsidiaries;
“QRS” means a qualified REIT subsidiary within the meaning of Section 856(i) of the Code;
“QSR” means quick-service restaurants;
“qualified stockholders” means certain non-U.S. publicly traded stockholders that meet certain record-keeping and other requirements;
“REIT” means a real estate investment trust within the meaning of Sections 856 through 860 of the Code;
“REIT Contribution Transactions” means the contributions of the interests in entities within our predecessor’s private REIT fund structure that directly or indirectly own our predecessor’s properties, pursuant to the terms of the Contribution Agreements, which will close contemporaneously with the closing of this offering;
“REIT Requirements” means the REIT qualification requirements set forth under Sections 856 through 860 of the Code and the applicable U.S. Treasury Regulations;
“rent coverage ratio” means the ratio of tenant-reported or, when unavailable, management’s estimate, based on tenant-reported financial information, of annual EBITDA, and cash rent attributable to the leased property (or properties, in the case of a master lease) to the annualized base rental obligation as of a specified date;
“restaurant” means quick service and fast casual / full service restaurants;
“Restricted Stock” means restricted stock grants;
“Revolving Credit Facility” means the $202.5 million secured revolving credit facility, dated March 8, 2021 and amended on July 31, 2021 by and among the OP, CIBC Bank USA, as Administrative Agent and the other Lenders parties thereto, as amended from time to time;
“RCG” means Rosen Consulting Group, a nationally recognized real estate consulting firm;
“RSUs” means restricted stock units;
“SARs” means stock appreciation rights;
“Sarbanes-Oxley” means the Sarbanes-Oxley Act of 2002, as amended;
“SEC” means the Securities and Exchange Commission;
“Securities Act” means the Securities Act of 1933, as amended;
“Similar Laws” means Section 4975 of the Code, including an individual retirement account (“IRA”), or provisions under any other federal, state, local, non-U.S., or other laws or regulations that are similar to such provisions of ERISA or the Code;
“SOFR” means the Secured Overnight Financing Rate, which is a new index calculated by short-term repurchase agreements, backed by Treasury securities;
“Subsidiary OP” means the operating partnership entity within our predecessor’s private REIT fund structure whose interests will be contributed to the OP upon completion of this offering pursuant to the REIT Contribution Transactions;
“Subsidiary REITs” means the REIT entities within our predecessor’s private REIT fund structure whose interests will be contributed to the OP upon completion of this offering pursuant to the REIT Contribution Transactions;
“Term Loan Credit Facility” means the $17.0 million loan and security facility, dated as of March 31, 2022 by and among the 50/50 Joint Venture and CIBC Bank USA, as Administrative Agent, and the other parties thereto, as amended from time to time;
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“triple net leases” means leases for which the tenant is generally responsible for materially all property operating expenses, including property taxes, insurance, and property maintenance and repairs; however, certain of our triple net leases contain limited landlord responsibilities for one or more of the following: property maintenance and repairs related to the roof, structure or parking lot or certain utilities;
“TRSs” means taxable REIT subsidiaries within the meaning of Section 856(l) of the Code;
“UBTI” means unrelated business taxable income as defined in Section 512 of the Code;
“UPREIT” means an umbrella partnership real estate investment trust;
“USRPI” means a United States real property interest as defined in Section 897 of the Code;
“U.S. holder” means a beneficial owner of shares of our Common Stock that is for U.S. federal income tax purposes:
a citizen or resident of the United States;
a corporation, or other entity taxable as a corporation, created or organized under the laws of the United States or any state thereof (or the District of Columbia);
a trust if it (i) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (ii) has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person; or
an estate that is subject to U.S. federal income tax on its income regardless of its source; and
“we,” “our,” “us,” “FrontView,” and “Company” mean FrontView REIT, Inc., a Maryland corporation, together with its consolidated subsidiaries, including the OP, after giving effect to the REIT Contribution Transactions and Internalization, except where it is clear from the context that the term only means
FrontView REIT, Inc. before giving effect to such transactions.
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PROSPECTUS SUMMARY
The following summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our Common Stock. You should read the entire prospectus carefully, including the section entitled “Risk Factors,” as well as the financial statements and related notes included elsewhere in this prospectus, before making an investment decision.
Our Company
FrontView is an internally-managed net-lease REIT that is experienced in acquiring, owning and managing outparcel properties that are net leased to a diversified group of tenants. We have chosen the name “FrontView” to represent our differentiated “real estate first” investment approach focused on outparcel properties that are in prominent locations with direct frontage on high-traffic roads that are highly visible to consumers. We are a growing net-lease REIT and own a well-diversified portfolio of 278 outparcel properties with direct frontage across 31 U.S. states as of June 30, 2024. Our tenants include service-oriented businesses, such as restaurants, cellular stores, financial institutions, automotive stores and dealers, medical and dental providers, pharmacies, convenience and gas stores, car washes, home improvement stores, grocery stores, professional services as well as general retail tenants. Our Founder, Stephen Preston, who formed our company in 2016, previously served as a principal of NADG, an acquirer and developer of commercial, residential and net-lease real estate across the United States and Canada founded in 1977 and currently with approximately $5.0 billion of assets under management.
We focus on investing primarily in well-located, net-leased outparcel properties that provide high visibility to consumers. We believe our tenants value the prominent location of our outparcel properties with frontage on high-traffic roads that are highly visible to consumers and drive demand for their core business operations. In addition, our tenants are able to retain operational control of their strategically important locations through long-term net leases.
As of June 30, 2024, our portfolio comprised approximately 2.1 million rentable square feet of operational space and was highly diversified based on tenant, industry, and geography. As of June 30, 2024, our outparcel properties were located in 96 MSAs in 31 U.S. states, with no single state exceeding 12.1% of our ABR. Our portfolio’s occupancy rate was 98.9% as of June 30, 2024. Our properties were leased to 292 tenants that represented 137 different brands, with no single tenant brand accounting for more than 3.4% of our ABR. As of June 30, 2024, approximately 40.0% of our tenants had an investment-grade credit rating. As of June 30, 2024, approximately 96.6% of our leases (based on ABR) had contractual rent escalations, including, in some cases, pursuant to option terms, with an ABR weighted average minimum increase of approximately 1.7%. As of June 30, 2024, the ABR weighted average remaining term of our leases was approximately 7.0 years, excluding renewal options and approximately 96.6% of such leases (based on ABR) have renewal options. For the six months ended June 30, 2024, we had total rental revenues of $29.9 million, a net loss of $4.6 million and FFO of $7.6 million.
From our inception in 2016 through June 30, 2024, our portfolio has grown to 278 properties. In order to benefit from increasing economies of scale as we continue to grow and as a part of our evolution toward entering the public markets, we have made the decision to internalize our management team and functions currently performed by our external manager and its affiliates, which will become effective upon completion of this offering. Upon closing of the Internalization, each member of our senior management team will become a full-time employee of FrontView. We intend to continue to execute our growth strategy, utilizing our long-standing, established relationships within the marketplace to source new acquisition opportunities. Following completion of this offering, we believe that our balance sheet, including cash on hand, expected borrowing capacity under our New Revolving Credit Facility and New Delayed Draw Term Loan, and overall leverage profile will enable us to continue to expand our portfolio.
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Our Competitive Strengths
We believe we possess the following competitive strengths that enable us to implement our business and growth strategies and distinguish our Company from other market participants, allowing us to compete effectively in the individual tenant, net-lease market for outparcel properties:
Focused Portfolio of Well-Located Net-Lease Outparcel Properties. Pursuant to our “real estate first” investment strategy, we have acquired a highly curated portfolio of outparcel properties that are in prominent locations with direct frontage on high-traffic roads that are highly visible to consumers, which we believe is important to our tenants’ operations and success. We are selective in acquiring outparcels and frequently decline opportunities that may otherwise pass certain financial tests if we do not believe in the quality and long-term viability of the real estate. In 2016, we made a strategic decision to acquire outparcel properties with frontage on high-traffic roads and today we have developed an extensive track-record in acquiring, owning and managing outparcel properties. As a result, we believe we are a market leader in acquiring, owning and managing outparcel properties and therefore are well positioned for future growth. We believe we have a differentiated strategy and competitive positioning, given our acquisition history and experience, that will enable us to aggregate assets within the outparcel market at scale efficiently.
Highly-Diversified Tenants, Brands, Industries, and Geographic Reach. Our portfolio is highly diversified based on tenant brands, industries and geography and is cross-diversified within each (e.g., tenant diversification within a geographic concentration). As of June 30, 2024, we had 292 tenants that operated 137 different brands. Our top 10 tenant brands (based on ABR) represented approximately 23.3% of our portfolio ABR as of June 30, 2024, with no single tenant brand representing more than 3.4% of our ABR. As of June 30, 2024, our outparcel properties were located in 96 MSAs in 31 U.S. states, with no single state exceeding 12.1% of our ABR. We believe this diversification positions us well for significant growth and helps mitigate the risks inherent in a concentration in only one or a few tenants, brands or geographies, including risks presented by tenant bankruptcies, adverse industry trends, and economic downturns or changes in a particular geographic area.
Creditworthiness of Tenants. We believe that underlying credit or financial wherewithal of a tenant is one of the more important criteria when evaluating an acquisition. When appropriate information is available, we focus on evaluating a tenant’s financial statements to understand performance, liquidity, leverage and key ratios, as well as sales volume and rent to sales coverage, at both the parent/corporate guarantor level and unit level. In addition, as part of our review of tenant creditworthiness we evaluate the details of each tenant’s brand, industry, and management team expertise and experience, amongst other factors. Substantially all of our leases are with the parent or corporate entity (direct or guarantee) for a tenant brand. As of June 30, 2024, approximately 40.0% of our tenants had an investment-grade credit rating.
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Scalable Net-Lease Platform Well Positioned for Significant Growth. We expect to have approximately 15 employees upon completion of the Internalization. Our senior leadership, asset management and property management teams collectively have an average of more than 20 years of real estate and/or net lease real estate experience. We also have dedicated industry specialists who provide significant capabilities across real estate underwriting and origination, development, acquisition, financing, and property and asset management, and believe our platform is highly scalable. Given our management team and organizational structure, we expect that as our portfolio grows, we will not need to make a significant number of additional hires.
Value-Enhancing Asset and Property Management Teams. Our asset and property management teams focus on creating value and maximizing cash flow post-acquisition through active tenant engagement and risk monitoring and mitigation. Our experienced team of professionals work closely with tenants to identify their needs to help minimize tenant turnover, which in turn supports our strong occupancy levels. Our portfolio’s occupancy rate was 98.9% as of June 30, 2024. Overall, our value-enhancing asset and property management strategies are key to long-term success in the net-lease real estate industry.
Strong Balance Sheet with Conservative Leverage Profile. As of June 30, 2024, on a pro forma basis, we had approximately $249.9 million of total debt outstanding (net of fees), with a variable interest rate of SOFR plus 1.2% and approximately $71.5 million of cash and cash equivalents. Upon completion of this offering and after giving effect to the repayment of debt with the net proceeds of this offering and borrowings under our New Revolving Credit Facility and New Delayed Draw Term Loan, we expect to have a net debt-to-annualized adjusted EBITDAre ratio of approximately 4.28x, based on our pro forma annualized adjusted EBITDAre for the six months ended June 30, 2024.
Experienced and Innovative Senior Leadership Team. Our senior management team has significant net-lease real estate, acquisition, development, finance, and capital markets experience, including working together since 2016 to collectively manage our operations from the ground up. Our senior management team has a strong investment track record and reputation as a proven and focused buyer of outparcels, having invested on behalf of our predecessor a total of approximately $786.0 million to acquire 278 net-lease outparcel properties as of June 30, 2024. Mr. Preston, our Founder, Chairman of the Board, co-Chief Executive Officer and co-President has more than 24 years of real estate and finance experience with outparcels and other real estate asset classes. Randall Starr, our co-Chief Executive Officer, co-President and member of our board of directors, has more than 20 years of experience in real estate, finance and corporate executive leadership. Messrs. Preston and Starr also have an extensive network of relationships in the net-lease real estate business, including with real estate brokers, financial advisors, and lenders, which we believe will continue to promote our growth and success. Following consummation of this offering and Internalization, Messrs. Preston and Starr will own an aggregate of approximately 2.3% of the outstanding shares of our Common Stock on a fully diluted basis, which we believe promotes a strong alignment of interest with our stockholders.
Our Business and Growth Strategies
Our primary business objectives are to maximize cash flows, the value of our portfolio, and total returns to our stockholders through pursuit of the following business and growth strategies:
Target Well-Located Outparcel Properties While Maintaining a Highly-Diversified Portfolio. We plan to continue our focused acquisition strategy to target well-located, net-leased outparcel properties that we believe are compelling real estate opportunities while maintaining our portfolio’s overall diversification based on tenants, brands, industries and geographic markets. We target specific acquisition opportunities in a highly selective manner using our “real estate first” investment approach. We are focused on acquiring outparcel properties that are well located, providing high visibility to consumers. We primarily seek e-commerce resistant tenants whose business operations are service-oriented, such as restaurants, cellular stores, financial institutions, automotive stores and dealers, medical and dental providers, pharmacies, convenience and gas stores, car washes, home improvement stores, grocery stores, professional services, as well as general retail tenants. We intend to pursue acquisitions of individual properties already subject to a net lease, including through sale leaseback transactions, and we also may pursue portfolio acquisitions that are significantly larger based on the desirability of the portfolio. We also believe that our ability to offer OP Units in tax-deferred transactions under current tax laws could give us flexibility in structuring and consummating acquisitions.
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Broad Market Relationships Drive Acquisition Pipeline. We believe our reputation and in-depth knowledge of properties based upon our operating history will enable us to continue to expand our market relationships and enhance our acquisition activity. Since our founding in 2016, we have rapidly built our portfolio and established a reputation as a proven and focused buyer of outparcels. We intend to continue to leverage the relationships we have developed with brokers and sellers based upon our successful historical activity to help identify acquisition opportunities early, to help source off market opportunities and to help pursue obtaining other opportunities, all of which we believe will help to enhance our ability to source compelling acquisitions.
Consistent Internal Growth through Long-Term Net Leases with Strong Contractual Rent Escalations. We seek to acquire properties with long-term net leases in place that include contractual rent escalations over the lease term. As of June 30, 2024, substantially all of the properties in our portfolio were subject to net leases with an ABR weighted average remaining lease term of approximately 7.0 years, excluding renewal options. Approximately 96.6% of our leases (based on ABR) had contractual rent escalations, including, in some cases, pursuant to options terms, with an ABR weighted average minimum increase of approximately 1.7% per annum. As of June 30, 2024, approximately 93.2% of our leases (based on ABR) contained fixed annual rent increases or periodic escalations over the term of the lease (e.g., a 10% increase every five years) and approximately 3.4% of our leases (based on ABR) contained annual lease escalations based on increases in the CPI.
Proactively Manage Our Portfolio. We believe our proactive approach to asset management and property management helps enhance the performance of our portfolio through risk mitigation strategies. These strategies include active rent collection monitoring, potential property sales, lease extension or renewals and, when applicable, the repositioning of a non-performing property. We have successfully re-tenanted, re-merchandised and sold outparcel properties as vacancies have arisen in our portfolio. Our experience in the industry over the years has allowed our management team to develop a wide array of tenant / tenant representative and brokerage relationships that are key to the successful re-tenanting of an outparcel property. We believe that our proactive approach to asset management helps to identify and address issues, such as tenant credit deterioration, changes in real estate fundamentals, and general market disruption.
Actively Manage Our Balance Sheet to Maximize Capital Efficiency. We seek to maintain a prudent balance between debt and equity financing, to obtain various funding sources, including both fixed and floating rate debt, and to reduce interest rate risk by minimizing exposure to floating rate debt in the current economic climate. As of June 30, 2024, on a pro forma basis, we had approximately $249.9 million of total debt outstanding (net of fees) and approximately $71.5 million of cash and cash equivalents. Upon completion of this offering, and after giving effect to the repayment of debt with the net proceeds of this offering and borrowings under our New Revolving Credit Facility and New Delayed Draw Term Loan, we will have a pro forma net debt-to-annualized adjusted EBITDAre ratio of approximately 4.28x based on our pro forma annualized EBITDAre for the six months ended June 30, 2024. Our long-term goal is to target a net debt-to-annualized adjusted EBITDAre ratio of 6.0x or below. In addition, our New Revolving Credit Facility and New Delayed Draw Term Loan will provide additional sources of debt funding of up to $250 million and $200 million, respectively. We plan to use net proceeds from this offering to repay in full the outstanding balance of the Revolving Credit Facility and Term Loan Facility and pay approximately $0.3 million of debt service obligations under the ABS Notes using cash on hand. We anticipate using a portion of our New Revolving Credit Facility and New Delayed Draw Term Loan to repay our obligations under the ABS Notes in December 2024.
Our “Real Estate First” Investment Strategy
We believe our “real estate first” investment strategy, focused on outparcel properties, is highly differentiated and includes the following carefully considered set of criteria:
Prime Properties in Desirable High-Traffic Locations. We selectively acquire outparcel properties that offer high-traffic locations with prime street frontage. We seek high-demand locations that provide certain inherent advantages such as advertising and brand building characteristics, high-customer traffic and, in some cases, drive thru-optionality that make these locations attractive for tenants and their business operations. In addition, we seek outparcel properties that offer high quality buildings and signage. We evaluate site locations using average daily traffic counts, typically seeking property locations with 15,000 cars or more at the closest corresponding intersection.
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Clearly Defined Target MSAs and Sub-Markets with Favorable Demographic Characteristics. We typically consider acquisition opportunities that are in MSAs and trade areas that have at least 50,000 residents within a 10-mile radius. Our acquisition team utilizes MSA data and other sources to pursue outparcel sites within locales exhibiting favorable demographic trends such as population growth, strong household incomes, locations of schools, offices, businesses and other demographic drivers. Excluding the State of California, we have acquired properties in each of the eight largest MSAs and 24 of the largest 30 MSAs in the United States.
E-Commerce Resistant Tenants. We seek to acquire properties in locations that are typically sought-after by e-commerce resistant, service-based tenants. We believe high-traffic locations are attractive to these tenants, which often outperform the broader market during market downturns and have historically been more resilient.
Favorable Physical Characteristics, Layout, and Site Position within Broader or Mixed-Use Location. We review the site location for each acquisition opportunity within the context of the overall development and the overall trade area. We focus on acquiring properties with favorable physical characteristics, including, but not limited to, the ability to add drive-thrus where appropriate, the ability to provide a significant number of parking spaces, sufficient land acreage to serve a variety of building types and tenants, easy access and unobstructed visibility from main roads.
Locations that Appeal to Diverse Tenant Types. For each acquisition opportunity, we consider the site’s desirability for different tenant types, the site’s positioning within and size of the marketplace, the site’s zoning rights and restrictions and generally the site’s ability to accommodate different tenant industries.
Sites with Potential for Value Creation. We also assess the potential for value creation over time by applying our asset management capabilities. For each acquisition opportunity, we review data to understand the performance of tenants within the marketplace, rents within the marketplace, tenant presence, duplicate tenant categories, void analysis and competing marketplaces or trade areas which help to understand market rent growth and potential occupancy trends.
Market Opportunity
According to RCG, the net lease outparcel market in the United States is large and highly fragmented with many smaller, private owners. Within this market, there are more than 500,000 buildings with fast food, vehicle service or repair, convenience store, or bank activities according to RCG’s market study. Taking into account other service businesses that lease outparcels and were not included in the RCG study, we believe that the total number of properties in the outparcel market is even greater in scale. Based on our acquisition experience, the typical purchase price for individual tenant, small format outparcel properties is between $1.5 million and $7.0 million.
According to RCG, there may be an opportunity for a well-capitalized investor to aggregate assets within the large and fragmented outparcel market. We believe, based on our strong relationships with outparcel tenants, significant expertise in the outparcel space, the size and scalability of our platform, historical broker relationships and a balance sheet with significant liquidity, that we are uniquely positioned to capitalize on this opportunity.
Our Real Estate Investment Portfolio
To achieve an appropriate risk-adjusted return, we intend to maintain a highly-diversified portfolio of outparcel properties that are in prominent locations with direct frontage on high-traffic roads that are highly visible to consumers and maintain diversity across geographic locations, tenants, and brands and that have cross-diversification within each. We discuss below our portfolio diversification based on several different metrics and information provided as of June 30, 2024.
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Diversification by Tenant Brand
We primarily seek tenants that operate service-oriented businesses, such as restaurants, cellular stores, financial institutions, automotive stores and dealers, medical and dental providers, pharmacies, convenience and gas stores, car washes, home improvement stores, grocery stores, professional services as well as general retail tenants. As of June 30, 2024, our properties were occupied by 292 tenants that operated 137 different brands, with no single tenant brand accounting for more than 3.4% of our ABR.
The following table sets forth information with respect to each of our top 10 tenant brands (based on ABR) as of June 30, 2024:
Tenant
ABR
(in thousands)
% of ABR
Verizon
$1,761
3.4%
Oak Street Health
$1,310
2.5%
Adams Auto Group
$1,284
2.5%
Raising Canes
$1,262
2.4%
IHOP
$1,213
2.3%
Mammoth Car Wash
$1,198
2.3%
CVS
$1,081
2.1%
AT&T
$1,050
2.0%
Walgreens
$1,014
1.9%
Chili’s
$959
1.9%
Other
$39,870
76.7%
Total
$52,002
100.0%
Diversification by Tenant Industry
The following chart shows a breakdown of our ABR by the tenant industries that comprised our portfolio as of June 30, 2024:

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Diversification by Geography
As of June 30, 2024, our outparcel properties were located in 96 MSAs in 31 U.S. states, with no single state exceeding 12.1% of our ABR.
High-Quality, Diversified Portfolio

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Our Leases
Our portfolio was approximately 98.9% leased as of June 30, 2024. As of June 30, 2024, the ABR weighted average remaining term of our leases was approximately 7.0 years, excluding renewal options, and approximately 96.6% of such leases (based on ABR) have renewal options. As of June 30, 2024, no more than 14.0% of our rental revenue was derived from leases that expire in any single year prior to 2030.
The following chart sets forth our annual lease expirations based upon the terms of our leases in place as of June 30, 2024 (percentages based on rental revenue):

Approximately 96.6% of our leases (based on ABR) provide for periodic contractual rent escalations, generally ranging from 1.0% to 3.0% annually, with an ABR weighted average minimum increase of 1.7% per annum. The following chart breaks down the type of rent increase provided in our leases (based on ABR) as of June 30, 2024:
Lease Escalations

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Acquisitions and Dispositions
Acquisitions
During the year ended December 31, 2023, we acquired a total of 26 properties for an aggregate amount of approximately $74.8 million for an average capitalization rate of 7.1%. From January 1, 2024 through the date of this prospectus, we have not acquired any properties; provided, however, we have identified and are pursuing a number of potential acquisition opportunities. More specifically, we currently have non-binding letters of intent (in agreed form or executed) or are negotiating purchase sale agreements representing approximately $34.0 million of acquisitions at an average capitalization rate of approximately 7.8%. Further, we are evaluating potential acquisitions in the amount of at least $45.2 million. As of the date of this prospectus, we have not entered into any purchase and sale agreements in connection with any potential acquisitions. We may not complete any of the potential acquisitions that we are currently pursuing.
The following chart shows the number of completed acquisitions each year from 2016 through 2023 by dollar volumes and acquisition capitalization rates:

Selective Property Sales
Our team focuses our disposition efforts around capturing value and attempting to minimize value degradation due to unfavorable changes in the critical nature of an asset, underlying real estate fundamentals, tenant credit profile, or lease and guarantee structures. In the future, we may sell certain properties that we acquire as part of a larger portfolio transaction that do not individually meet our desired investment criteria or properties that are vacant or should be repositioned. From 2016 through June 30, 2024 we sold a total of 11 properties. Subsequent to June 30, 2024, we have not sold any properties.
Corporate Responsibility–ESG
We believe that our corporate responsibility and ESG initiatives are key to our performance and we are focused on efforts and changes designed to have long-term, positive impacts for our stockholders, employees, tenants, other stakeholders, and the communities where we live, work, and own our properties.
Environmental
As a real estate owner, we are aware of the need to develop and implement environmentally sustainable practices within our business and are committed to doing so. We believe that mitigating environmental risks and working to implement sustainable practices is important to the success and long-term performance of our business.
Social
Our commitment to our employees is central to our ability to continue to deliver strong performance and financial results for our stockholders and other stakeholders. We are as passionate about our people as we are about
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real estate. We seek to create and cultivate an engaging work environment for our employees, which allows us to attract, retain, and develop top talent to manage our business.
Governance
We are committed to conducting our business in accordance with corporate governance best practices. Our reputation is one of our most important assets and each director, officer, and employee must contribute to the care and preservation of that asset.
We have structured our corporate governance in a manner we believe closely aligns our interests with those of our stockholders. Notable features of our corporate governance structure will include the following:
our board of directors will not be classified, with each of our directors subject to election annually, and our charter provides that we may not elect to be subject to the elective provision of the MGCL that would classify our board of directors without the affirmative vote of a majority of the votes cast on the matter by stockholders entitled to vote generally in the election of directors;
our stockholders will have the ability to amend our bylaws by the affirmative vote of a majority of the votes entitled to be cast on the matter;
a majority of our directors will be “independent” in accordance with NYSE listing standards;
we will have a fully independent Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee;
at least one of our directors serving on the Audit Committee will qualify as an “audit committee financial expert” as defined by the SEC;
we have opted out of the business combination and control share acquisition statutes in the MGCL, and we may only opt back in with the affirmative vote of a majority of the votes cast on the matter by stockholders entitled to vote generally in the election of directors; and
we do not have a stockholder rights plan, and we will not adopt a stockholder rights plan in the future without (i) the approval of our stockholders or (ii) seeking ratification from our stockholders within 12 months of adoption of the plan if the board of directors determines, in the exercise of its duties under applicable law, that it is in our best interest to adopt a rights plan without the delay of seeking prior stockholder approval.
Summary Risk Factors
You should carefully consider the matters discussed in the “Risk Factors” section beginning on page 22 of this prospectus for factors you should consider before investing in our Common Stock. Some of these risks include:
Outparcel properties involve significant risks of tenant defaults and tenant vacancies, which could materially and adversely affect us.
We have limited opportunities to increase rents under our long-term leases with tenants, which could impede our growth and materially and adversely affect us.
Our financial results have and may continue to fluctuate in the future, which makes predicting our revenues, costs and expenses difficult, and any volatility in our future financial results could materially and adversely affect us.
We may not be able to achieve growth through acquisitions at a rate that is comparable to our historical results, which could materially and adversely affect us.
We may not be able to effectively manage our growth and any failure to do so could materially and adversely affect us.
As we continue to acquire outparcel properties pursuant to our growth strategy, our portfolio may become less diversified which could materially and adversely affect us.
The departure of any of our key personnel with long-standing business relationships could materially and adversely affect us.
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Our portfolio is concentrated in certain states and MSAs and any adverse developments and/or economic downturns in these geographic markets could materially and adversely affect us.
Our portfolio of outparcel properties is also concentrated in certain tenant brands and industries, and any adverse developments relating to one or more of these brands or industries could materially and adversely affect us.
Our portfolio of outparcel properties is concentrated among tenants with non-investment grade credit ratings, and any adverse developments affecting the credit of these tenants could materially and adversely affect us.
The decrease in demand for restaurant outparcel properties may materially and adversely affect us.
We may be unable to renew leases, re-lease outparcel properties as leases expire, or lease vacant spaces on favorable terms or at all, which, in each case, could materially and adversely affect us.
Our business is subject to significant re-leasing risk, particularly for specialty outparcel properties that are suitable for only one use, which could materially and adversely affect us.
We may experience tenant defaults, particularly from tenants that do not have an investment grade credit rating, which could materially and adversely affect us.
Increases in interest rates may decrease the value of our properties, which could materially and adversely affect us.
Inflation may materially and adversely affect us and our tenants, which could materially and adversely affect us.
As of June 30, 2024, on a pro forma basis, we had approximately $249.9 million principal balance of indebtedness outstanding (net of fees), which may expose us to the risk of default under our debt obligations.
Market conditions could adversely affect our ability to refinance existing indebtedness on acceptable terms or at all, which could materially and adversely affect us.
An increase in market interest rates could increase our interest costs on existing and future debt and could adversely affect our stock price, and a decrease in market interest rates could lead to additional competition for the acquisition of real estate, any of which could materially and adversely affect us.
Our ABS Notes, New Revolving Credit Facility and New Delayed Draw Term Loan contain various covenants which, if not complied with, could accelerate our repayment obligations, thereby materially and adversely affecting us.
Cash interest expense and financial covenants relating to our indebtedness, including covenants in our New Revolving Credit Facility and New Delayed Draw Term Loan that will restrict us from paying distributions if a default or event of default exists, other than distributions required to maintain our REIT status, may limit or eliminate our ability to make distributions to holders of our Common Stock.
We are a holding company with no direct operations and rely on funds received from the OP to pay liabilities.
Failure to qualify as a REIT would materially and adversely affect us and the value of our Common Stock.
There has been no public market for our Common Stock prior to this offering and an active trading market for our Common Stock may not develop following this offering.
The market price and trading volume of shares of our Common Stock may be volatile following this offering.
We may not be able to make distributions to our stockholders at the times or in the amounts we expect, or at all.
You will experience immediate and substantial dilution from the purchase of the shares of Common Stock sold in this offering.
Increases in market interest rates may result in a decrease in the value of shares of our Common Stock.
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REIT Contribution Transactions and Internalization
REIT Contribution Transactions
The purpose of the REIT Contribution Transactions and Internalization is to create an UPREIT structure, with a publicly-traded REIT that is internally managed and owns all of its assets and conducts all of its business through a subsidiary operating partnership.
We were formed as a Maryland corporation in June 2023, and the OP was formed as a Delaware limited partnership in August 2023. Prior to or contemporaneously with the closing of this offering, we will become the sole general partner of the OP, and the limited partnership agreement of the OP will be amended and restated, among other things, to denominate the OP Units so that the value of one OP Unit equals the value of one share of Common Stock and to provide the outside limited partners of the OP with redemption rights that give the holders the right, after 180 days, to redeem their interests for Common Stock (on a one-for-one basis) or cash, at our election.
Prior to the REIT Contribution Transactions and the closing of this offering, our properties were owned by our predecessor in a private REIT fund structure. Pursuant to the REIT Contribution Transactions, interests in various entities within our predecessor’s private REIT fund structure will be contributed to our newly created UPREIT structure. As of June 30, 2024, ownership interests in our predecessor’s private REIT fund structure consisted of a total of 30,078 common units and 9,968 preferred units. Holders of common and preferred units in the private REIT fund structure will receive OP Units or shares of Common Stock pursuant to the REIT Contribution Transactions, as described below:
Prior to the REIT Contribution Transactions, our predecessor’s private REIT will effect a 250 for-one split of its common units. Following that unit split, pursuant to the Contribution Agreements, our predecessor’s common unit holders will exchange their common units (or interest in the entity that owns the common units in our predecessor’s private operating partnership) for OP Units or shares of Common Stock on a one-for-one basis. Following that unit split and exchange, such contributing investors will receive an aggregate of 5,742,303 OP Units and 1,777,310 shares of Common Stock, representing approximately 28.1% of our outstanding shares of our Common Stock on a fully diluted basis. The shares of Common Stock issued in the REIT Contribution Transactions will not be listed on the NYSE until 180 days after the closing of this offering. For more information, see “REIT Contribution Transactions and Internalization—REIT Contribution Transactions.”
Pursuant to the REIT Contribution Transactions, existing preferred unit holders will exchange their interests in our predecessor’s private operating partnership (or interest in the entity that owns the preferred interests in our predecessor’s private operating partnership) for OP Units. Such contributing investors will receive an aggregate of 5,080,877 OP Units, representing approximately 19.0% of our outstanding shares of our Common Stock on a fully diluted basis. The number of OP Units to be issued to such contributing investors was calculated by dividing the fixed liquidation preference of the preferred units in our predecessor’s private operating partnership ($10,400 per unit, plus any accrued and unpaid preferred return, or approximately $103.7 million in the aggregate) by the sum of the initial public offering price per share of our Common Stock and $1.41 (which represents the preferred unit holders' proportional share of the cost of the Internalization). For more information, see “REIT Contribution Transactions and Internalization—REIT Contribution Transactions.”
Internalization
The Internalization also will be implemented contemporaneously with the closing of this offering as set forth below:
The purchase price for the Internalization will be payable in 931,490 OP Units, representing approximately 3.5% of our outstanding shares of our Common Stock on a fully diluted basis. For more information, see “REIT Contribution Transactions and Internalization—Internalization.”
At the closing of the Internalization, we will hire approximately 15 employees and we will enter into employment agreements with each of our named executive officers.
The management and other fees, and carried interest provisions, in the existing OP agreement that were paid by our predecessor will be eliminated.
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At the closing of the Internalization, the OP will acquire all of the assets reasonably necessary to operate and manage our portfolio of outparcel properties, including the assumption of an office lease and certain operating liabilities.
NARS and certain of its affiliates have made representations and warranties in the Internalization Agreement for our benefit that will survive until six months after the closing of the Internalization.
The Internalization Agreement includes a non-compete clause that restricts Messrs. Preston and Starr from engaging in certain competitive businesses in any geographic area in which our business is conducted as of the closing date of the Internalization for one year following the closing of the Internalization.
Outsourcing Agreement
At the closing of the Internalization, pursuant to an outsourcing agreement with North American Asset Management Corp. (“NAAM”), an affiliate of our predecessor, NAAM will provide us with services limited to (i) property accounting and (ii) human resources support. The outsourcing agreement will have a term of three years with automatic one-year renewal options and can be terminated at any time for any reason by either party upon six months’ advance notice and will provide an option for us to directly hire the full-time personnel providing the property accounting services. We will pay NAAM an annual fee equal to the actual allocated costs incurred by NAAM in providing the services under the outsourcing agreement, which fee is estimated to be $0.575 million for the first year of the term, and is subject to a true-up mechanism at the end of each year of the term to reflect the actual costs incurred by NAAM during such year.
Issuance of OP Units and Grants of RSUs to our Executive Officers, Non-employee Director, Employees and NARS Affiliates
The following table below sets forth (i) the OP Units to be issued or allocated to our Founder, certain of our executive officers, non-employee directors, other employees and affiliates of NARS in connection with the Internalization and (ii) one-time grants of RSUs shortly after the consummation of this offering to our Founder, our executive officers, our non-employee directors, and certain other employees.
Name and Principal Position
OP Units to be received in the Internalization
One-time Grant of RSUs
Stephen Preston, Co-Chief Executive Officer and Co-President
427,818
263,158
Randall Starr, Co-Chief Executive Officer and Co-President
178,258
171,053
Timothy Dieffenbacher, Chief Financial Officer, Treasurer and Secretary
52,632
Drew Ireland, Chief Operating Officer
9,616
52,632
Robert S. Green, Director
71,303
Ernesto Perez, Independent Director
4,737
Noelle LeVeaux, Independent Director Nominee
2,369
Daniel Swanstrom, Independent Director Nominee
2,369
Elizabeth Frank, Independent Director Nominee
2,369
Other FrontView Employees
6,915
5,398
NARS and Affiliates
237,580
Total
931,490
556,717
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Organizational Structure Following This Offering
The following diagram depicts our organizational structure and percentage equity ownership immediately upon the closing of the REIT Contribution Transactions, the Internalization and this offering. Share and unit percentages below assume the underwriters’ option to purchase additional shares of Common Stock is not exercised.

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50/50 Joint Venture Acquisition
Pursuant to the Interest Purchase Agreement, on October 20, 2023, our predecessor acquired the remaining 50% interest in the 50/50 Joint Venture previously held by our predecessor’s partner on behalf of certain Canadian investors for approximately $26.9 million. The purchase price was based on the 50/50 Joint Venture’s enterprise value of approximately $138.3 million, less approximately $86.7 million of debt. The purchase price was also subject to customary adjustments for cash and real estate prorations and was reduced by the value of our predecessor’s existing 50% equity interest in the 50/50 Joint Venture. Our predecessor funded the 50/50 Joint Venture Acquisition through cash, cash equivalents and restricted cash and borrowings under its Revolving Credit Facility.
Restrictions on Ownership and Transfer
Our charter, subject to certain exceptions, authorizes our board of directors to take such actions as are necessary or advisable to allow us to qualify and to preserve our status as a REIT. To assist us in preserving our status as a REIT, among other consequences, our charter contains limitations on the ownership and transfer of shares of our stock which are intended to prohibit: (i) any person or entity from owning or acquiring, directly or indirectly, more than 9.8% of the value of the aggregate of our then outstanding shares of capital stock or more than 9.8% of the value or number of shares, whichever is more restrictive, of the aggregate of our then outstanding shares of Common Stock and (ii) any transfer of or other event or transaction with respect to shares of capital stock that would result in the beneficial ownership of our outstanding shares of capital stock by fewer than 100 persons. In addition, our charter includes provisions intended to prohibit any transfer of, or other event with respect to, shares of our capital stock that would result in us being “closely held” within the meaning of Section 856(h) of the Code or otherwise failing to qualify as a REIT (including, but not limited to, ownership that would result in us owning an interest in a tenant if the income derived by us from such tenant would cause us to fail to satisfy any of the gross income requirements of Section 856(c) of the Code). However, these ownership limits do not apply to a person or persons that our board of directors exempts (prospectively or retroactively) from the ownership limits upon receiving appropriate assurances from such person that our qualification as a REIT is not jeopardized.
The ownership limits and other restrictions on ownership and transfer of our stock contained in our charter will not apply if our board of directors determines that it is no longer in our best interests to qualify as a REIT or that compliance with any such restriction is no longer required in order for us to qualify as a REIT. The restrictions on ownership and transfer could delay, defer or prevent a transaction or a change of control of our Company that might involve a premium price for our Common Stock that our stockholders believe to be in their best interest. See “Description of Our Capital Stock—Restrictions on Ownership and Transfer.”
Tax Status
We intend to elect to qualify to be taxed as a REIT under the Code, commencing with our short taxable year ending December 31, 2024. We believe that as of such date we will have been organized and will have operated in a manner to qualify for taxation as a REIT for U.S. federal income tax purposes. We intend to continue to be organized and operate as a REIT in the future but we cannot provide any assurance that we have been or will be able to do so. See “Material U.S. Federal Income Tax Considerations.”
Implications of Being an Emerging Growth Company
We are an emerging growth company, as defined in the JOBS Act, and as such we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to take advantage of this extended transition period. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards. We may elect to comply with public company effective dates at any time, and such election would be irrevocable pursuant to Section 107(b) of the JOBS Act.
We expect to remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which we have total annual gross revenue of $1.235 billion or more (subject to adjustment for inflation),
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(ii) the last day of the fiscal year following the fifth anniversary of the first sale of our Common Stock pursuant to an effective registration statement, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt, or (iv) the date on which we are deemed to be a “large accelerated filer.”
Corporate Information
We were formed as a Maryland corporation on June 23, 2023. Our principal executive offices are located at 3131 McKinney Avenue, Suite L10, Dallas, TX 75204 and our telephone number is (469) 906-7300. Our website is www.frontviewreit.com. The information found on, or otherwise accessible through, our website is not incorporated into, and does not form a part of, this prospectus or any other report or document we file with or furnish to the SEC.
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The Offering
Common Stock offered by us
13,200,000 shares (or 15,180,000 shares if the underwriters exercise in full their option to purchase additional shares of our Common Stock)(1)
Common Stock to be outstanding upon completion of the REIT Contribution Transactions and this offering
14,977,310 shares (or 16,957,310 shares if the underwriters exercise in full their option to purchase additional shares of our Common Stock)(1)(2)
OP Units and Common Stock to be issued pursuant to the REIT Contribution Transactions and Internalization
1,777,310 shares and 11,754,670 OP Units(3)
Total Common Stock and OP Units (excluding OP Units held directly by us) to be outstanding upon completion of the REIT Contribution Transactions, Internalization and this offering
26,731,980 shares and OP Units (or 28,711,980 shares and OP Units if the underwriters exercise in full their option to purchase additional shares of our Common Stock)(1)(2)(3)
Proposed NYSE symbol / Listing
The Common Stock is listed on the NYSE under the symbol “FVR.”
Distribution Policy
Following completion of this offering, we intend to make regular quarterly distributions to holders of our Common Stock. We intend to make a pro rata distribution with respect to the period commencing after the completion of this offering and ending on December 31, 2024, assuming a distribution of $0.20 per share for a full quarter. On an annualized basis, this would be $0.81 per share, or an annual distribution rate of approximately 4.3%, based on an initial public offering price of $19.00 per share. We intend to maintain our initial distribution rate for the 12-month period following completion of this offering unless our actual results of operations, economic conditions or other factors differ materially and adversely from the assumptions used in our estimate. Actual distributions may be significantly different from the expected distributions.
Distributions made by us will be authorized and determined by our board of directors in its sole discretion out of funds legally available therefor and will be
(1)
Excludes 1,722,719 shares of our Common Stock reserved for future issuance under the 2024 Equity Incentive Plan, as more fully described in “Executive Compensation—Material Terms of the 2024 Equity Incentive Plan,” a portion of which will be used to issue a total of 556,717 RSUs to our named executive officers, other employees and non-employee directors shortly after the closing of this offering.
(2)
Includes 1,777,310 shares of Common Stock to be issued to existing common unit holders in our predecessor’s private REIT fund structure.
(3)
Approximately 43.2% of the total number of OP Units includes 5,080,877 OP Units to be issued to existing preferred unit holders in our predecessor’s private REIT fund structure, which was determined by dividing the fixed liquidation preference of the preferred units by the sum of the initial public offering price and $1.41 (which represents the preferred unit holders’ proportional share of the cost of the Internalization). The remaining 56.8% of the total number of OP Units includes 5,742,303 OP Units to be issued to existing common unit holders in our predecessor’s private REIT fund structure and 931,490 OP Units to be issued in the Internalization. Common Stock includes 1,777,310 shares of Common Stock to be issued to existing common unit holders in our predecessor’s private REIT fund structure.
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dependent upon a number of factors, including, but not limited to, restrictions under applicable law and the capital requirements of the Company. See “Distribution Policy.”
Voting Rights
Each outstanding share of Common Stock will entitle its holder to one vote on all matters to be voted on by stockholders generally.
Use of Proceeds
We estimate that the net proceeds to us from this offering will be approximately $231.9 million, or $267.0 million if the underwriters exercise in full their option to purchase additional shares of our Common Stock, after deducting underwriting discounts and commissions and other estimated expenses. Total estimated offering expenses payable by us are approximately $5.2 million, of which approximately $3.2 million have been previously paid and approximately $2.0 million will be paid using proceeds from this offering.
We will contribute the net proceeds from this offering to the OP in exchange for a number of OP Units that is equal to the number of shares of Common Stock that we issue in this offering.
The OP expects to use the net proceeds from this offering to repay borrowings under the Revolving Credit Facility and the Term Loan Credit Facility. The OP expects to use any remaining net proceeds for general business and working capital purposes, including potential future acquisitions. See “Use of Proceeds.”
Risk Factors
Investing in our Common Stock involves risks. You should carefully read and consider the information set forth under the heading “Risk Factors” beginning on page 22 and other information included in this prospectus before investing in our Common Stock.
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Summary Selected Consolidated Historical and Pro Forma Financial and Other Data
Set forth below is summary selected financial and other data presented on (i) a historical basis for our predecessor and its consolidated subsidiaries and (ii) a pro forma basis for our company after giving effect to the completion of this offering, the REIT Contribution Transactions, the Internalization and the other adjustments described in the unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. We have not presented historical data for FrontView REIT, Inc. because we have not had any corporate activity since our formation other than the issuance of shares of Common Stock in connection with our initial capitalization and activity in connection with this offering. Accordingly, we do not believe that a presentation of the historical results of FrontView REIT, Inc. would be meaningful. Upon completion of the REIT Contribution Transactions and Internalization, substantially all of our assets will be held by, and substantially all of our operations will be conducted through, the OP. We will contribute the net proceeds received by us from this to the OP in exchange for OP Units. For more information, please see “REIT Contribution Transactions and Internalization.”
Our predecessor’s historical consolidated balance sheet data as of December 31, 2023 and 2022 and consolidated results of operations for the years ended December 31, 2023 and 2022 have been derived from our predecessor’s audited historical consolidated financial statements included elsewhere in this prospectus. The financial information below also includes our predecessor’s historical unaudited condensed consolidated balance sheet data as of June 30, 2024, and unaudited condensed consolidated results of operations for the six months ended June 30, 2024 and 2023, which have been derived from our predecessor’s historical unaudited condensed consolidated financial statements contained elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and Article 10 of Regulation S-X. We believe all adjustments necessary for a fair presentation have been included in these interim condensed consolidated financial statements (which include only normal recurring adjustments). The historical consolidated financial data included below and set forth elsewhere in this prospectus are not necessarily indicative of our future performance.
Our unaudited summary selected pro forma condensed consolidated operating and balance sheet data as of and for the six months ended June 30, 2024 and for the year ended December 31, 2023, is presented (i) with respect to statements of operations data, giving effect to the REIT Contribution Transactions, the Internalization, and the completion of this offering and the use of proceeds described herein, assuming each of the transactions was completed on January 1, 2023, and (ii) with respect to balance sheet data, giving effect to the REIT Contribution Transactions, the Internalization, and the completion of this offering and the use of proceeds described herein, assuming each of the transactions was completed on June 30, 2024, in each case, giving effect to the other adjustments described in the unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. The preparation of the unaudited pro forma condensed consolidated financial statements requires management to make estimates and assumptions deemed appropriate. The unaudited pro forma condensed consolidated financial statements are not intended to represent, or be indicative of what our actual financial position and results of operations would have been as of the date and for the period indicated, nor does it purport to represent our future financial position or results of operations.
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Statement of Operations Data:
 
Six months ended June 30,
Years ended December 31,
(in thousands, except share and per share amounts)
Company Pro
Forma Condensed
Consolidated
(unaudited)
2024
Historical
Condensed
Consolidated
(unaudited)
2024
Historical
Condensed
Consolidated
(unaudited)
2023
Company Pro
Forma
Consolidated
(unaudited)
2023
Historical
Consolidated
2023
Historical
Consolidated
2022
Revenues
 
 
 
 
 
 
Rental revenues
$29,156
$29,869
$22,300
$57,891
$48,266
$39,863
Operating expenses
 
 
 
 
 
 
Depreciation and amortization
14,249
14,296
11,156
28,860
24,730
21,801
Property operating expenses
3,664
3,691
2,627
6,549
5,826
4,498
Property management fees
1,007
725
1,616
918
Asset management fees
2,068
2,070
4,139
3,638
General and administrative expenses
6,471
1,361
3,081
12,475
8,054
1,184
Total operating expenses
24,384
22,423
19,659
47,884
44,365
32,039
Other expenses (income)
 
 
 
 
 
 
Interest expense
8,738
13,292
7,268
17,517
18,377
12,464
Loss/ (gain) on sale of real estate
(337)
332
(725)
201
Impairment loss
591
591
407
Income taxes
281
281
158
390
316
430
Management Internalization expense
16,498
Total other expenses
9,610
13,827
7,758
34,405
18,375
13,095
Operating loss
(4,838)
(6,381)
(5,117)
(24,398)
(14,474)
(5,271)
Gain from acquisition of equity method investment
12,988
Equity (loss)/ income from investment in an unconsolidated entity
60
(38)
(109)
Net loss
(4,838)
(6,381)
(5,057)
(24,398)
(1,524)
(5,380)
Net loss attributable to convertible non-controlling preferred interests
1,743
1,364
424
910
Net loss attributable to NADG NNN Property Fund LP
4,638
3,693
1,100
4,470
Net loss attributable to non-controlling interests
2,127
10,728
Net loss attributable to common stockholders
$(2,711)
$
$
$(13,670)
$
$
Basic and Diluted net loss per share
$(0.18)
 
 
$(0.91)
 
 
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Balance Sheet Data (at period end):
 
As of June 30,
As of December 31,
(in thousands)
Company Pro
Forma Condensed
Consolidated
(unaudited)
2024
Historical
Condensed
Consolidated
(unaudited)
2024
Historical
Consolidated
2023
Historical
Consolidated
2022
Total real estate held for investment, at cost
$640,264
$640,264
$647,180
$462,923
Total assets
798,372
745,466
772,007
626,790
Total debt, net
249,869
427,435
436,452
281,307
Total liabilities
278,817
455,791
471,321
311,103
Total convertible non-controlling preferred interests, partners' capital and stockholders' equity
519,555
289,675
300,687
315,687
Other Data:
 
Six months ended June 30,
Years ended December 31,
(in thousands)
Company Pro
Forma Condensed
Consolidated
(unaudited)
2024
Historical
Condensed
Consolidated
(unaudited)
2024
Historical
Condensed
Consolidated
(unaudited)
2023
Company Pro
Forma
Consolidated
(unaudited)
2023
Historical
Consolidated
2023
Historical
Consolidated
2022
FFO(1)
$​9,411
$7,578
$7,287
$​4,462
$11,031
$19,007
AFFO(1)
12,406
9,939
11,110
26,801
20,812
21,049
EBITDA(1)
19,333
22,403
16,307
22,369
46,953
34,217
EBITDAre(1)
19,333
22,066
16,379
22,369
32,980
34,418
(1)
FFO, AFFO, EBITDA and EBITDAre are non-GAAP financial measures that are often used by analysts and investors to compare the operating performance of REITs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for definitions of these metrics and reconciliations of these metrics to the most directly comparable GAAP measures.
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RISK FACTORS
Investing in our Common Stock involves a high degree of risk. Before making an investment decision, you should carefully consider the following risk factors, together with all of the other information included in this prospectus. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section in this prospectus entitled “Forward-Looking Statements” for more information.
Risks Related to Our Business and Properties
Outparcel properties involve significant risks of tenant defaults and tenant vacancies, which could materially and adversely affect us.
Our portfolio consists of outparcel properties that are leased to one or more tenants, most of which are in a single building. As a result, our success depends on our tenants for substantially all of our revenue. The ability of our tenants to meet their obligations to us, including their obligations to pay rent, maintain certain insurance coverage, pay real estate taxes, and maintain the properties in a manner so as not to jeopardize their operating licenses or regulatory status depends on the performance of their business and industry, as well as general market and economic conditions, which are outside of our control. At any given time, any tenant may experience a downturn in its business that may weaken its operating results or the overall financial condition of individual properties or its business as whole. As a result, a tenant may fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent, or declare bankruptcy. The financial failure of, or default in payment by, an individual tenant under its lease is likely to cause a significant or complete reduction in our rental revenue from that property, increased expenses incurred by that property, and a reduction in the value of the property. We may also experience difficulty or a significant delay in re-leasing or selling such property. The occurrence of one or more tenant defaults could materially and adversely affect us.
We have limited opportunities to increase rents under our long-term leases with tenants, which could impede our growth and materially and adversely affect us.
We typically purchase properties that are subject to existing long-term net leases with a variety of remaining lease years (initial lease terms of 10 years or more that often have renewal options as well). As of June 30, 2024, the ABR weighted average remaining term of our leases was approximately 7.0 years, excluding renewal options. As of June 30, 2024, approximately 96.6% of our leases (based on ABR) had contractual rent escalations, including, in some cases, pursuant to options terms, with an ABR weighted average minimum increase of approximately 1.7%, as follows: (i) approximately 93.2% of our leases (based on ABR) contained fixed annual rent increases or periodic escalations over the term of the lease (e.g., a 10% increase every five years), (ii) approximately 3.4% of our leases (based on ABR) contained annual lease escalations based on increases in the CPI, and (iii) the remaining approximately 3.4% of our leases (based on ABR) did not contain rent escalation provisions. However, these built-in increases may be less than what we otherwise could achieve in the market. Most of our leases contain rent escalators that increase rent at a fixed amount on fixed dates, which may be less than prevailing market rates over the lease duration. For those leases that contain rent escalators based on CPI changes, our rent increases during periods of low inflation or deflation may be less than what we otherwise could achieve in the market. As a result, the long-term nature of our leases could impede our growth and materially and adversely affect us.
The weighted average remaining term of our leases is 7.0 years, excluding renewal options, which will require us to undertake more re-leasing efforts that could materially and adversely affect us.
The weighted average remaining term of our leases is 7.0 years, excluding renewal options, which is shorter than some other publicly-traded net-lease REITs. Because any of our tenants may not renew their lease, we anticipate our rental revenues may be affected by declines in market rental rates more quickly than if our leases were for longer terms. Additionally, short-term leases may result in the turnover of our tenants sooner than our competitors. Consequently, we may need to undertake re-leasing efforts sooner and at shorter intervals than our competitors. The associated costs with these re-leasing efforts, which may, among other things, include repositioning costs, repair costs and re-tenanting costs, and the time our management team spends on the foregoing, may materially and adversely affect us.
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Our financial results have and may continue to fluctuate in the future, which makes predicting our revenues, costs and expenses difficult, and any volatility in our future financial results could materially and adversely affect us.
Our quarterly and annual operating results have and may continue to fluctuate for a variety of reasons, including as a result of changes in the volume of real estate transactions, the availability of acquisition financing, capitalization rates, interest rates, competition, rental rates and other factors. If our financial results continue to fluctuate, our operations could be materially and adversely affected. As a result, our financial results that we report on a quarterly basis may not meet investors’ expectations and could materially and adversely affect us.
We may not be able to achieve growth through acquisitions at a rate that is comparable to our historical results, which could materially and adversely affect us.
Our growth strategy depends significantly on acquiring new properties. From inception in 2016 to June 30, 2024, our team has acquired more than $786.0 million of net-leased real estate. Our ability to continue to grow requires us to identify and complete acquisitions that meet our investment criteria and depends on general market and economic conditions.
Changes in the volume of real estate transactions, the availability of acquisition financing, capitalization rates, interest rates, competition, market conditions or other factors may negatively impact our acquisition opportunities in 2024 and beyond. If we are unable to achieve growth through acquisitions at a rate that is comparable to our historical results, it could materially and adversely affect us. Furthermore, our acquisition volume within each year has not always been consistent on a quarterly basis, nor can we guarantee it will be consistent in the future. As a result, our acquisition results that we report on a quarterly basis may not meet investors’ expectations and could materially and adversely affect us.
We have experienced net losses for the past two years and we may experience additional net losses in the future.
We recorded net losses of approximately $4.6 million and $3.7 million for the six months ended June 30, 2024 and 2023, respectively. We may continue to experience net losses in the future, which could have a material adverse effect on our business, financial condition and results of operations.
We may not achieve the total returns we expect from our future acquisitions, which could materially and adversely affect us.
As we pursue our growth strategy, we may encounter increasingly difficult market conditions that place downward pressure on the total returns we can achieve on our investments. In 2024 to date, we have experienced an increase in the cost of capital to finance our acquisitions, which may continue in the foreseeable future. In addition, as part of our strategy, we may pursue investments with lower capitalization rates, which are safer but more expensive investments. Accordingly, our future acquisitions may have lower returns on equity than our acquisitions completed in 2022 and earlier. To the extent that our future growth is achieved through acquisitions that yield lower returns, it could materially and adversely affect us. In addition, if we fund future acquisitions with equity issuances, the dilutive impact could outweigh the benefits of acquisitions that achieve lower returns, which also could materially and adversely affect us.
We may not be able to obtain acquisition financing or obtain other capital from third-party sources on favorable terms or at all, which could materially and adversely affect our growth prospects and our business.
In order to qualify as a REIT, we are required under the Code, among other things, to distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to income tax at the corporate rate to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gain. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, or repay debt obligations from operating cash flow. Consequently, we expect to rely, in part, on third-party sources to fund our capital needs. We may not be able to obtain the financing on favorable terms or at all. Our access to third-party sources of capital depends, in part, on:
general market conditions, including, but not limited to, credit availability, marketplace liquidity, inflation and increasing and/or fluctuating interest rates;
the market’s perception of our growth potential;
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our current cash and debt levels;
our current and expected future earnings;
the composition and performance of our portfolio;
our cash flow and cash distributions; and
the market price per share of our Common Stock.
If we cannot obtain capital from third-party sources, we may not be able to acquire individual tenant outparcel net-leased properties when strategic opportunities exist, meet the capital and operating needs of our existing outparcel properties, or satisfy our debt service obligations, any of which could materially and adversely affect us.
We may not be able to effectively manage our growth and any failure to do so could materially and adversely affect us.
We have grown rapidly and our growth strategy depends significantly on continued growth through acquisitions. Our future operating results will depend on our ability to effectively manage this growth. To accomplish this, we will need to:
invest in enhanced operational systems that can scale as our portfolio grows in size, including recent investments in updated systems;
attract, integrate, and retain operations personnel as our Company grows in complexity, including our recent hires of additional employees that could add to our expenses; and
identify, supervise and/or implement a number of suitable third-parties to provide services to us.
We cannot provide any assurance that we will be able to effectively manage our growth, which could materially and adversely affect us.
As we continue to acquire outparcel properties pursuant to our growth strategy, our portfolio may become less diversified which could materially and adversely affect us.
In pursuing our growth strategy, we may acquire outparcel properties that cause our portfolio to become less diversified based on tenants, brands or geographic reach. If our portfolio becomes less diverse in any respect, our business may become subject to greater risk, including tenant bankruptcies, adverse industry trends, and economic downturns in a particular industry or geographic area. As a result, if any such risks of a less diversified portfolio are realized, we could be materially and adversely affected.
We face increasing competition for acquiring outparcel properties from publicly traded REITs and companies, private institutional investors and business operators that may or may not have greater resources than we do, which could materially and adversely affect us.
The market for outparcel and other properties in the United States is highly competitive. We are facing increasing competition for outparcel properties from a diverse group of other entities engaged in real estate investment activities, including publicly traded and privately held REITs, public companies, private institutional real estate investors, sovereign wealth funds, banks, mortgage bankers, insurance companies, investment banking firms, lenders, specialty finance companies, individuals, family offices and other entities. In addition, we face competition for acquisition opportunities from business operators that prefer to own, rather than lease space. Some of our competitors are larger and may have considerably greater financial, technical, leasing, underwriting, marketing, and other resources than we do. Some competitors may have a lower cost of capital and access to funding sources that may not be available to us. In addition, other competitors may have higher risk tolerances or different risk assessments and may not be subject to the same operating constraints, including maintaining REIT status or maintaining lower yield requirements. This competition may result in fewer acquisitions, higher prices, lower yields, less desirable outparcel properties, and acceptance of greater risk. As a result, we cannot provide any assurance that we will be able to successfully execute our growth strategy. Any failure to grow through acquisitions as a result of the increasing competition we face could materially and adversely affect us.
We face significant competition for tenants, which could materially and adversely affect us, including our occupancy, rental rates, and results of operations.
We compete for tenants to occupy our outparcel properties in all of our markets with numerous developers, owners, and operators of outparcel properties, as well as owner occupied businesses, many of which own outparcel
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properties in the same markets in which our outparcel properties are located. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose existing or potential tenants or we may be pressured to reduce our rental rates or to offer more substantial rent abatements, tenant improvements, early termination rights, or below-market renewal options to retain tenants when our leases expire. Competition for tenants could decrease the rental rates we achieve and/or negatively impact the occupancy rates of our outparcel properties, which could materially and adversely affect us.
The departure of any of our key personnel with long-standing business relationships could materially and adversely affect us.
Our success and our ability to manage anticipated future growth depend, in large part, upon the efforts of our key personnel, particularly Messrs. Preston and Starr, our co-Chief Executive Officers. Messrs. Preston and Starr have extensive market knowledge and relationships and exercise substantial influence over our operational, financing, acquisition, and disposition activity. If we lost either of their services, our network of external relationships and resources would be materially diminished.
Our senior management team has significant net-lease real estate, acquisition, development, finance, and capital markets experience, including working together since 2016 to collectively build our portfolio and manage our operations from the ground up. Our senior management team has a strong investment track record with long-standing experience with outparcel properties beginning in 1999. During this time, our team has developed a reputation as a proven and focused buyer of outparcel properties. The departure of either of our co-Chief Executive Officers or any other member of our senior management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities, and weaken our relationships with lenders, business partners, existing and prospective tenants, and industry personnel, which could materially and adversely affect us.
No member of our management team has prior experience in operating a public company, which could materially and adversely affect us.
No member of our management team has prior experience in managing a publicly traded company. As such, our management team may encounter difficulties in successfully managing our business in a public company environment, including, among other things, effectively complying with our reporting and other obligations under federal securities laws and other regulations and in connection with operating as a public company. Our management team’s lack of prior experience operating a public company could materially and adversely affect us.
Tenant demand for outparcel properties may decline, which could materially and adversely affect us.
Tenant demand for outparcel properties historically has been adversely affected by, among other things, weakness in the national, regional and local economies, including in regions in which we operate, the adverse financial condition of our tenants, consolidation in the industries in which our tenants operate and an excess amount of outparcel properties in some markets and rents and operational costs that make outparcels unattractive to tenants. Any of these conditions may arise in the future and are likely to negatively affect demand for outparcel properties and could materially and adversely affect us.
Our portfolio is concentrated in certain states and MSAs and any adverse developments and/or economic downturns in these geographic markets could materially and adversely affect us.
As of June 30, 2024, approximately 39.3% of our ABR came from outparcel properties in our top five states: Illinois (12.1%), Texas (8.5%), Georgia (6.7%), Ohio (6.3%) and North Carolina (5.8%). Also, as of June 30, 2024 approximately 29.3% of our ABR came from outparcel properties in our top five MSAs: the Chicago area (10.8%), the Atlanta area (6.5%), the Philadelphia area (4.6%), the Dallas-Fort Worth area (3.7%) and the Charlotte area (3.7%). These geographic concentrations could adversely affect our operating performance if conditions become less favorable in any of the states or markets within which we have a concentration of outparcel properties. We can provide no assurance that any of our markets will grow, will not experience adverse developments, or that underlying real estate fundamentals will be favorable to owners and operators of service-oriented businesses, such as restaurants, cellular stores, financial institutions, automotive stores and dealers, medical and dental providers, pharmacies, convenience and gas stores, car washes, home improvement stores, grocery stores, professional services as well as general retail tenants. A downturn in the economy in the states or regions in which we have a concentration of
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outparcel properties, or markets within such states or regions including MSAs, or a slowdown in the demand for our tenants’ businesses caused by adverse economic, regulatory, or other conditions could adversely affect our tenants’ operating businesses in those states, regions or MSAs and impair their ability to pay rent to us, which, in turn could materially and adversely affect us.
Our portfolio of outparcel properties is also concentrated in certain tenant brands and industries, and any adverse developments relating to one or more of these brands or industries could materially and adversely affect us.
As of June 30, 2024, approximately 19.3% of our ABR came from casual dining tenants, 17.5% from QSR tenants, 10.3% from automotive tenants, 10.0% from healthcare service tenants, 8.3% from banking tenants and 8.0% from general retail tenants. Any adverse developments in one or more of these industries could materially and adversely affect us. For example, labor shortages, wages, including changes in the minimum wage, supply chain issues and general operational costs have particularly affected the restaurant, healthcare services and automotive sectors. Changes in technology could impact the viability of many of our tenant industries. In addition, we are subject to increased risks related to the concentration of specific restaurant brands such as IHOP, Wendy’s and Chili’s. If our QSR, full-service restaurant, banking, medical and dental, cellular or automotive tenants suffer weakening demand for their goods or services, it could adversely affect their ability to meet their rent and other obligations under their leases with us. It also may be difficult and expensive to re-tenant an outparcel property designed for a particular industry with a new tenant that operates in an industry requiring a different property type. As a result, any adverse developments in one or more of our concentrated industries could materially and adversely affect us.
Our portfolio of outparcel properties is concentrated among tenants with non-investment grade credit ratings, and any adverse developments affecting the credit of these tenants could materially and adversely affect us.
As of June 30, 2024, approximately 60.0% of our tenants had a credit rating below investment-grade, or were unrated, as a percentage of our ABR. Any adverse developments in the business or prospects of these tenants could materially and adversely affect us. For example, according to S&P Global Ratings Credit Research and Insights, as of September 30, 2023, in every year since 1981 speculative-grade rated companies defaulted at higher rates than investment-grade rated companies. Similarly, in Moody’s Investor Services Annual Corporate Default Study: Corporate Default and Recover Rates, 1920-2015, the cumulative five-year average default rate is linearly correlated with a company’s credit rating. If tenants with credit ratings below investment-grade, or tenants without credit ratings, suffer weakening demand for their goods or services, it could adversely affect their ability to meet their rent and other obligations under their leases with us. As a result, any adverse developments to one or more of our tenants that have credit ratings below investment-grade, or tenants without credit ratings, could materially and adversely affect us.
Our assessment that many of our tenants’ businesses are e-commerce resistant may prove to be incorrect, which could materially and adversely affect us.
Our tenants, including restaurants, pharmacies, financial institutions, convenience and gas stores, general retail stores, and other industries are increasingly affected by ecommerce and changes in customer buying habits, including the delivery or curbside pick-up of items ordered online. Many retail tenants sell goods that have historically been less likely to be purchased online (such as restaurants, pharmacies, automotive stores and dealers and gas stations), however, the continuing increase in ecommerce sales in all retail categories (including online orders for immediate delivery or pick-up in store) may cause retailers to adjust the size or number or character of retail locations in the future or close stores. Changes in shopping trends as a result of the growth in ecommerce may affect the profitability of retailers, including our tenants, that do not adapt to changes in market conditions. We cannot predict with certainty what consumers will want, what future retail spaces for outparcel properties will look like, or how much revenue will be generated at traditional brick and mortar outparcels. If we or our tenants are unable to anticipate and respond promptly to trends in the market (such as space for a drive through or curbside pickup), we may be materially and adversely affected.
The decrease in demand for restaurant outparcel properties may materially and adversely affect us.
As of June 30, 2024, tenants in the restaurant industry represented approximately 36.8% of our ABR. In the future, we may acquire additional restaurant outparcel properties. Accordingly, decreases in the demand for restaurant outparcel properties may have a greater adverse effect on us than if we had fewer investments in this industry. The market for restaurant outparcel properties has been, and could continue to be, adversely affected by weakness in the
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national, regional, and local economies, the adverse financial condition of some large restaurant companies, the ongoing consolidation in the restaurant industry, local, state or federal mandated closures or occupancy changes and the excess amount of restaurant outparcel properties in a number of markets. For example, in recent years a number of companies in the restaurant industry have declared bankruptcy, gone out of business, or significantly reduced the number of their locations. As a result, we have experienced, and expect to continue to experience, challenges with some of our restaurant tenants, and have recorded asset impairments, which were immaterial on a consolidated basis, on certain assets as a result of increased credit losses.
To the extent that these conditions continue in the restaurant industry, they are likely to negatively affect market rents for such outparcel properties and could materially and adversely affect us.
If one or more of our top 20 tenant brands, which together represented approximately 38.5% of our ABR as of June 30, 2024, suffers a downturn in their business, it could materially and adversely affect us.
As of June 30, 2024, our top 20 tenant brands together represented approximately 38.5% of our ABR. Our largest tenant brand is Verizon, which leased nine outparcel properties that in the aggregate represent approximately 3.4% of our ABR as of June 30, 2024. One or more of our top 20 tenant brands may experience a material business downturn weakening their financial position and resulting in their failure to make timely rent payments and/or default under their leases. Further, many of our tenant brands, like Verizon, operate more than one outparcel property. Any financial difficulties experienced by a tenant brand that operates multiple outparcel properties, whether resulting from macroeconomic conditions, management performance or other causes, could also affect other outparcel properties operated by that tenant brand. As a result, if one or more of our top 20 tenant brands suffers a downturn, it could materially and adversely affect us.
We may be unable to renew leases, re-lease outparcel properties as leases expire, or lease vacant spaces on favorable terms or at all, which, in each case, could materially and adversely affect us.
Our results of operations depend on our ability to continue to successfully lease our outparcel properties, including renewing expiring leases, re-leasing outparcel properties as leases expire, leasing vacant space, optimizing our tenant mix, or leasing outparcel properties on more economically favorable terms. As of June 30, 2024, four leases representing approximately 1.4% of our ABR are scheduled to expire during 2024 and 16 leases representing approximately 4.8% of our ABR are scheduled to expire during 2025. Current tenants may decline, or may not have the financial resources available, to renew their current leases, and we cannot assure you that leases that are renewed will have terms that are as economically favorable to us as the expiring lease terms. If our tenants do not renew their leases as they expire, we cannot provide any assurance that we will be able to find new tenants at rental rates equal to or above the current average rental rates or that substantial rent abatements, leasing commissions, tenant improvement allowances, early termination rights, or below-market renewal options will not be required to attract new tenants. We may experience significant costs in connection with re-leasing a significant number of our outparcel properties, which could materially and adversely affect us. As of June 30, 2024, three of our outparcel properties remained unoccupied. We may experience difficulties in leasing these vacant spaces on favorable terms or at all. Any failure to renew leases, re-lease outparcel properties as leases expire, or lease vacant space could materially and adversely affect us.
Our business is subject to significant re-leasing risk, particularly for specialty outparcel properties that are suitable for only one use, which could materially and adversely affect us.
The loss of a tenant, either through lease expiration or tenant bankruptcy or insolvency, may require us to spend significant amounts of capital to renovate and or reposition the outparcel property before it is suitable for a new tenant and cause us to incur significant costs. In particular, our specialty outparcel properties are designed for a particular type of tenant or tenant use. If tenants of specialty outparcel properties do not renew or default on their leases, we may not be able to re-lease such outparcel properties without substantial capital improvements, which may require significant cost and time to complete. Alternatively, we may not be able to re-lease or sell the outparcel property without such improvements or may be required to reduce the rent or selling price significantly. These re-leasing risks could materially and adversely affect us. Further, certain of the current specialty uses may prevent future use of such properties for other purposes. For example, the use of a property as a gas station or car wash may prevent such property from being used for food and beverage service in the future.
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We may experience tenant defaults, particularly from tenants that do not have an investment grade credit rating, which could materially and adversely affect us.
We depend on the ability of our tenants to meet their obligations to pay rent to us due under our lease for substantially all of our revenue. As of June 30, 2024, approximately 40.0% of our ABR came from tenants that had an investment grade credit rating. A portion of our outparcel properties are leased to unrated tenants. Our investments in outparcel properties leased to such tenants may have a greater risk of default than investments in outparcel properties leased to investment grade tenants. The ability of an unrated tenant to meet its rent and other obligations under its lease with us may be subject to greater risk than our tenants that have an investment grade rating. When we invest in properties where the tenant does not have a publicly available credit rating, we use certain credit-assessment tools as well as our own estimates of the tenant’s credit rating which includes reviewing the tenant’s financial information (e.g., financial ratios, net worth, revenue, cash flows, leverage, and liquidity, if applicable). Our methods, however, may not adequately assess the risk of an investment and, if our assessment of credit quality proves to be inaccurate, we may be subject to defaults and investors may view our cash flows as less stable. If one or more of our tenants defaults, it could have a material adverse effect on us.
Our underwriting and risk management procedures that we use to evaluate a tenant’s credit risk may fail, or otherwise not accurately reflect the risk of our investment, which could materially and adversely affect us.
Our underwriting and risk management procedures that we use to evaluate a tenant’s credit risk may not be sufficient to identify tenant problems in a timely manner or at all. For tenants without published financial data, it can be difficult to properly monitor or manage changes in credit quality, increasing the possibility of credit risk within the portfolio. Tenant credit ratings, public or implied, however, are only one component of how we assess the risk of tenant insolvency. We also use our own internal estimate of the likelihood of an insolvency or default, based on the regularly monitored performance of our properties and rent collections, our assessment of a tenant’s financial health, including profitability, liquidity, indebtedness, and leverage profile, and our assessment of the health and performance of a tenant’s particular industry. If our assessment of credit quality proves to be inaccurate, we may experience one or more tenant defaults, which could have a material adverse effect on us.
Any failure of one or more tenants to provide accurate or complete financial information could prevent us from identifying tenant problems that could materially and adversely affect us.
We rely on information from our tenants to determine a potential tenant’s credit risk as well as for on-going risk management. As of June 30, 2024, approximately 35.2% of our ABR came from tenants that were required to periodically provide us with specified financial information and approximately 40.0% of our ABR came from tenants that were not required to provide us with specified financial information under the terms of our lease, but were required to file financial statements publicly, either through SEC filings or otherwise. Ratings or conclusions derived from both credit-assessment tools and our internal teams rely on such information provided to us by our tenants and prospective tenants without independent verification on our part, and we are at risk to the extent the estimates and judgments that were made by the party preparing the financial information are not reliable or appropriate. A tenant’s failure to provide appropriate information may interfere with our ability to accurately evaluate a potential tenant’s credit risk or determine an existing tenant’s default risk, the occurrence of either could materially and adversely affect us.
If one or more of our tenants declares bankruptcy or becomes insolvent, then we may encounter significant difficulties in navigating those bankruptcy proceedings, which could materially and adversely affect us.
If a tenant, or the guarantor of a lease of a tenant, commences, or has commenced against it, a bankruptcy proceeding, we may be unable to collect all sums due to us under that tenant’s lease or be forced to “take back” a property as a result of a default or a rejection of a lease by a tenant in a bankruptcy proceeding. If a tenant becomes bankrupt or insolvent, federal law may prohibit us from evicting such tenant based solely upon such bankruptcy or insolvency. In addition, a bankrupt or insolvent tenant may be authorized to reject and terminate its lease or leases with us. Any claims against such bankrupt tenant for unpaid future rent would be subject to statutory limitations that would likely result in our receipt of rental revenues that are substantially less than the contractually specified rent we are owed under the lease or leases. Any or all of the lease obligations of our tenants, or any guarantor of our tenants, could be subject to a bankruptcy proceeding which may bar our efforts to collect pre-bankruptcy debts from these entities or their properties, unless we are able to obtain an enabling order from the bankruptcy court. If our lease is rejected by a tenant in bankruptcy, we may only have a general unsecured claim against the tenant and may not be
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entitled to any further payments under the lease. In addition, one or more tenants may be partnerships or limited liability companies. Under certain circumstances, the bankruptcy of the general partner in a partnership or a member of a limited liability company may result in the dissolution of such partnership or limited liability company. The dissolution of a tenant structured as a partnership or a limited liability company, the winding-up of its affairs and the distribution of its assets could result in a default on the related lease. We may also be unable to re-lease a terminated or rejected space or to re-lease it on comparable or more favorable terms. A bankruptcy proceeding could hinder or delay our efforts to collect past due balances and ultimately preclude collection of these sums, resulting in a decrease or cessation of rental payments, which could materially and adversely affect us.
Some of our leases may require us to pay or reimburse tenants for property-related expenses, which could materially and adversely affect us.
Under the terms of some of our leases, we may be required to pay or reimburse specified expenses of the property, such as the costs of roof and structural repairs, real estate taxes, insurance, certain non-structural repairs, maintenance, off-site improvements, and remediation activities (unless necessitated by the tenant), especially if a property becomes vacant. In addition, under some of our leases, the tenant reimbursement obligations for costs related to the operation of the property are subject to caps and exclusions contained within the underlying lease. For the six months ended June 30, 2024, we incurred a total of approximately $0.6 million of non-reimbursable expenses. If, however, our properties incur significant expenses in the future that must be paid by us under the terms of our leases, our business, financial condition and results of operations may be adversely affected and the amount of cash available to meet expenses and to make distributions to our stockholders and unitholders may be reduced.
Some of our tenants operate their businesses under franchise or license agreements, which, if terminated or not renewed prior to the expiration of their leases with us, would likely impair their ability to pay us rent, which could materially and adversely affect us.
As of June 30, 2024, approximately 12.9% of our tenants operated their businesses under franchise or license agreements. Generally, these franchise agreements have terms that end earlier than the respective expiration dates of our leases with these tenants. In addition, a tenant’s rights as a franchisee or licensee typically may be terminated by the franchisor or licensor and the tenant may be precluded from competing with the franchisor or licensor upon termination. Usually, we have no notice or cure rights with respect to a tenant’s termination and have no rights to assignment of any such franchise agreement. A franchisor’s or licensor’s termination or refusal to renew a franchise or license agreement would likely have a material adverse effect on the ability of the tenant to make payments under its lease, which could materially and adversely affect us.
Security breaches and other technology disruptions could compromise our information systems and expose us to liability, which could materially and adversely affect us.
Information security risks generally have increased significantly in recent years due to the increased technological sophistication and activities of perpetrators of cyber-attacks. Our business involves the storage and transmission of numerous classes of sensitive and confidential information and intellectual property, including tenants’ information, private information about our stockholders and our employees, and financial and strategic information about us. We face risks associated with security breaches through cyber-attacks or cyber-intrusions, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, external systems hosted by third-party service providers, and other significant disruptions of our information technology (“IT”) networks and related systems. The risk of a security breach or disruption, particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased. If we fail to assess and identify cybersecurity risks associated with our operations, we may become increasingly vulnerable to such risks. Additionally, the measures we have implemented to prevent security breaches and cyber incidents may not be effective. The theft, destruction, loss, misappropriation, or release of sensitive or confidential information or intellectual property, or interference with or disruptions of our IT networks and related systems or the technology systems of third parties on which we rely, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of tenants, potential liability, and competitive disadvantage. Laws and regulations governing data privacy are constantly evolving. Many of these laws and regulations, including the California Consumer Protection Act, contain detailed requirements regarding collecting and processing personal information, restrict the use and storage of such information, and govern the effectiveness of consumer consent. Any of the above risks could materially and adversely affect us.
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Our properties may be subject to impairment charges which could materially and adversely affect us, including our financial condition.
We routinely evaluate our real estate investments for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions and tenant performance. For example, the early termination of, or default under, a lease by a tenant may lead to an impairment charge. Since our investment focus is on outparcel properties leased to one or two tenants, the financial failure of, or other default by, tenants under their lease(s) may result in a significant impairment loss. If we determine that an impairment has occurred, we would be required to make a downward adjustment to the net carrying value of the property, which could have a material adverse effect on our results of operations in the period in which the impairment charge is recorded. Negative developments in the real estate market may cause management to reevaluate the business and macro-economic assumptions used in its impairment analysis. Changes in management’s assumptions based on actual results may have a material impact on the Company’s financial statements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Polices Estimates—Impairment of Long-Lived Assets” for a discussion of real estate impairment charges.
We face risks associated with repositioning or construction of real estate projects, which may materially and adversely affect us.
From time to time we expect to engage in repositioning or construction of real estate projects and will therefore face significant risks relating to such activities. We must rely on expected rental income, expense projections and estimates of the fair market value of a property upon completion of repositioning or construction when determining an outparcel property’s most economical use. If our projections are inaccurate, or we may pay too much for a property, our return on capital could suffer. Additionally, we may incur costs for construction or repositioning of outparcel properties that exceed our original estimates due to factors beyond our control, including, among other things, increased material costs, labor costs, material shortages, supply chain delays or disruptions, or unanticipated technical difficulties. Any occurrence of these events could impact our ability to achieve the expected value of a repositioning or construction project, including, among other things, because of our inability to timely deliver outparcel properties in a way that meets tenant needs or because market rents may not increase sufficiently to compensate for the increase in construction or repositioning costs. We may even suspend repositioning or construction projects after construction has begun due to changes in economic conditions or other factors, and this may result in the write-off of costs, payment of additional costs or increases in overall costs if the development project is ever restarted. To the extent any of these events occur, such events may materially and adversely affect us.
Changes in accounting and reporting standards may materially and adversely affect us.
From time to time the FASB and the SEC may change the financial accounting and reporting standards or their interpretation and application of these standards that will govern the preparation of our financial statements. These changes could materially and adversely affect our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Similarly, these changes could materially and adversely affect our tenants’ reported financial condition or results of operations and affect their preferences regarding leasing real estate.
We may acquire outparcel properties or portfolios of outparcel properties through tax deferred contribution transactions, which could result in stockholder dilution and limit our ability to sell such assets and materially and adversely affect us.
In the future we may acquire outparcel properties or portfolios of outparcel properties through tax deferred contribution transactions in exchange for OP Units, which may result in stockholder dilution. This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired outparcel properties, and may require that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired outparcel properties and/or the allocation of debt to the contributors to maintain their tax bases. These restrictions could limit our ability to sell certain assets of the OP at a time, or on terms, that would be favorable absent such restrictions. As a result, any acquisitions we complete using OP Units could result in stockholder dilution and limit our ability to subsequently sell such assets, which could materially and adversely affect us.
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Certain provisions of our leases or loan agreements may be unenforceable, which could materially and adversely affect us.
Our rights and obligations with respect to the leases at our outparcel properties, mortgage loans, or other loans are governed by written agreements. A court could determine that one or more provisions of such agreements are unenforceable, such as a particular remedy, a loan prepayment provision or a provision governing our security interest in the underlying collateral of a borrower or lessee. We could be materially and adversely impacted if this were to happen with respect to an asset or group of assets.
We may become subject to litigation, which could materially and adversely affect us.
In the future we may become subject to litigation, including, but not limited to, claims relating to our operations, past and future securities offerings, corporate transactions, and otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. We generally intend to vigorously defend ourselves. However, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters may require us to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and settlements exceed insured levels, could materially and adversely impact us, including our earnings and cash flows. Some litigation matters and/or their resolution may adversely affect the availability or cost of some of our insurance coverage, which could materially and adversely impact us, expose us to increased risks that would be uninsured, and materially and adversely impact our ability to attract directors and officers.
We previously identified a material weakness and a significant deficiency in our internal control over financial reporting and may identify additional material weaknesses or significant deficiencies in the future, which could materially adversely affect us and our ability to accurately and timely report our financial results.
As defined in standards established by the PCAOB, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The identified material weakness required adjustments to our financial statements during the audit. The PCAOB defines “significant deficiency” as a deficiency, or a combination of deficiencies, in internal control over financial reporting, that results in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented or detected. While a significant deficiency is considered less severe than a material weakness, it is important enough to merit attention by those responsible for oversight of financial reporting, including the audit committee of a company's board of directors.
As of and for the year ended December 31, 2022, we and our independent registered public accounting firms identified a material weakness in our internal control over financial reporting relating to our predecessor’s control activities, which were not designed and implemented effectively with respect to the evaluation and review of significant assumptions used in the purchase price allocation of tangible assets and identifiable intangible assets and liabilities for our acquisitions of properties. This material weakness resulted in errors that were identified in connection with the audit of our predecessor’s consolidated financial statements to record the acquisition of certain tangible assets and identifiable intangible assets and liabilities. The identified material weakness required adjustments to our financial statements.
As of and for the year ended December 31, 2022, we and our independent registered public accounting firms also identified a significant deficiency in our predecessor’s internal control over financial reporting relating to management’s review of manual journal entries. Specifically, our predecessor’s control activities were not designed and implemented effectively with respect to the review of manual journal entries. This deficiency may result in journal entries being recorded which are not accurate.
As part of our remediation plan for the material weakness during 2023, we engaged a third-party valuation expert to assist in the preparation of the purchase price allocations. The remediation plan included implementation of a documented review to verify the completeness, accuracy and assumptions used in the purchase price allocations. During 2023, we designed and implemented a manual journal entry review control that validated that the journal entries were accurate and supported with the requisite documentation. Based on the implementation of these controls, we believe the material weakness and significant deficiency have been remediated as of December 31, 2023.
If our material weakness and significant deficiency were not successfully remediated, or if we identify any future material weaknesses or significant deficiencies, we could experience decreased investor confidence in the
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accuracy and completeness of our financial reports and public disclosures, civil litigation, or investigations by the SEC or other regulatory authorities, and we could fail to meet our reporting obligations, which could materially and adversely affect us.
As a public company, we expect to expend additional time and resources to comply with rules and regulations that do not currently apply to us, and any failure to comply with such rules may materially and adversely affect us.
As a public company, we will be subject to the reporting requirements of the Exchange Act, Sarbanes-Oxley, the Dodd-Frank Act, and the regulations of the NYSE. Such requirements will increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and could be burdensome on our personnel, systems and resources. We will devote significant resources to address these public company-associated requirements, including compliance programs and investor relations, as well as our financial reporting obligations. Complying with these rules and regulations has and will substantially increase our legal and financial compliance costs and make some activities more time-consuming and costly. Any failure to comply with such rules could materially and adversely affect us.
The costs of environmental contamination or liabilities related to environmental laws may materially and adversely affect us.
There may be known or unknown environmental liabilities associated with properties we previously owned, currently own, or may acquire in the future. Under various federal, state, and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from environmental matters, including the presence or discharge of hazardous or toxic substances, waste, or petroleum products at, on, in, under or migrating from such property, including costs to investigate or clean up such contamination and liability for personal injury, property damage, or harm to natural resources. Certain uses of some properties may have a heightened risk of environmental liability because of the hazardous materials used in performing services on those properties, such as industrial properties, car washes, gasoline stations, or auto parts and auto service businesses using petroleum products, paint, machine solvents, and other hazardous materials. Our due diligence team typically undertakes customary environmental diligence prior to our acquisition of any property, including obtaining Phase I environmental site assessments. The Phase I environmental site assessments are limited in scope and therefore may not reveal all environmental conditions affecting a property. For example, Phase I environmental assessments do not include soil sampling or subsurface investigations. Therefore, there could be undiscovered environmental liabilities on the properties we own.
The known or potential presence of hazardous substances on a property may adversely affect our ability to sell, lease, or improve the property, or to borrow using the property as collateral. In addition, environmental laws may create liens on contaminated properties in favor of the government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which they may be used or which businesses may be operated, and these restrictions may require substantial expenditures.
Our environmental liabilities may include property and natural resources damage, personal injury, investigation, and clean-up costs, among other potential environmental liabilities. These costs could be substantial. Although we obtain insurance for environmental liability in excess of tenant indemnification for certain properties that are deemed to warrant coverage, our insurance may be insufficient to address any particular environmental situation and we may be unable to continue to obtain insurance for environmental matters, at a reasonable cost or at all, in the future. If our environmental liability insurance is inadequate, we may become subject to material losses for environmental liabilities. Our ability to receive the benefits of any environmental liability insurance policy will depend on the financial stability of our insurance company and the position it takes with respect to our insurance policies. If we were to become subject to significant environmental liabilities, we could be materially and adversely affected.
Although our leases generally require our tenants to operate in compliance with all applicable federal, state, and local environmental laws, ordinances, and regulations, and to indemnify us against any environmental liabilities arising from the tenants’ activities on the property, we could nevertheless be subject to liability as a current or previous owner of real estate, including strict liability, by virtue of our ownership interest and may be required to remove or remediate hazardous or toxic substances on, under, or in a property. Further, there can be no assurance that our tenants, or the guarantor of a lease, could or would satisfy their indemnification obligations under their leases. We may face liability regardless of our knowledge of the contamination, the timing of the contamination, the cause
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of the contamination, or the party responsible for the contamination of the property. Our leases generally require the landlord or a third-party to undertake remediation for the presence, use or release of hazardous materials on the property by the landlord or by any party other than the lessee, provided that the lessee was not responsible for the contamination of the property. Of that subset of leases, most do not permit the landlord to pass the costs of remediation through to the tenant, and some permit the tenant to terminate the lease and seek reimbursement of the tenant’s unamortized development costs if remediation is not completed within a certain timeframe or if the tenant’s use of its premises is interrupted for a certain period of time. If we are required to undertake remediation or if a tenant is permitted to terminate its lease, we could be materially and adversely affected. The cost of compliance, remediation or defense against claims from a contaminated property could materially and adversely affect us.
We could become subject to liability for asbestos-containing building materials in the buildings on our property, which could cause us to incur additional expenses.
Some of our properties may contain, or may have contained, asbestos-containing building materials. Environmental, health, and safety laws require that owners or operators of or employers in buildings with ACM properly manage and maintain these materials, adequately inform or train those who may come into contact with ACM, and undertake special precautions, including removal or other abatement, in the event that ACM is disturbed during building maintenance, renovation, or demolition. These laws may impose fines and penalties on employers, building owners, or operators for failure to comply with these laws. In addition, third parties may seek recovery from employers, owners, or operators for personal injury associated with exposure to asbestos. If we become subject to any of these penalties or other liabilities as a result of ACM at one or more of our properties, it could have a material adverse effect on us.
Our properties may contain or develop harmful mold or suffer from other adverse conditions, which could lead to liability for adverse health effects and costs of remediation.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Certain uses of our properties are more susceptible to giving rise to mold. Some molds may produce airborne toxins or irritants. Indoor air quality issues also can stem from inadequate ventilation, chemical contamination from indoor or outdoor sources and other biological contaminants such as pollen, viruses, and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants, and others if property damage or personal injury occurs. Thus, conditions related to mold or other airborne contaminants could have a material adverse effect on us.
Risks Related to Investments in Real Estate
Our operating results are affected by economic and regulatory changes that impact the commercial real estate market in general, which could materially and adversely affect us.
Our core business is the ownership of outparcel properties that are net leased on a long-term basis to businesses generally in the restaurant, cellular store, financial institution, automotive store and dealer, medical and dental provider, pharmacy, convenience and gas store, car wash, home improvement store, grocery stores, professional services and general retail sectors. Accordingly, our performance is subject to risks generally attributable to the ownership of outparcel properties, including:
inability to collect rents from tenants due to financial hardship, including bankruptcy, financial difficulties, or lease defaults by tenants;
changes in global, national, regional, or local economic, demographic, or real estate market conditions in the markets in which we operate, including the supply and demand for individual tenant outparcel properties in the restaurant, cellular store, financial institution, automotive store and dealer, medical and dental provider, pharmacy, convenience and gas store, car wash, home improvement store, professional services and general retail sectors;
competition from other properties;
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changes in consumer trends and preferences that affect the demand for products and services offered by our tenants;
inability to lease or sell properties upon expiration or termination of existing leases and renewal of leases at lower rental rates;
the subjectivity of real estate valuations and changes in such valuations over time;
the illiquid nature of real estate compared to most other financial assets;
changes in laws, government rules, regulations, and fiscal policies, including changes in tax, real estate, environmental, access closure or changes, condemnation proceedings and zoning laws;
changes in interest rates and availability of financing, including changes in the terms of available financing such as more conservative loan-to-value requirements and shorter debt maturities;
unexpected expenditures relating to age of building, quality of construction, construction defects and physical or weather-related damage to properties;
labor shortages, supply chain issues and increased material and labor costs;
the potential risk of functional obsolescence of properties over time;
acts of terrorism and war;
pandemics and natural disasters;
acts of God and other factors beyond our control; and
increased competition for real property acquisitions targeted by our investment strategy.
The factors described above are out of our control, and we are unable to predict future changes in such factors. Any negative changes in these factors may cause the value of our real estate to decline, which could materially and adversely affect us.
Global and U.S. financial markets and economic conditions may materially and adversely affect us.
A significant portion of our portfolio is leased to tenants operating businesses that rely on discretionary consumer spending. The success of most of these businesses depends on the willingness of consumers to use discretionary income to purchase their products or services. Our results of operations are sensitive to changes in the overall economic conditions that impact our tenants’ financial condition and leasing practices and a downturn in the economy could cause consumers to reduce their discretionary spending, which could result in tenant bankruptcies or otherwise have an adverse impact on our tenants’ ability to successfully manage their businesses and pay us amounts due under our lease agreements, thereby materially and adversely affecting us. Accordingly, adverse economic conditions such as high unemployment levels, an increase in interest rates, a decrease in available financing, high inflation, labor and workforce shortages, supply chain issues, tax rates, and fuel and energy costs may have an impact on the results of operations and financial conditions of our tenants. During periods of economic slowdown or recession, rising interest rates and declining demand for real estate may result in a general decline in rents or an increased incidence of defaults under existing leases. A lack of demand for outparcel properties could adversely affect our ability to maintain our current tenants and gain new tenants, which may affect our growth and results of operations. Accordingly, a decline in economic conditions could materially and adversely affect us.
Our real estate investments are illiquid, which could materially and adversely affect us, including our financial condition and cash flows.
Because real estate investments are relatively illiquid, our ability to adjust our portfolio promptly in response to economic, financial, investment, or other conditions may be limited. Return of capital and realization of gains, if any, from an investment generally will occur upon disposition or refinancing of the underlying property. We may be unable to realize our investment objective by sale, other disposition, or refinancing at attractive prices within any given period of time, or we may otherwise be unable to complete any exit strategy. In particular, these risks could arise from weakness in or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions, and changes in laws, regulations, or fiscal policies of the jurisdiction in which the property is located. Further, certain significant
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expenditures generally do not change in response to economic or other conditions, such as (i) debt service, (ii) real estate taxes, and (iii) operating and maintenance costs. The inability to dispose of a property at an acceptable price or at all, as well as the combination of variable revenue and relatively fixed expenditures may result, under certain market conditions, in reduced earnings and could materially and adversely affect us, including our financial condition and cash flows.
Increases in interest rates may decrease the value of our properties, which could materially and adversely affect us.
The Federal Reserve Board has maintained the federal funds rate for eight consecutive meetings. As of August 9, 2024, the effective federal funds rate was greater than 5%, which is at the highest level since 2006. If the Federal Reserve Board continues to increase the federal funds rate, overall interest rates will likely continue to rise. During periods of increasing interest rates, real estate valuations have generally decreased as a result of rising capitalization rates, which tend to be positively correlated with interest rates. Consequently, prolonged periods of higher interest rates may negatively impact the valuation of our portfolio which could materially and adversely affect us.
Inflation may materially and adversely affect us and our tenants, which could materially and adversely affect us.
As of June 2024, the CPI rose 3.0% year over year before seasonal adjustment. Federal policies and recent global events, such as the rising price of oil and the conflict between Russia and Ukraine, may have exacerbated, and may continue to exacerbate, increases in the CPI.
A sustained or further increase in inflation could have a negative impact on variable-rate debt we and our tenants currently have or that we or our tenants may incur in the future. During times when inflation is greater than the increases in rent provided by many of our leases, rent increases will not keep up with the rate of inflation. Because tenants are typically required to pay all property operating expenses, increases in property-level expenses at our leased properties generally do not affect us. However, increased operating expenses at vacant properties and the properties for which we are responsible for reimbursing tenants for a limited number of specified expenses could cause us to incur additional operating expenses, which could increase our exposure to inflation. Increased costs may have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue, which may adversely affect the tenants’ ability to pay rent owed to us, which in turn could materially and adversely affect us. Inflation may also have an adverse effect on consumer spending, which could impact our tenants’ revenues and their ability to pay rent owed to us. Any of these factors could materially and adversely affect us.
Natural disasters, terrorist attacks, other acts of violence or war, or other catastrophic events could materially and adversely affect us.
Natural disasters, terrorist attacks, other acts of violence or war, or other catastrophic events (e.g., hurricanes, floods, earthquakes, or other types of natural disasters or wars or other acts of violence) could cause damage to our properties, materially interrupt our business operations (or those of our tenants), cause consumer confidence and spending to decrease, or result in increased volatility in the U.S. and worldwide financial markets and economy. Such occurrences also could result in or prolong an economic recession in the United States. We own properties in regions that have historically been impacted by natural disasters and it is probable such regions will continue to be impacted by such events. If a disaster occurs, we could suffer a complete loss of capital invested in, and any profits expected from, the affected properties. Any of these occurrences could materially and adversely affect us.
We face risks associated with climate change, which could materially and adversely affect us.
As a result of climate change, our properties in certain markets could experience increases in storm intensity, flooding, drought, wildfires, rising sea levels, and extreme temperatures. The potential physical impacts of climate change on our properties are uncertain and would be particular to the geographic circumstances in areas in which we own property. Over time, these conditions could result in volatile or decreased demand for certain of our properties or, in extreme cases, the inability of our tenants to operate the properties at all. Climate change may also have indirect effects on our business by increasing the cost of insurance (or making insurance unavailable), increasing the cost of energy at our properties, or requiring us to spend funds to repair and protect our properties against such risks. In addition, we also face business trend-related climate risks as investors, employees and other stakeholders are increasingly taking into account ESG factors, including climate risks. Our reputation and investor relationships could be damaged as a result of our involvement with certain industries or assets associated with activities perceived to be
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causing or exacerbating climate change, as well as any decisions we make to continue to conduct or change our activities in response to considerations relating to climate change. Moreover, compliance with new laws or regulations related to climate change, including compliance with “green” building codes, water use measures or other laws or regulations relating to reduction of carbon footprints, greenhouse gas emissions or land use, may require us to make improvements to our existing properties or increase taxes and fees assessed on us or our properties. Any of these occurrences could materially and adversely impact us.
Our inability to effectively monitor and respond to the rapid and ongoing developments and expectations regarding our ESG practices, may materially and adversely affect us.
There is an increasing focus from certain investors and other stakeholders concerning corporate responsibility, specifically related to ESG factors. Some investors may use these factors to guide their investment strategies and, in some cases, may choose not to invest in our securities if they believe our policies relating to corporate responsibility are inadequate. Third-party providers of corporate responsibility ratings and reports on companies have increased in number, resulting in varied and in some cases inconsistent standards. In addition, the criteria by which companies’ corporate responsibility practices are assessed are evolving, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. Alternatively, if we elect not to or are unable to satisfy such new criteria or do not meet the criteria of a specific third-party provider, some investors may conclude that our policies with respect to corporate responsibility are inadequate. We may face reputational damage in the event that our corporate responsibility procedures or standards do not meet the standards set by various constituencies. Furthermore, if our competitors’ corporate responsibility performance is perceived to be greater than ours, potential or current investors may elect to invest with our competitors instead. In addition, in the event that we communicate certain initiatives and goals regarding ESG matters, we could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or goals. If we fail to satisfy any of the expectations of third-party providers of corporate responsibility ratings, investors, tenants and other stakeholders, or our initiatives are not executed as planned, our reputation and financial results could be materially and adversely affected.
Insurance on our properties may not adequately cover all losses and any uninsured losses could materially and adversely affect us.
Our tenants are generally required to maintain comprehensive insurance coverage for the properties they lease from us pursuant to our net leases. Pursuant to such leases, our tenants are generally required to name us (and any of our lenders that have a mortgage on the property leased by the tenant) as additional insureds on their liability policies and additional named insureds and/or loss payees (or mortgagee, in the case of our lenders) on their property policies. To the extent that our tenants do not name us as additional insureds on their liability policies, this may create a risk for us regarding coverage for any losses or liabilities associated with such properties. Additionally, most tenants are required to maintain casualty coverage and most are required to carry limits at 100% of replacement cost, although some of our leases allow tenants to self-insure their insurance obligations for casualty losses. Depending on the location of the property, losses of a catastrophic nature, such as those caused by casualty, earthquakes and floods, may be covered by insurance policies that are held by our tenant with limitations such as large deductibles or co-payments that a tenant may not be able to meet. In addition, losses of a catastrophic nature, such as those caused by wind/hail, hurricanes, terrorism, or acts of war, may be uninsurable or not economically insurable. In the event there is damage to our properties that is not covered by insurance and such properties are subject to recourse indebtedness, we will continue to be liable for the indebtedness, even if these properties are irreparably damaged. In addition, if uninsured damage to a property occurs or a loss exceeds policy limits and we do not have adequate cash to fund repairs, we may be forced to sell the property at a loss or to borrow capital to fund the repairs.
Inflation, changes in building codes and ordinances, environmental considerations, and other factors, including terrorism or acts of war, may make any insurance proceeds we receive insufficient to repair or replace a property if it is damaged or destroyed. In that situation, the insurance proceeds received may not be adequate to restore our economic position with respect to the affected real property. Also, if we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications without significant capital expenditures which may exceed any amounts received pursuant to insurance policies, as reconstruction or improvement of such a property would likely require significant upgrades to meet zoning and building code requirements. The loss of our capital investment in or anticipated future returns from our properties due to material uninsured losses could materially and adversely affect us.
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Our costs of compliance with laws and regulations may require us or our tenants to make unanticipated expenditures that could reduce the investment return of our stockholders.
All real property and the operations conducted on real property are subject to numerous federal, state, and local laws and regulations. We cannot predict what laws or regulations will be enacted in the future, how future laws or regulations will be administered or interpreted, or how future laws or regulations will affect us or our properties. For example, we may be required to make substantial capital expenditures to comply with applicable fire and safety regulations, building codes, the ADA, environmental regulations, and other land use regulations, and may be required to obtain approvals from various authorities with respect to our properties, including prior to acquiring a property or when undertaking improvements of any of our existing properties. Compliance with new laws or regulations, or stricter interpretation of existing laws, may require us or our tenants to incur significant expenditures, impose significant liability, restrict or prohibit business activities, and could materially adversely affect us.
Compliance with the ADA may require us to make unanticipated expenditures that could materially and adversely affect us.
Our properties are subject to the ADA. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. While our tenants are obligated by law to comply with the ADA and typically obligated under our leases to cover costs associated with compliance, if required changes involve greater expenditures than anticipated or if the changes must be made on a more accelerated basis than anticipated, the ability of our tenants to cover costs could be adversely affected. We could be required to expend our own funds to comply with the provisions of the ADA, which could materially and adversely affect us.
Compliance with fire, safety, environmental, and other regulations may require us to make unanticipated expenditures that could materially and adversely affect us.
We are required to operate our properties in compliance with fire and safety regulations, building codes, environmental regulations, and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We may be required to make substantial capital expenditures to comply with those requirements and may be required to obtain approvals from various authorities with respect to our properties, including prior to acquiring a property or when undertaking improvements of any of our existing properties. We cannot assure you that existing laws and regulatory policies will not materially and adversely affect us or the timing or cost of any future acquisitions or improvements, or that additional regulations will not be adopted that increase such delays or result in additional costs. Additionally, failure to comply with any of these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. While we intend to only acquire properties that we believe are currently in substantial compliance with all regulatory requirements, these requirements may change and new requirements may be imposed which would require significant unanticipated expenditures by us and could materially and adversely affect us.
We may obtain only limited warranties when we acquire a property and may only have limited recourse if our acquisitions subject us to unknown liabilities.
The seller of a property often sells the property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will survive for only a limited period after the closing. The acquisition of, or purchase of, properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property, lose rental income from that property or may be subject to unknown liabilities with respect to such properties.
Risks Related to Debt Financing
As of June 30, 2024, on a pro forma basis, we had approximately $249.9 million principal balance of indebtedness outstanding (net of fees), which may expose us to the risk of default under our debt obligations.
As of June 30, 2024, on a pro forma basis, we had approximately $249.9 million of total debt outstanding (net of fees), consisting of borrowings under our New Revolving Credit Facility and New Delayed Draw Term Loan with a variable interest rate of SOFR plus 1.2% and a maturity date of October 2027. In addition, upon completion of this
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offering, our $250 million New Revolving Credit Facility and $200 million New Delayed Draw Term Loan will become effective. We have incurred, and plan to incur in the future, financing through borrowings under further issuances of ABS Notes, an acquisition line, our New Revolving Credit Facility, our New Delayed Draw Term Loan, and mortgage loans secured by some or all of our properties. In some cases, the mortgage loans we incur are guaranteed by us, the OP, or both. We may also borrow funds if necessary to satisfy the requirement that we distribute to stockholders as dividends at least 90% of our annual REIT taxable income (computed without regard to the dividends paid deduction and our net capital gains), or otherwise as is necessary or advisable to assure that we maintain our qualification as a REIT for U.S. federal income tax purposes. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:
our cash flow may be insufficient to meet our required principal and interest payments;
cash interest expense and financial covenants relating to our indebtedness, including covenants in our New Revolving Credit Facility and New Delayed Draw Term Loan that will restrict us from paying distributions if a default or event of default exists, other than distributions required to maintain our REIT status, may limit or eliminate our ability to make distributions to holders of our Common Stock;
we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to capitalize upon investment opportunities or meet operational needs;
we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;
because a portion of our debt bears interest at variable rates, increases in interest rates would increase our interest expense;
we may be unable to hedge floating rate debt, counterparties may fail to honor their obligations under any hedge agreements we enter into, such agreements may not effectively hedge interest rate fluctuation risk, and, upon the expiration of any hedge agreements we enter into, we would be exposed to then-existing market rates of interest and future interest rate volatility;
we may be forced to dispose of properties, possibly on unfavorable terms or in violation of certain covenants to which we may be subject;
we may default on our obligations and the lenders or mortgagees may foreclose on our properties or our interests in the entities that own the properties that secure their loans and receive an assignment of rents and leases;
any foreclosures by lenders of our outparcel properties could create taxable income without accompanying cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code;
we may be restricted from accessing some of our excess cash flow after debt service if certain of our tenants fail to meet certain financial performance metric thresholds;
fluctuations in interest rates and available liquidity in the marketplace;
we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations; and
our default under any loan with cross default provisions could result in a default on other indebtedness.
The occurrence of any of these events could materially and adversely affect us.
Market conditions could adversely affect our ability to refinance existing indebtedness on acceptable terms or at all, which could materially and adversely affect us.
We use external financing to refinance indebtedness as it matures and to partially fund our acquisitions. Credit markets may experience significant price volatility, displacement, and liquidity disruptions, including the bankruptcy, insolvency, or restructuring of certain financial institutions. As a result, we may be unable to fully refinance maturing indebtedness with new indebtedness, which could materially and adversely affect us. Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase. Currently, our Revolving Credit Facility and Term Loan Credit Facility, which are expected to be repaid with the net proceeds of this offering, carry variable interest
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rates and are scheduled to mature in March 2025 and March 2027, respectively. In addition, the outstanding principal balance of our ABS Notes become due and payable on the anticipated repayment date in December 2024. We cannot assure you that we will be able to refinance our debt on acceptable terms, or at all, and any inability to refinance will materially and adversely affect us. Higher interest rates on newly incurred debt may negatively impact us as well. If interest rates increase, our interest costs and overall costs of capital will increase, which could materially and adversely affect us and our ability to make distributions to our stockholders.
In addition, we may enter into hedging arrangements in the future. Our hedging arrangements may include interest rate swaps, caps, floors and other interest rate hedging contracts. Our hedging arrangements could reduce, but may not eliminate, the impact of rising interest rates, and they could expose us to the risk that other parties to our hedging arrangements will not perform or that the agreements relating to our hedges may not be enforceable.
Our debt obligations may make it difficult to meet the REIT distribution requirements and avoid entity-level taxes.
To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year (computed without regard to the dividends paid deduction and our net capital gains) and we will be subject to corporate income tax on our undistributed taxable income to the extent that we distribute less than 100% of our REIT taxable income each year (computed without regard to the dividends paid deduction). In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. Payments of principal on our borrowings, which are not deductible for tax purposes, may leave us with insufficient cash resources to make the distributions to our stockholders necessary to maintain our REIT status and avoid the payment of income and excise taxes. Furthermore, foreclosures could create taxable income without accompanying cash proceeds, which also could hinder our ability to meet those REIT distribution requirements and avoid those entity-level taxes.
An increase in market interest rates could increase our interest costs on existing and future debt and could adversely affect our stock price, and a decrease in market interest rates could lead to additional competition for the acquisition of real estate, any of which could materially and adversely affect us.
Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. The Federal Reserve Board has maintained the federal funds rate for eight consecutive meetings. As of August 9, 2024, the effective federal funds rate is over 5%, which is at the highest level since 2006. If the Federal Reserve Board continues to increase the federal funds rate, overall interest rates will likely continue to rise. Interest rate increases would increase our interest costs for any new debt and our variable rate debt obligations we have, which could, in turn, make the financing of any acquisition more expensive as well as lower our current period earnings. Rising interest rates could limit our ability to refinance existing debt when it matures or cause us to pay higher interest rates upon refinancing. In addition, an increase in interest rates could decrease the access third parties have to credit, thereby decreasing the amount they are willing to pay to lease our assets and consequently limiting our ability to reposition our portfolio promptly in response to changes in economic or other conditions. Furthermore, the dividend yield on shares of our Common Stock, as a percentage of the price of such shares, will influence the price of our Common Stock. Thus, an increase in market interest rates may lead prospective purchasers of our shares to expect a higher dividend yield, which could adversely affect the market price of our Common Stock.
In addition, decreases in interest rates may lead to additional competition for the acquisition of real estate due to a reduction in desirable alternative income-producing investments. Increased competition for the acquisition of real estate may lead to a decrease in the yields on real estate we have targeted for acquisition. In such circumstances, if we are not able to offset the decrease in yields by obtaining lower interest costs on our borrowings, our results of operations will be adversely affected.
Consequently, increases or decreases in market interest rates could materially and adversely affect us.
Disruptions in the financial markets and deteriorating economic conditions could adversely affect our ability to obtain debt financing on commercially reasonable terms and adversely impact our ability to implement our investment strategy and achieve our investment objectives.
The United States and global financial markets have experienced significant volatility and disruption in the past. Recent increases in interest rates have and may continue to adversely affect acquisition yields. During the mid-2000s, there was a widespread tightening in overall credit markets, devaluation of the assets underlying certain financial
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contracts, and increased borrowing by governmental entities. The turmoil in the capital markets resulted in constrained equity and debt capital available for investment in the real estate market, resulting in fewer buyers seeking to acquire properties, increases in capitalization rates, and lower property values. While capital has generally become more available, future events or sustained negative conditions may also reduce the availability of financing, make financing terms less attractive, as well as impact the value of our investments in properties. If sufficient sources of external financing are not available to us on cost effective terms, we could be forced to limit our planned business activities or take other actions to fund our business activities and repayment of debt such as selling assets or reducing our cash distributions. Uncertainty in the credit markets could also negatively impact our ability to make acquisitions, make it more difficult or impossible for us to sell properties, or adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing.
We may incur mortgage debt on our properties, which may subject us to certain risks, and the occurrence of any such risk could materially and adversely affect us.
We may incur mortgage debt on a particular property, especially if we believe the property’s projected cash flow is sufficient to service the mortgage debt. In addition, incurring mortgage debt may increase the risk of loss since defaults on indebtedness secured by a property may result in foreclosure actions initiated by lenders and our loss of the property securing the loan that is in default. For U.S. federal income tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure but would not receive any of the proceeds. We may give full or partial guarantees to lenders to the OP or its affiliates. If we give a guaranty on behalf of the OP, we will be responsible to the lender for satisfaction of the debt if it is not paid by the OP. If any mortgages contain cross-collateralization or cross-default provisions, there is a risk that more than one of our real properties may be affected by a default. If any of our properties are foreclosed upon due to a default, we could be materially and adversely affected.
Failure to hedge effectively against interest rate changes may materially and adversely affect us.
To reduce our exposure to variable-rate debt, we enter into interest rate swap agreements to fix the rate of interest as a hedge against interest rate fluctuations on floating-rate debt. These arrangements involve risks and may not be effective in reducing our exposure to interest rate changes. In addition, the counterparties to any hedging arrangements we enter into may not honor their obligations. Failure to hedge effectively against changes in interest rates relating to the interest expense of our future floating-rate borrowings may materially and adversely affect us.
Our ABS Notes, New Revolving Credit Facility and New Delayed Draw Term Loan contain various covenants which, if not complied with, could accelerate our repayment obligations, thereby materially and adversely affecting us.
We are subject to various financial and operational covenants and financial reporting requirements pursuant to the agreements we have entered into governing our New Revolving Credit Facility, New Delayed Draw Term Loan and ABS Notes. These covenants require us to, among other things, maintain certain financial ratios, including leverage, fixed charge coverage, and debt service coverage, among others. As of June 30, 2024, we believe we were in compliance with all such covenants. Our continued compliance with these covenants depends on many factors and could be impacted by current or future economic conditions, and thus there are no assurances that we will continue to comply with these covenants. Failure to comply with these covenants would result in a default which, if we were unable to cure or obtain a waiver from the lenders, could accelerate our repayment obligations and thereby have a material and adverse impact on us.
Further, these covenants, as well as any additional covenants to which we may be subject in the future because of additional borrowings, could cause us to forego investment opportunities, reduce or eliminate distributions to our holders of our Common Stock, or obtain financing that is more expensive than financing we could obtain if we were not subject to the covenants. Additionally, these restrictions may adversely affect our operating and financial flexibility and may limit our ability to respond to changes in our business or competitive environment, all of which may materially and adversely affect us.
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Failure to maintain the current credit ratings assigned to our ABS Notes could materially and adversely affect our cost of capital, liquidity, and access to capital markets.
The spread we pay over applicable reference rates for our unsecured credit facilities is determined based upon our credit ratings. In December 2019, Standard & Poor’s assigned our ABS Notes an investment grade credit rating of “A”, which was upgraded to “AA” in December 2023. In December 2019, Kroll Bond Rating Agency assigned our ABS Notes an investment grade credit rating of “A”, which was re-affirmed most recently in July of 2020. These ratings are based on a number of factors, including an assessment of our financial strength, portfolio size and diversification, credit and operating metrics, and sustainability of cash flow and earnings. If we are unable to maintain the current credit ratings assigned to our ABS Notes it could adversely affect our cost of capital, liquidity, and access to capital markets. Factors that could negatively impact our credit ratings include, but are not limited to: a significant increase in our leverage on a sustained basis; a significant increase in the proportion of secured debt levels; a significant decline in our unencumbered asset base; and a significant decline in our portfolio diversification.
We may be adversely affected by changes in SOFR reporting practices, the method in which SOFR is determined or the use of alternative reference rates.
On July 27, 2017, the FCA which regulates LIBOR, announced its intention to stop compelling banks to submit rates for the calculation of LIBOR after June 30, 2023. Upon completion of this offering, our $250 million New Revolving Credit Facility and $200 million New Delayed Draw Term Loan will become effective, which bear interest at floating rates based on SOFR plus an applicable margin. The Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee, which identified SOFR, a new index calculated by short-term repurchase agreements, backed by Treasury securities, as its preferred alternative rate for LIBOR. There can be no assurances as to whether such interest rates will be more or less favorable than LIBOR and any other unforeseen impacts of the discontinuation of LIBOR.
Risks Related to Our Organizational Structure
Our charter contains provisions, including ownership and transfer restrictions, that may delay, discourage, or prevent a takeover or change of control transaction that could otherwise result in a premium price to our stockholders.
Our charter contains various provisions that are intended to facilitate our qualification as a REIT. For example, our charter restricts the direct or indirect ownership by one person or entity to no more than 9.8% of the value of our then outstanding shares of capital stock and no more than 9.8% of the value or number of shares, whichever is more restrictive, of our then outstanding shares of Common Stock unless exempted by our board of directors. This restriction may discourage a change of control of us and may deter individuals or entities from making tender offers for shares of our Common Stock on terms that might be financially attractive to stockholders or which may cause a change in our management. In addition to deterring potential change of control transactions that may be favorable to our stockholders, these provisions may also decrease our stockholders’ ability to sell their shares of our Common Stock. As a result, these charter provisions may negatively impact the market price of our Common Stock.
We may issue preferred stock or separate classes or series of common stock, which could adversely affect the holders of our Common Stock.
Our charter authorizes us to issue up to 500,000,000 shares of capital stock, including up to 450,000,000 shares of Common Stock and up to 50,000,000 shares of preferred stock, $0.01 par value per share (“preferred stock”), and our board of directors, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Holders of shares of our Common Stock do not have preemptive rights to acquire any shares issued by us in the future.
In addition, our board of directors may classify or reclassify any unissued shares of our Common Stock or preferred stock and establish the preferences, rights, and powers of any such stock. As a result, our board of directors could authorize the issuance of preferred stock or separate classes or series of common stock with terms and conditions that could have priority, with respect to distributions and amounts payable upon our liquidation, over the rights of our Common Stock. The issuance of shares of such preferred or separate classes or series of common stock could dilute the value of an investment in shares of our Common Stock. The issuance of shares of preferred stock or a separate class or series of common stock could provide the holders thereof with specified dividend payments and
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payments upon liquidation prior or senior to those of the Common Stock, and could also have the effect of delaying, discouraging, or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer, or sale of all or substantially all of our assets) that might provide a premium price for holders of our Common Stock.
Termination of our employment agreements with certain members of our senior management team could be costly.
The employment agreements that we entered into with certain members of our senior management team provide that if their employment with us terminates under certain circumstances (including in connection with a change in control of our Company), we may be required to pay them significant amounts of severance compensation, thereby making it costly to terminate their employment.
In the event of the executive’s termination of employment by the Company without “cause,” by the executive for “good reason” or due to the executive’s death or “disability” (as such terms are defined in the Employment Agreement) outside of the period beginning three months prior to or and ending 24 months following a change in control of the Company (the “Change in Control Window”), the executive is entitled to receive: (i) accrued benefits consisting of unpaid base salary and accrued but unused vacation or paid time off through the date of termination, reimbursement for all reasonable out-of-pocket business expenses incurred and paid by the executive through date of termination, and vested benefits under Company benefit plans (collectively, the “Accrued Benefits”); (ii) a lump sum payment equal to (a) in the case of termination by the Company without “cause” or by the employee for “good reason,” two times and (b) in the case of termination due to death or “disability,” one and one-half times the sum of the executive’s base salary and two-year average annual bonus, in the case of Messrs. Starr and Preston, or one times the sum of the executive’s base salary and two-year average annual bonus, in the case of Messrs. Dieffenbacher and Ireland; (iii) any earned but unpaid annual bonus for the prior calendar year; (iv) an amount equal to the executive’s target bonus for the year of termination, prorated through the date of termination; (v) reimbursement for the executive’s health insurance continuation coverage at the active-employee rate for 18 months, in the case of Messrs. Starr and Preston, or 12 months, in the case of Messrs. Dieffenbacher and Ireland; and (vi) full vesting of any outstanding equity awards that are subject solely to time-based vesting conditions.
In the event of the executive’s termination of employment by the Company without cause or by the executive for good reason during the Change in Control Window, the executive is entitled to receive: (i) the Accrued Benefits; (ii) a lump sum payment equal to three times the sum of the base salary and two-year average annual bonus, in the case of Messrs. Starr and Preston, or two times the sum of the executive’s base salary and two-year average annual bonus, in the case of Messrs. Dieffenbacher and Ireland; (iii) any earned but unpaid annual bonus for the prior calendar year; (iv) an amount equal to the executive’s target bonus for the year of termination, prorated through the date of termination; (v) payment for the executive’s health insurance continuation coverage at the active-employee rate for 24 months, in the case of Messrs. Starr and Preston, or 18 months, in the case of Messrs. Dieffenbacher and Ireland; and (vi) full vesting of any outstanding equity awards that are subject solely to time-based vesting conditions.
Also in the event of a change in control of the Company, if any of the payments or benefits provided for under the Employment Agreement or otherwise payable to the executive would constitute “parachute payments” within the meaning of Section 280G of the Code and would be subject to the related excise tax under Section 4999 of the Code, then the executive will be entitled to receive either the full payment of such payments and benefits or a reduced amount of payments and benefits, where the reduced amount would result in no portion of the payments or benefits being subject to the excise tax, whichever results in the greater amount of after-tax benefits being retained by the executive.
In the event of the executive’s employment is terminated by the Company for cause, or the executive voluntarily terminates employment (without good reason), the executive will be entitled to receive the Accrued Benefits.
All the severance payments and benefits are conditioned on the executive executing and not revoking a general release of claims for the benefit of the Company and the executive’s continued compliance with the restrictive covenants set forth in the Employment Agreements.
The severance payments included in our employment agreements described above could be costly.
We may experience adverse consequences as a result of the Internalization.
In connection with the closing of this offering, we intend to complete the Internalization, through which we intend to acquire the affiliates of NARS that have performed external advisory and management services for our predecessor and the assets reasonably necessary to operate and manage our business. In connection with the
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Internalization, we intend to onboard certain employees of NARS or its affiliates, including our entire senior management team, assume certain contractual relationships, including the assumption of an office lease and certain operating liabilities, and terminate the contractual relationship with NARS and its affiliates. There is no guarantee that the Internalization will be successful or achieve the results in the timeframe we expect or at all.
In addition, as a self-managed REIT, we may encounter unforeseen costs, expenses, and difficulties associated with providing these services on a self-advised basis, which may materially and adversely affect us. While we would no longer bear the costs of the various fees and expenses we currently pay to affiliates of NARS under our management arrangement, our direct expenses would include general and administrative costs, including legal, accounting, employee compensation and benefits, and other expenses related to corporate governance, including SEC reporting and compliance.
We may have incurred unknown liabilities in connection with the 50/50 Joint Venture Acquisition, which could materially and adversely affect us.
In connection with the 50/50 Joint Venture Acquisition, we may have incurred unknown liabilities. The Interest Purchase Agreement provided that we are responsible for any liabilities associated with the 50/50 Joint Venture Acquisition. To the extent that we incurred any unknown liabilities in connection with the 50/50 Joint Venture Acquisition, it could materially and adversely affect us.
Our ability to recover any loss that we may suffer as a result of the REIT Contribution Transactions and Internalization may be limited.
We have entered, or will enter, into the Internalization Agreement and the Contribution Agreements, which contain customary representations and warranties. The representations and warranties of our counterparties to the Contribution Agreements are not expected to survive the closing of the REIT Contribution Transactions and any alleged inaccuracies in or breaches of these representations and warranties, including those made to us, will not serve as the basis for any post-closing indemnification claims. The representations and warranties of our counterparties to the Internalization Agreement will survive until six months following the closing of the Internalization and any alleged inaccuracies in or breaches of these representations and warranties, including those made to us, will serve as the basis for any post-closing indemnification claims, which are subject to a cap and minimum amount to make such claims. There can be no assurance that we would be able to successfully recover any loss that we may suffer arising from a breach of a representation or warranty under the Internalization Agreement, and as a result, we may be materially adversely affected.
Our board of directors may change our investment and financing policies without stockholder approval, which could materially and adversely alter the nature of an investment in us.
The methods of implementing our investment policies and strategy may vary as new real estate development trends emerge, new investment techniques are developed, and market conditions evolve. Our investment and financing policies are exclusively determined by our board of directors and the Real Estate Investment Committee, which is comprised of three members, including each of our co-Chief Executive Officers. Accordingly, our stockholders do not control these policies. Further, our organizational documents do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. Our long-term goal is to target a net debt-to-annualized adjusted EBITDAre ratio of 6.0x or below. Our board of directors and Real Estate Investment Committee may alter or eliminate our current policy on borrowing at any time without stockholder approval. If this policy changed, we could become more highly leveraged, which could result in an increase in our debt service costs and obligations. Higher leverage also increases the risk of default on our obligations. In addition, a change in our investment policies, including the manner in which we allocate our resources across our portfolio or the types of assets in which we seek to invest, may increase our exposure to interest rate risk, real estate market fluctuations, and liquidity risk. Changes to our policies with regard to the foregoing could materially and adversely affect us.
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
Maryland law provides that a director of a Maryland corporation will not have any liability as a director if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinary prudent person in a like position would use under similar circumstances. A director who performs his or her duties in accordance with the foregoing standards should not be liable to us or any other
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person for failure to discharge his or her obligations as a director. Our charter eliminates the liability of our directors and officers to us and our stockholders for money damages to the maximum extent permitted by Maryland law. Therefore, our directors and officers are subject to monetary liability resulting only from:
actual receipt of an improper personal benefit or profit in money, property, or services; or
active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated.
As a result, we and our stockholders have rights against our directors and officers that are more limited than might otherwise exist. Accordingly, in the event that actions taken by any of our directors or officers impede the performance of our Company, your and our ability to recover damages from such director or officer will be limited. Our charter also requires us to indemnify and advance expenses to our directors and our officers for actions taken by them in those and certain other capacities subject to any limitations under Maryland law or in our charter.
Moreover, we have entered into separate indemnification agreements with each of our directors and executive officers. As a result, we and our stockholders may have more limited rights against these persons than might otherwise exist absent these provisions in our charter. In addition, we may be obligated to fund the defense costs incurred by these persons in some cases, which would reduce the cash available for distributions.
Our bylaws designate specific courts in Baltimore, Maryland and the federal district courts of the United States as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that court does not have jurisdiction, the United States District Court for the District of Maryland, will be the sole and exclusive forum for (a) any Internal Corporate Claim, as such term is defined in the MGCL, or any successor provision thereof, and any action or proceeding asserting any Internal Corporate Claim, including without limitation: (i) any derivative action or proceeding brought on our behalf (ii) any claim, or any action or proceeding asserting a claim, based on an alleged breach of any duty owed by any director or officer or other employee of ours to us or to our stockholders; or (iii) any claim, or any action or proceeding asserting a claim, against us or any director or officer or other employee of ours arising under or pursuant to any provision of the MGCL, our charter or our bylaws; or (b) any action or proceeding asserting a claim against us or any director or officer or other employee of ours that is governed by the internal affairs doctrine. These exclusive forum provisions will not apply to suits brought to enforce a duty or liability created by the Securities Act, the Exchange Act, or any other claim for which federal courts have exclusive jurisdiction. Furthermore, our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for any action or proceeding asserting claims arising under the Securities Act, including all causes of action asserted against any defendant to such action or proceeding. The exclusive forum provision could limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which could discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the exclusive forum provision contained in our bylaws to be inapplicable or unenforceable in an action, we could incur additional costs associated with resolving such action in other jurisdictions.
We are a holding company with no direct operations and rely on funds received from the OP to pay liabilities.
We are a holding company and conduct substantially all of our operations through the OP. We do not have, apart from an indirect interest in the OP, any independent operations. As a result, we rely on distributions from the OP to pay any distributions we might declare on shares of our Common Stock. We will also rely on distributions from the OP to meet any of our obligations, including any tax liability on taxable income allocated to us from the OP. In addition, because we are a holding company, your claims as stockholders are structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of the OP and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation, or reorganization, our assets and those of the OP and its subsidiaries will be able to satisfy the claims of our stockholders only after all of our, the OP and its subsidiaries’ liabilities and obligations have been paid in full.
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Our UPREIT structure may result in potential conflicts of interest between the interests of our stockholders and limited partners in the OP, which may materially and adversely impede business decisions that could benefit our stockholders.
Conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and the OP or any future member thereof, on the other. Our directors and officers have duties to our Company under applicable Maryland law in connection with the management of our Company. At the same time, we, as the general partner of the OP, will have fiduciary duties and obligations to the OP and its limited partners under Delaware law and the OP Agreement in connection with the management of the OP. Our fiduciary duties and obligations, as the general partner of the OP and its limited partners may come into conflict with the duties of our directors and officers to our Company.
While we intend to avoid situations involving conflicts of interest, there may be situations in which the interests of the OP may conflict with our interests. Our activities specifically authorized by or described in the OP Agreement may be performed by us, directly or indirectly, and will not, in any case or in the aggregate, be deemed a breach of the OP Agreement or any duty owed by us to the OP or any of their respective limited partners. In exercising our authority under the OP Agreement, we may, but are under no obligation to, take into account the tax consequences of any action we take. We and the OP have no liability to a limited partner under any circumstances as a result of an income tax liability incurred by such limited partner as a result of an action (or inaction) by us pursuant to our authority under the OP Agreement.
The OP Agreement provides that the general partner will not be liable to the OP, its limited partners, or any other person bound by the OP Agreement for monetary damages for losses sustained, liabilities incurred, or benefits not derived by the OP or any of its limited partners, except for liability for the general partner’s gross negligence or willful misconduct. Moreover, the OP Agreement provide that the OP, as applicable, is required to indemnify us, the direct or indirect general partner, our affiliates, and certain related persons, and any of our officers, stockholders, directors, employees, representatives, or agents from and against any and all claims that relate to the operations of the OP, except if (i) the act was committed in bad faith, (ii) the act was the result of active and deliberate dishonesty and was material to the cause of action involved, or (iii) it personally gained in fact a financial income or other advantage to which it was not entitled under law.
We are an “emerging growth company,” and we cannot be certain if the reduced SEC reporting requirements applicable to emerging growth companies will make our Common Stock less attractive to investors, which could make the market price and trading volume of our Common Stock more volatile and decline significantly.
We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which we have total annual gross revenue of $1.235 billion or more (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the first sale of our Common Stock pursuant to an effective registration statement, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt, or (iv) the date on which we are deemed to be a “large accelerated filer.” We intend to take advantage of exemptions from various reporting requirements that are applicable to most other public companies, whether or not they are classified as “emerging growth companies,” including, but not limited to, an exemption from the provisions of Section 404(b) of Sarbanes-Oxley requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting. An attestation report by our auditor would require additional procedures by them that could detect problems with our internal control over financial reporting that are not detected by management. If our system of internal control over financial reporting is not determined to be appropriately designed or operating effectively, it could require us to restate financial statements, cause us to fail to meet reporting obligations, and cause investors to lose confidence in our reported financial information, all of which could lead to a significant decline in the market price of our Common Stock. The JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in the Securities Act, for complying with new or revised accounting standards. We have elected to take advantage of this extended transition period. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards. We may elect to comply with public company effective dates at any time, and such election would be irrevocable pursuant to Section 107(b) of the JOBS Act. We cannot predict if investors will find our Common Stock less attractive
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because we intend to rely on certain of these exemptions and benefits under the JOBS Act. If some investors find our Common Stock less attractive as a result, there may be a less active, liquid, and/or orderly trading market for our Common Stock and the market price and trading volume of our Common Stock may be more volatile and decline significantly.
The value of an investment in our Common Stock may be reduced if we or any of our subsidiaries are required to register as an investment company under the Investment Company Act and, if we are subject to registration under the Investment Company Act, we will not be able to continue our business.
Neither we, the OP, nor any of our subsidiaries intend to register as an investment company under the Investment Company Act. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act that would impose significant and onerous limitations on our operations, as well as require us to comply with various reporting, record keeping, voting, proxy disclosure, and other rules and regulations that would significantly alter our operations and significantly increase our operating expenses.
We believe that we, the OP, and the subsidiaries of the OP do not and will not fall within the definition of “investment company” under Section 3(a)(1) of the Investment Company Act as we intend to invest primarily in real property through our wholly or majority-owned subsidiaries. Accordingly, we believe that we and the OP are and will be primarily engaged in the non-investment company business of such subsidiaries and therefore will not fall within the aforementioned definition of “investment company.”
To ensure that neither we nor any of our subsidiaries, including the OP, are required to register as an investment company, each entity may be unable to sell assets that it would otherwise want to sell and may need to sell assets that it would otherwise wish to retain. In addition, we, the OP, or our subsidiaries may be required to acquire additional income- or loss-generating assets that we might not otherwise acquire or forego opportunities to acquire interests in companies that we would otherwise want to acquire. Although we, the OP, and our subsidiaries intend to monitor our portfolio periodically and prior to each acquisition and disposition, any of these entities may not be able to remain outside the definition of investment company or maintain an exclusion from the definition of investment company. If we, the OP, or our subsidiaries are required to register as an investment company but fail to do so, the unregistered entity would be prohibited from engaging in our business, and criminal and civil actions could be brought against such entity. In addition, the contracts of such entity would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of the entity and liquidate its business.
U.S. Federal Income Tax Risks
Failure to qualify as a REIT would materially and adversely affect us and the value of our Common Stock.
We intend to elect to qualify be taxed as a REIT under Sections 856 through 860 of the Code and the applicable U.S. Treasury regulations, commencing with our short taxable year ending December 31, 2024. We believe that as of such date we will have been organized and will have operated in a manner to qualify for taxation as a REIT for U.S. federal income tax purposes. We intend to continue to operate as a REIT in the future but we cannot provide an assurance that we have been or will be able to do so. If we lose our REIT status, we will face significant tax consequences that would substantially reduce our cash available for distribution to our stockholders for each of the years involved because:
we would not be allowed a deduction for distributions to stockholders in computing our taxable income and would be subject to U.S. federal income tax at the corporate rate;
we also could be subject to increased state and local income taxes;
unless we are entitled to relief under applicable statutory provisions of the Code, we could not elect to be taxed as a REIT for four taxable years following the year during which qualification was lost; and
for the five years following re-election of REIT status, upon a taxable disposition of an asset owned as of such re-election, we would be subject to corporate level tax with respect to any built-in gain inherent in such asset at the time of re-election.
Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our operations and distributions to stockholders. If this occurs, we may need to borrow funds or liquidate some of our properties in order to pay any applicable taxes. However, if we fail to qualify as a REIT, we will not be required
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to make distributions to our stockholders. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to execute our growth strategy and raise capital, and could materially and adversely affect the trading price of our Common Stock.
Qualification as a REIT involves the application of technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of REIT Requirements, including requirements regarding the ownership of our stock, requirements regarding the composition of our assets and a requirement that at least 75% or 95% of our gross income in any year must be derived from qualifying sources, such as “rents from real property.” Also, we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gains. In addition, legislation, new regulations, administrative interpretations, or court decisions may materially and adversely affect our investors, our ability to qualify as a REIT for U.S. federal income tax purposes, or the desirability of an investment in a REIT relative to other investments.
The OP will own all of the common units of the Subsidiary REITs upon completion of this offering. One Subsidiary REIT elected to be taxed as a REIT, beginning with its taxable year ended December 31, 2016. The other Subsidiary REIT elected to be taxed as a REIT, beginning with its taxable year ended December 31, 2021. If either of the Subsidiary REITs failed to qualify as a REIT, or fails to continue to qualify as a REIT in the future, that Subsidiary REIT would face the same tax consequences described above. In addition, the failure of either of the Subsidiary REITs to qualify as a REIT may prevent us from qualifying as a REIT.
Even if we qualify and remain qualified as a REIT for U.S. federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to our stockholders.
Even if we qualify and remain qualified as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state, and local income, property, and excise taxes on our income or property. For example:
In order to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income to our stockholders (computed without regard to the dividends paid deduction and our net capital gain), and to the extent that we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income (computed without regard to the dividends paid deduction and including our net capital gain), we will be subject to U.S. federal corporate income tax on the undistributed income, as well as applicable state and local income taxes.
If we should fail to distribute, or fail to be treated as having distributed, with respect to each calendar year at least the sum of (i) 85% of our REIT ordinary income for such year, (ii) 95% of our REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, we would be subject to a 4% nondeductible excise tax on the excess of such required distribution over the sum of (a) the amounts actually distributed and (b) the amounts we retained and upon which we paid U.S. federal income tax at the corporate level.
If we have (i) net income from the sale or other disposition of “foreclosure property” that is held primarily for sale to customers in the ordinary course of business or (ii) other non-qualifying net income from foreclosure property, we will be subject to tax at the U.S. federal corporate income tax rate on such income. To the extent that income from “foreclosure property” is otherwise qualifying income for purposes of the 75% gross income test, this tax is not applicable.
If we have net income from prohibited transactions (which are, in general, certain sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, other than sales of foreclosure property and sales that qualify for certain statutory safe harbors), such income will be subject to a 100% tax.
We may be subject to tax on gain recognized in a taxable disposition of assets acquired from a non-REIT C corporation by way of a carryover basis transaction, when such gain is recognized on a disposition of an asset during a five-year period beginning on the date on which we acquired the asset. To the extent of any “built-in gain,” such gain will be subject to U.S. federal income tax at the federal corporate income tax rate. Built-in gain means the excess of (i) the fair market value of the asset as of the beginning of the applicable recognition period over (ii) our adjusted basis in such asset as of the beginning of such recognition period.
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Similarly, even if the Subsidiary REITs remain qualified as REITs for U.S. federal income tax purposes, they may be subject to the same U.S. federal, state and local income, property, and excise taxes on their income or property. In addition, the earnings of our TRSs will be subject to U.S. federal corporate income tax, and state and local income tax in the jurisdictions in which they operate.
If the OP fails to qualify as a partnership for U.S. federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.
We believe that the OP will be treated as a partnership for U.S. federal income tax purposes. As a partnership, the OP would generally not be subject to U.S. federal income tax on its income. Instead, for U.S. federal income tax purposes, if the OP is treated as a partnership, each of its partners, including us, would be allocated, and may be required to pay tax with respect to, such partner’s share of its income. The OP may be required to determine and pay an imputed underpayment of tax (plus interest and penalties) resulting from an adjustment of the OP’s items of income, gain, loss, deduction, or credit at the partnership level. We cannot assure you that the IRS will not challenge the status of the OP or any other subsidiary partnership in which we own an interest as a disregarded entity or partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating the OP or any such other subsidiary partnership as an entity taxable as a corporation for U.S. federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would cease to qualify as a REIT. Also, the failure of the OP or any subsidiary partnerships to qualify as a disregarded entity or partnership could cause it to become subject to U.S. federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including us.
To satisfy the REIT distribution requirements, we may be forced to take certain actions to raise funds if we have insufficient cash flow which could materially and adversely affect us and the trading price of our Common Stock.
To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, computed without regard to the dividends paid deduction and our net capital gains, and we will be subject to corporate income tax on our undistributed taxable income to the extent that we distribute less than 100% of our REIT taxable income each year, computed without regard to the dividends paid deduction. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. In order to satisfy these distribution requirements to maintain our REIT status and avoid the payment of income and excise taxes, we may need to take certain actions to raise funds if we have insufficient cash flow, such as borrowing funds, raising additional equity capital, selling a portion of our assets or finding another alternative to make distributions to our stockholders. We may be forced to take those actions even if the then-prevailing market conditions are not favorable for those actions. This situation could arise from, among other things, differences in timing between the actual receipt of cash and recognition of income for U.S. federal income tax purposes, or the effect of non-deductible capital expenditures or other non-deductible expenses, the creation of reserves, or required debt or amortization payments. Such actions could increase our costs and reduce the value of our Common Stock. These sources, however, may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of factors, including the market’s perception of our growth potential, our current debt levels, the market price of our Common Stock, and our current and potential future earnings. We cannot assure you that we will have access to such capital on favorable terms at the desired times, or at all, which may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, and could materially and adversely affect us and the trading price of our Common Stock.
Further, to qualify as a REIT, we must also satisfy tests on an ongoing basis concerning, among other things, the sources of our income, nature of our assets, and the amounts we distribute to our stockholders. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Compliance with the REIT Requirements (as defined below in “Material U.S. Federal Income Tax Considerations—Taxation of Our Company”) may hinder our ability to operate solely on the basis of maximizing profits.
The ownership of our TRSs, and any other TRS we form, will be subject to limitations, and our transactions with our TRSs, and any other TRS we form, may cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.
Overall, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. The Code also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted
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on an arm’s-length basis. It is our policy to evaluate material intercompany transactions and to attempt to set the terms of such transactions so as to achieve substantially the same result as they believe would have been the case if they were unrelated parties. As a result, we believe that all material transactions between and among us and the entities in which we own a direct or indirect interest have been and will be negotiated and structured as arm’s-length transactions and that the potential application of the 100% excise tax will not have a material effect on us. There can be no assurance, however, that we will be able to comply with the TRS limitation or to avoid application of the 100% excise tax.
The IRS may treat sale-leaseback transactions as loans, which could jeopardize our REIT status or require us to make an unexpected distribution.
We have purchased properties and leased them back to the sellers of such properties, and may do so in the future. The IRS may take the position that certain of these sale-leaseback transactions that we treat as leases are not “true leases” but are, instead, financing arrangements or loans for U.S. federal income tax purposes.
If a sale-leaseback transaction were so re-characterized, the Subsidiary REITs and we might fail to satisfy the REIT asset tests, the income tests, or distribution requirements and consequently the Subsidiary REITs and we could lose REIT status effective with the year of re-characterization unless the Subsidiary REITs and we elect to make additional distributions to maintain REIT status. The primary risk relates to the disallowance of deductions for depreciation and cost recovery relating to such property, which could affect the calculation of REIT taxable income and could cause the Subsidiary REITs and us to fail the REIT distribution requirement that requires a REIT to distribute at least 90% of its REIT taxable income, computed without regard to the dividends paid deduction and any net capital gain. In this circumstance, the Subsidiary REITs and we may elect to distribute additional dividends of the increased taxable income so as not to fail the REIT distribution test. This distribution would be paid to all stockholders at the time of declaration rather than the stockholders that held our shares in the taxable year affected by the re-characterization.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum U.S. federal income tax rate applicable to income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts, and estates is 20%. Ordinary dividends payable by REITs, however, generally are not eligible for the 20% rate applicable to “qualified dividends” except to the extent the REIT dividends are attributable to “qualified dividends” received by the REIT itself or generally attributable to income upon which we (or a predecessor) have paid U.S. federal corporate income tax. However, for non-corporate U.S. stockholders, ordinary dividends payable by REITs that are not designated as capital gain dividends or treated as “qualified dividends” generally are eligible for a deduction of 20% of the amount of such ordinary REIT dividends, for taxable years beginning before January 1, 2026. The deduction, if allowed in full, equates to a maximum effective U.S. federal income tax rate on ordinary REIT dividends of 29.6%, based on currently applicable rates. More favorable rates will nevertheless continue to apply for regular corporate “qualified dividends.” Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the 20% rate continues to apply to regular corporate qualified dividends, investors who are individuals, trusts and estates may regard investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations.
The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for U.S. federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with that characterization of those properties or that we will always be able to make use of the available safe harbors.
Complying with the REIT Requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code substantially limit our ability to hedge our assets and liabilities. Any income from a hedging transaction that we enter into to manage the risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets, or from certain terminations of such hedging positions, does not constitute “gross income” for purposes of the 75% or 95% gross income tests that apply to REITs, provided that certain identification requirements are met. To the extent that we enter into other types of hedging transactions or fail to properly identify such
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transaction as a hedge, the income is likely to be treated as non-qualifying income for purposes of the 75% and 95% gross income tests. See “Material U.S. Federal Income Tax Considerations.” As a result of these rules, we may be required to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because any TRS in which we own an interest may be subject to tax on its income or gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in any TRS in which we own an interest will generally not provide any tax benefit, except that such losses may only be carried forward and may only be deducted against 80% of future taxable income in such TRS.
Complying with the REIT Requirements may force us to liquidate or forgo otherwise attractive investments.
To qualify as REITs, the Subsidiary REITs and we must continually satisfy tests concerning, among other things, the nature and diversification of its assets, the sources of its income, and the amounts it distributes to its stockholders. See “Material U.S. Federal Income Tax Considerations.” In connection with the Internalization, we will be treated as having acquired substantial amounts of goodwill that may not qualify for the 75% asset test. Compliance with these limitations, particularly given the goodwill that we acquire in the Internalization, may hinder our ability to make, and, in certain cases, maintain ownership of certain attractive investments that might not qualify for the 75% asset test. If the Subsidiary REITs and we fail to comply with the REIT asset test requirements at the end of any calendar quarter, it must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing its REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate or forgo otherwise attractive investments in order to satisfy the asset and income tests or to qualify under certain statutory relief provisions. These actions could have the effect of reducing our income, increasing our income tax liability, and reducing amounts available for distribution to our stockholders. In addition, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, and may be unable to pursue investments (or, in some cases, forego the sale of such investments) that would be otherwise advantageous to the Subsidiary REITs and us in order to satisfy the REIT Requirements. Accordingly, satisfying the REIT Requirements could materially and adversely affect us. Moreover, if we are compelled to liquidate our investments to meet any of these asset, income, or distribution tests, or to repay obligations to our lenders, we may be unable to comply with one or more of the requirements applicable to REITs or may be subject to a 100% tax on any resulting gain if such sales constitute prohibited transactions.
Changes to the U.S. federal income tax laws could have a material and adverse effect on us and our stockholders.
There may be changes in U.S. federal tax laws, regulations, rules, and judicial and administrative interpretations applicable to us, our subsidiaries and their businesses, the effect of which cannot be predicted. In particular, United States President Joseph R. Biden has made several tax proposals which would adversely impact real estate, including a proposal to severely limit the deferral of gain from like-kind exchanges under Section 1031 of the Code. Changes to Section 1031 of the Code could adversely impact the Company if it desires to dispose of its properties in a tax-efficient manner. Changes to Section 1031 of the Code also could adversely impact the market for individual tenant outparcel properties more generally. Our stockholders and prospective investors are urged to consult with their own tax advisors with respect to the status of legislative, regulatory, or administrative developments and proposals and their potential effect on an investment in shares of our Common Stock.
Risks Related to this Offering and Ownership of Our Common Stock
There has been no public market for our Common Stock prior to this offering and an active trading market for our Common Stock may not develop following this offering.
Prior to this offering, there has been no public market for our Common Stock, and there can be no assurance that an active trading market will develop or be sustained or that shares of our Common Stock will be resold at or above the initial public offering price. The shares of our Common Stock are listed on the NYSE, which will be effective upon completion of this offering. The initial public offering price of our Common Stock was determined by agreement among us and the underwriters, but there can be no assurance that our Common Stock will not trade below the initial public offering price following the completion of this offering. See “Underwriting.” The initial public offering price does not necessarily bear any relationship to our book value, assets, or financial condition; or any other established criteria of value and may not be indicative of the market price for our Common Stock after this offering. The price at which our Common Stock trades after the completion of this offering may be lower than the price at which the underwriters sell Common Stock in this offering. The market value of our Common Stock could be substantially affected by general market conditions, including the extent to which a secondary market develops for our Common Stock in the future, the extent of institutional investor interest in
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us, the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities (including securities issued by other real estate-based companies), our financial performance, and general stock and bond market conditions. If a robust public market for our Common Stock does not develop, you may have difficulty selling shares of our Common Stock, which could adversely affect the price that you receive for such shares.
The market price and trading volume of shares of our Common Stock may be volatile following this offering.
The market price of shares of our Common Stock may fluctuate. In addition, the trading volume in shares of our Common Stock may fluctuate and cause significant price variations to occur. Historically, these changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our Common Stock could fluctuate based upon factors that have little or nothing to do with us in particular. If the market price of shares of our Common Stock declines significantly, you may be unable to resell your shares of our Common Stock at or above the public offering price. We cannot assure you that the market price of shares of our Common Stock will not fluctuate or decline significantly, including a decline below the public offering price, in the future.
Some of the factors that could negatively affect our share price or result in fluctuations in the market price or trading volume of shares of our Common Stock include:
actual or anticipated declines in our quarterly operating results or distributions;
changes in government regulations;
changes in laws affecting REITs and related tax matters;
the announcement of new contracts by us or our competitors;
reductions in our FFO, AFFO, or earnings estimates;
publication of research reports about us or the real estate industry;
increases in market interest rates that lead purchasers of shares of our Common Stock to demand a higher yield;
future equity issuances, or the perception that they may occur, including issuances of Common Stock upon exercise or vesting of Awards under the 2024 Equity Incentive Plan or redemption of OP Units;
changes in market valuations of similar companies;
adverse market reaction to any increased indebtedness we incur in the future;
additions or departures of key management personnel;
actions by institutional stockholders;
differences between our actual financial and operating results and those expected by investors and analysts;
changes in analysts’ recommendations or projections;
speculation in the press or investment community; and
the realization of any of the other risk factors presented in this prospectus.
In the past, securities class action litigation has often been instituted against companies following periods of volatility in the price of their common stock. This type of litigation could result in substantial costs and divert our management’s attention and resources, which could have a material adverse effect on our cash flows, our ability to execute our business strategy, and our ability to make distributions to our stockholder.
We may not be able to make distributions to our stockholders at the times or in the amounts we expect, or at all.
We intend to make cash distributions to our stockholders in amounts such that all or substantially all of our taxable income in each year, subject to adjustments, is distributed. However, we may not be able to continue to generate sufficient cash flow from our properties to permit us to make the distributions we expect. Our ability to continue to make distributions in the future may be adversely affected by the risk factors described in this prospectus. We can provide no assurance that we will be able to make or maintain distributions and certain agreements relating to our indebtedness may, under certain circumstances, limit or eliminate our ability to make distributions to holders of our Common Stock. For instance, our credit agreement contains provisions that restrict us from paying distributions if an event of default exists, other than distributions
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required to maintain our REIT status. We can give no assurance that rents from our properties will increase, or that future acquisitions of real properties or other investments will increase our cash available for distributions to stockholders. In addition, any distributions will be authorized at the sole discretion of our board of directors, and the form, timing, and amount, if any, will depend upon a number of factors, including our actual and projected results of operations, FFO, AFFO, liquidity, cash flows and financial condition, the revenue we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, our REIT taxable income, the annual REIT distribution requirements, applicable law, and such other factors as our board of directors deems relevant.
Distributions are expected to be based upon our FFO, AFFO, financial condition, cash flows and liquidity, debt service requirements, and capital expenditure requirements for our properties. If we do not have sufficient cash available for distributions, we may need to fund the shortage out of working capital or borrow to provide funds for such distributions, which would reduce the amount of proceeds available for real estate investments and increase our future interest costs. Our inability to make distributions, or to make distributions at expected levels, could result in a decrease in trading price of our Common Stock.
You will experience immediate and substantial dilution from the purchase of the shares of Common Stock sold in this offering.
As of June 30, 2024, our predecessor had a consolidated net tangible book value of approximately $92.7 million, or $12.32 per share of our Common Stock held by contributing investors, assuming the exchange of OP Units into shares of our Common Stock on a one-for-one basis. As a result, the pro forma net tangible book value per share of our Common Stock after the completion of the REIT Contribution Transactions, the Internalization and this offering will be less than the initial public offering price. The purchasers of shares of our Common Stock offered hereby will experience immediate and substantial dilution of $3.08 per share in the pro forma net tangible book value per share of our Common Stock. See “Dilution.”
We may change the dividend policy for our Common Stock in the future.
The decision to declare and pay dividends on our Common Stock, as well as the form, timing, and amount of any such future dividends, will be at the sole discretion of our board of directors and will depend on our earnings, cash flows, liquidity, financial condition, capital requirements, contractual prohibitions or other limitations under our indebtedness, the annual distribution requirements under the REIT provisions of the Code, state law, and such other factors as our board of directors considers relevant. Any change in our dividend policy could have a material adverse effect on the market price of our Common Stock.
Increases in market interest rates may result in a decrease in the value of shares of our Common Stock.
One of the factors that will influence the price of shares of our Common Stock will be the distribution yield on shares of our Common Stock (as a percentage of the price of shares of our Common Stock) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of shares of our Common Stock to expect a higher distribution yield and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the per share trading price of our Common Stock to decrease.
This offering is expected to be dilutive to earnings, and there may be future dilution to earnings related to shares of our Common Stock.
On a pro forma basis, we expect that this offering will have a dilutive effect on our expected earnings per share and FFO per share. The actual amount of dilution cannot be determined at this time and will be based upon numerous factors. The market price of shares of our Common Stock could decline as a result of issuances or sales of a large number of shares of our Common Stock in the market after this offering or the perception that such issuances or sales could occur. Additionally, future issuances or sales of substantial amounts of shares of our Common Stock may be at prices below the initial public offering price of the shares of our Common Stock offered by this prospectus and may result in further dilution in our earnings and FFO per share and/or materially and adversely impact the per share trading price of our Common Stock.
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Future offerings of debt, which would be senior to shares of our Common Stock upon liquidation, and/or preferred equity securities that may be senior to shares of our Common for purposes of distributions or upon liquidation, may materially and adversely affect the market price of shares of our Common Stock.
In the future, we may attempt to increase our capital resources by making additional offerings of debt or preferred equity securities (or causing the OP to issue debt securities). Upon liquidation, holders of our debt securities and preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to our stockholders. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences, and privileges more favorable than those of our Common Stock and may result in dilution to owners of our Common Stock. Our stockholders are not entitled to preemptive rights or other protections against dilution. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on distribution payments that could limit our right to make distributions to our stockholders. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of our future offerings. Our stockholders bear the risk of our future offerings reducing the per share trading price of our Common Stock.
Sales of substantial amounts of our Common Stock in the public markets, or the perception that they might occur, could reduce the price of our Common Stock.
Upon the completion of this offering, we will have outstanding a total of 14,977,310 shares of our Common Stock, or 16,957,310 shares if the underwriters exercise in full their option to purchase additional shares. Prior to this offering, our Common Stock was not listed on any national securities exchange and the ability of stockholders to liquidate their investments was limited. As a result, there may be increased demand to sell shares of our Common Stock when shares of our Common Stock owned by the contributing investors are listed on the NYSE and freely tradable. A large volume of sales of shares (or short sales) of our Common Stock (whether they are shares of Common Stock that are issued in the offering, shares of Common Stock that are held by contributing investors upon the closing of the REIT Contribution Transactions, or shares of Common Stock issued upon redemption of OP Units) could decrease the prevailing market price of our Common Stock and could impair our ability to raise additional capital through the sale of equity securities in the future. Even if a substantial number of sales of our Common Stock are not affected, the mere perception of the possibility of these sales could depress the market price of our Common Stock and have a negative effect on our ability to raise capital in the future.
The shares of our Common Stock that we are selling in this offering may be resold immediately in the public market unless they are held by “affiliates,” as that term is defined in Rule 144 of the Securities Act. The Common Stock and OP Units issued as consideration in connection with the Internalization are “restricted securities” within the meaning of Rule 144 under the Securities Act and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemptions contained in Rule 144. Certain of our existing stockholders (as well as our directors and officers) have agreed, subject to certain exceptions, not to sell or otherwise dispose of any of their shares of Common Stock or OP Units from the date of this prospectus continuing through 180 days after the date of this prospectus, except with the prior written consent of the representatives of the underwriters. Sales of a substantial number of such shares upon expiration of the lock-up agreements, the perception that such sales may occur, or early release of these agreements, could cause the market price of our Common Stock to fall or make it more difficult for you to sell your shares of our Common Stock at a time and price that you deem appropriate.
Sales of substantial amounts of our capital stock in the public markets may dilute your voting power and your ownership interest in us.
Our charter provides that we may issue up to 450,000,000 shares of Common Stock and 50,000,000 shares of preferred stock, $0.01 par value per share. Moreover, under Maryland law and as provided in our charter, a majority of our entire board of directors has the power to amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue without stockholder approval. Future issuances of shares of our Common Stock, securities convertible or exchangeable into Common Stock, or shares of our preferred stock may dilute the ownership interest of the holders of our Common Stock. Because our decision to issue additional equity or convertible or exchangeable securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future issuances. In addition, we are not required to offer any such securities to existing stockholders on a preemptive basis. Therefore, it may not be possible for existing stockholders to participate in such future issuances, which may dilute the existing stockholders’ interests in us.
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The holders of outstanding OP Units have the right to have their OP Units exchanged for cash or (at our option) shares of Common Stock and any disclosure of such exchange or the subsequent sale (or any disclosure of an intent to enter into such an exchange or subsequent sale) of such shares of Common Stock may cause volatility in our stock price.
The exchange of OP Units for Common Stock, including OP Units granted to certain directors, executive officers and other employees, or the issuance of our Common Stock or OP Units in connection with future property, portfolio or business acquisitions, or the perception that such exchanges might occur, could adversely affect the market price of our Common Stock. In addition, the existence of shares of our Common Stock reserved for issuance under the 2024 Equity Incentive Plan may adversely affect the terms upon which we may be able to obtain additional capital through the sale of equity securities. Future issuances of shares of our Common Stock may also be dilutive to existing stockholders. Any of these events may materially and adversely affect the market price of our Common Stock.
A lack of research analyst coverage or restrictions on the ability of analysts associated with the co-managers of this offering to publish during certain time periods, including when we report our results of operations, could materially and adversely affect the trading price and liquidity of our Common Stock.
We cannot assure you that research analysts, including those associated with the underwriters of this offering, will initiate or maintain research coverage of us or our Common Stock. In addition, regulatory rules prohibit research analysts associated with the co-managers of this offering from publishing or otherwise distributing a research report or from making a public appearance regarding us for 15 days prior to and after the expiration, waiver, or termination of any lock-up agreement that we or certain of our stockholders have entered into with the underwriters of this offering. Accordingly, it could be the case that research concerning our results of operations or the possible effects on us of significant news or a significant event will not be published or will be published on a delayed basis. A lack of research or the inability of certain research analysts to publish research relating to our results of operations or significant news or a significant event in a timely manner could materially and adversely affect the trading price and liquidity of our Common Stock.
Certain participants in our directed share program must hold their shares for a minimum of 180 days following the date of this prospectus and, accordingly, will be subject to market risks not imposed on other investors in the offering.
At our request, the underwriters have reserved up to 5.0% of the shares of our Common Stock to be offered by this prospectus for sale, at the initial public offering price, to our directors, officers, employees, friends, family, and business associates. Purchasers of these shares that have entered into a lockup agreement with the underwriters in connection with this offering will be required to agree that they will not, subject to certain exceptions, dispose of or hedge any of such shares of Common Stock held by them for at least 180 days after the date of this prospectus. As a result of the lockup restriction, these purchasers may face risks not faced by other investors that have the right to sell their shares at any time following the offering. These risks include the market risk of holding our shares during the period that such restrictions are in effect. In addition, the price of our Common Stock may decrease following the expiration of the lockup period if there is an increase in the number of shares for sale in the market.
We will have broad discretion in the use of a significant part of the net proceeds from this offering and may not use them effectively.
Our management currently intends to use the net proceeds from this offering in the manner described in “Use of Proceeds,” and will have broad discretion in the application of the net proceeds from this offering. We may invest or spend the proceeds of offerings in ways with which you may not agree or in ways which may not enhance the value of our Common Stock.
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which reflect our current views regarding our business, financial performance, growth prospects and strategies, market opportunities, and market trends. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of these words or other comparable words. All of the forward-looking statements included in this prospectus are subject to various risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results, performance, and achievements could differ materially from those expressed in or by the forward-looking statements and may be affected by a variety of risks and other factors. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from such forward-looking statements. These factors include, but are not limited to, those factors described in “Risk Factors” beginning on page 22 of this prospectus. The “Risk Factors” section should not be construed as exhaustive and should be read in conjunction with other cautionary statements included elsewhere in this prospectus.
You are cautioned not to place undue reliance on any forward-looking statements included in this prospectus. All forward-looking statements are made as of the date of this prospectus and the risk that actual results, performance, and achievements will differ materially from the expectations expressed in or referenced by this prospectus will increase with the passage of time. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law. In light of the significant uncertainties inherent in the forward-looking statements included in this prospectus, the inclusion of such forward-looking statements should not be regarded as a representation by us, the underwriters, or any other person that the objectives and strategies set forth in this prospectus will be achieved.
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USE OF PROCEEDS
We estimate that the net proceeds to us from this offering will be approximately $231.9 million, or $267.0 million if the underwriters exercise in full their option to purchase additional shares of our Common Stock from us, in each case, after deducting underwriting discounts and commissions and other estimated expenses. Total estimated expenses associated with this offering are approximately $5.2 million, of which approximately $3.2 million have been previously paid and approximately $2.0 million will be paid using proceeds from this offering.
We will contribute the net proceeds from this offering to the OP in exchange for a number of OP Units that is equal to the number of shares of Common Stock we issue.
The OP intends to use the net proceeds received from us as follows:
approximately $159.9 million to repay borrowings under the Revolving Credit Facility; and
approximately $16.0 million to repay borrowings under the Term Loan Credit Facility.
The OP expects to use any remaining net proceeds (including any net proceeds from the exercise of the underwriters’ option to purchase additional shares) for general business and working capital purposes, including potential future acquisitions. No acquisitions are probable as of the date of this prospectus.
The following table sets forth the maturity and interest rates of the indebtedness to be repaid as of June 30, 2024:
Indebtedness to be Repaid
Maturity Date
Interest Rate
Revolving Credit Facility
March 8, 2025
SOFR plus 2.36%
Term Loan Credit Facility
March 31, 2027
SOFR plus 1.80%
Certain of the underwriters and/or their respective affiliates are acting as agents, arrangers, and/or lenders under or may hold positions in the indebtedness to be repaid and accordingly will receive a portion of the proceeds from this offering. See “Underwriting—Other Relationships.”
Pending the permanent use of the net proceeds from this offering, we intend to invest the net proceeds in interest-bearing accounts, short-term investment-grade securities, money-market accounts, or other investments that are consistent with our intention to qualify for taxation as a REIT for U.S. federal income tax purposes.
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DISTRIBUTION POLICY
Following completion of this offering, we intend to make regular quarterly distributions to holders of our Common Stock.
We intend to make a pro rata distribution with respect to the period commencing after the completion of this offering and ending on December 31, 2024, assuming a distribution of $0.20 per share for a full quarter. On an annualized basis, this would be $0.81 per share, or an annual distribution rate of approximately 4.3%, based on an initial public offering price of $19.00 per share. We estimate that this initial annual distribution rate will represent approximately 87.9% of our estimated cash available for distribution to stockholders for the 12 months ending June 30, 2025. Our intended initial annual distribution rate has been established based on our estimate of cash available for distribution for the 12 months ending June 30, 2025, which we have calculated based on adjustments to our pro forma net income for the year ended December 31, 2023 and the six months ended June 30, 2024. This estimate was based on our pro forma operating results and does not take into account our long-term business and growth strategies, nor does it take into account any unanticipated expenditures we may have to make or any financings for such expenditures. In estimating our cash available for distribution for the 12 months ending June 30, 2025, we have made certain assumptions as reflected in the table and footnotes below.
Our estimate of cash available for distribution does not include the effect of any changes in our working capital resulting from changes in our working capital accounts. It also does not reflect the amount of cash estimated to be used for investing activities, financing activities, or other activities. Any such investing and/or financing activities may have a material and adverse effect on our estimate of cash available for distribution. Because we have made the assumptions described herein in estimating cash available for distribution, we do not intend this estimate to be a projection or forecast of our actual results of operations, FFO, AFFO, liquidity, or financial condition, and we have estimated cash available for distribution for the sole purpose of determining our estimated initial annual distribution amount. Our estimate of cash available for distribution should not be considered as an alternative to cash flow from operating activities (computed in accordance with GAAP) or as an indicator of our liquidity. In addition, the methodology upon which we made the adjustments described herein is not necessarily intended to be a basis for determining future distributions.
We intend to maintain our initial distribution rate for the 12-month period following the completion of this offering unless our results of operations, FFO, AFFO, liquidity, cash flows, financial condition, prospects, economic conditions, or other factors differ materially and adversely from the assumptions used in projecting our initial distribution rate. We believe that our estimate of cash available for distribution constitutes a reasonable basis for setting the initial distribution rate. However, we cannot assure you that our estimate will prove accurate, and actual distributions may therefore be significantly below the expected distributions. Our actual results of operations will be affected by a number of factors, including the revenue received from our properties, our operating expenses, interest expense, and unanticipated capital expenditures. We may, from time to time, be required, or elect, to incur indebtedness to pay distributions.
We cannot assure you that our estimated distributions will be made or sustained or that our board of directors will not change our distribution policy in the future. Any distributions will be at the sole discretion of our board of directors, and their form, timing, and amount, if any, will depend upon a number of factors, including our actual results of operations, FFO, AFFO, liquidity, cash flows and financial condition, the revenue we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and limitations contained in our New Revolving Credit Facility and New Delayed Draw Term Loan that restrict us from paying distributions upon the occurrence of a default or event of default, our REIT taxable income, the annual REIT distribution requirements, applicable law, including restrictions on distributions under the MGCL, and such other factors as our board of directors deems relevant. If in the future a default or event of default occurs, our New Revolving Credit Facility and New Delayed Draw Term Loan may limit our ability to make distributions to include only distributions made pursuant to stock option or other benefit plans and distributions to our stockholders and OP unitholders that are required to maintain our REIT status and to avoid payment of federal or state income or excise tax. In addition, if certain payment and/or bankruptcy defaults occur, or if our loans have been accelerated due to any other event of default, then we will not be permitted to make any distributions. For more information regarding risk factors that could materially and adversely affect us and our ability to make cash distributions, see “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock—We may not be able to make distributions to our stockholders at the times or in the amounts we expect, or at all.” If our operations do not generate sufficient cash flow to enable us to pay our intended or required distributions, we may be required either to fund distributions from working capital, borrow, or raise equity or reduce such distributions. In addition, our charter allows
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us to issue preferred stock that could have a preference on distributions and could limit our ability to make distributions to our common stockholders. Additionally, under certain circumstances, agreements relating to our indebtedness could limit our ability to make distributions to our stockholders.
U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, and that it pay tax at the corporate rate to the extent that it annually distributes less than 100% of its REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains. In addition, a REIT will be required to pay a 4% non-deductible excise tax on the amount, if any, by which the distributions it makes in a calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income, and 100% of its undistributed income from prior years. For more information, see “Material U.S. Federal Income Tax Considerations.” We anticipate that our estimated cash available for distribution will be sufficient to enable us to meet the annual distribution requirements applicable to REITs and to avoid or minimize the imposition of corporate and excise taxes. However, under some circumstances, we may be required to make distributions in excess of cash available for distribution in order to meet these distribution requirements or to avoid or minimize the imposition of tax and we may need to borrow funds to make certain distributions.
The following table sets forth calculations relating to the estimated initial distribution based on our pro forma net income for the 12 months ended June 30, 2024 and is provided solely for the purpose of illustrating the estimated initial distribution and is not intended to be a basis for future distributions.
 
(in thousands)
Pro forma net loss for the year ended December 31, 2023
$(24,398)
Less: Pro forma net loss for the six months ended June 30, 2023
(20,131)
Add: Pro forma net loss for the six months ended June 30, 2024
(4,838)
Pro forma net loss for the 12 months ended June 30, 2024
(9,105)
Add: Estimated net increases in contractual lease revenues(1)
648
Add: Real estate depreciation and amortization
28,265
Add: Non-cash impairment charges
591
Add: Non-cash interest expense
1,584
Add: Non-cash compensation expense(2)
3,943
Add: Amortization of lease intangibles(3)
1,809
Less: Net decrease in contractual lease revenues, due to tenant lease expirations, dispositions, and other vacancies(4)
(1,340)
Less: Estimated recurring capital expenditure(5)
(210)
Less: Straight-line rent adjustment(6)
(1,554)
Estimated cash available for distribution for the 12 months ending June 30, 2025
$24,631
Our stockholders' share of estimated cash available for distribution(7)
13,793
Non-controlling interests' share of estimated cash available for distribution(8)
10,838
Estimated initial annual distribution per share of Common Stock and per OP Unit
0.81
Total estimated initial annual distributions to stockholders(9)
12,131
Total estimated initial annual distribution to non-controlling interests(10)
9,521
Total estimated initial annual distribution to stockholders and non-controlling interests
21,652
Payout ratio(11)
87.9%
(1)
Represents contractual increases in rental revenue from:
-
Scheduled fixed rent increases;
-
Contractual increases including (a) increases that have already occurred but were not in effect for the entire 12 months ended June 30, 2024 and (b) actual increases that have occurred from July 1, 2024 to July 31, 2024); and
-
Net increases from new leases or renewals that were not in effect for the entire 12 months ended June 30, 2024 or that will go into effect during the 12 months ending June 30, 2025 based upon leases entered into through July 31, 2024.
(2)
Represents non-cash stock-based compensation expense related to equity-based awards granted to non-employee directors, executive officers and other employees after the completion of this offering and reflected in our pro forma net income for the 12 months ended June 30, 2024.
(3)
Represents non-cash amortization of lease intangibles through revenue during the 12 months ended June 30, 2024 on a pro forma basis.
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(4)
Represents decreases in lease revenue due to leases that (a) expired, terminated, or were disposed of during the 12 months ended June 30, 2024 and the period from July 1, 2024 to July 31, 2024 in each case, that were not re-leased as of July 31, 2024, or (b) will expire during the 12 months ending June 30, 2025 based upon leases entered into through July 31, 2024.
(5)
Represents estimated recurring capital expenditures to be made during the 12 months ending June 30, 2025. Substantially all of our properties are net leased to tenants who are required to pay substantially all property-level operating expenses. As a result, we historically have had limited capital expenditure requirements.
(6)
Represents the difference between the straight-line lease revenue recognized for GAAP purposes, and the contractual amounts due under our long-term net leases during the 12 months ended June 30, 2024 on a pro forma basis.
(7)
Based on estimated ownership by our Company of approximately 56.0% of the general and limited partnership interests in the OP.
(8)
Represents the share of our estimated cash available for distribution for the 12 months ending June 30, 2025 attributable to the holders of limited partnership interests in the OP other than our Company.
(9)
Based on a total of 14,977,310 shares of our Common Stock to be outstanding upon completion of this offering.
(10)
Based on a total of 11,754,670 OP Units to be outstanding upon completion of this offering (excluding OP Units held by our Company).
(11)
Calculated as total estimated initial annual distribution to stockholders divided by our stockholders’ share of estimated cash available for distribution for the 12 months ending June 30, 2025. If the underwriters exercise in full their option to purchase additional shares of Common Stock, our total estimated initial annual distribution to stockholders and non-controlling interests would be $23.3 million and our payout rate would be 94.4%.
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CAPITALIZATION
The following table sets forth:
the historical capitalization of our predecessor as of June 30, 2024, on an actual basis;
our unaudited pro forma capitalization as of June 30, 2024, on a pro forma basis to give effect to the REIT Contribution Transactions and Internalization; and
our unaudited pro forma capitalization as of June 30, 2024, on a pro forma as adjusted basis to give effect to the transactions described in the preceding bullet and the issuance by us of 13,200,000 shares of Common Stock in this offering at the initial public offering price of $19.00 per share and the use of proceeds therefrom as described under “Use of Proceeds.”
This table should be read in conjunction with “Use of Proceeds,” “Selected Consolidated Historical and Pro Forma Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the audited historical consolidated financial statements and unaudited historical condensed consolidated financial statements of our predecessor, and our unaudited pro forma condensed consolidated financial statements and, in each case, the related notes thereto, included elsewhere in this prospectus.
 
As of June 30, 2024
(in thousands, except share and per share amounts)
Historical
Pro Forma
(unaudited)
Pro Forma As
Adjusted
(unaudited)
Cash, cash equivalents and restricted cash
$16,621
$17,150
$71,455
Debt, net(1)
427,435
427,435
249,869
Convertible non-controlling preferred interests
103,724
Equity:
 
 
 
Partners' capital
185,951
Common Stock, par value $0.01 per share
 
 
 
Common Stock, 400,000,000 shares authorized, 100 shares issued and outstanding, historical; 1,777,310 shares issued and outstanding, pro forma; and 14,977,310 shares issued and outstanding, pro forma as adjusted(2)
18
150
Additional paid-in capital
1
45,795
274,343
Non-controlling interests in the OP(3)
245,062
245,062
Total equity
$185,952
$290,875
$519,555
Total capitalization
$717,111
$718,310
$769,424
(1)
Upon completion of this offering and following repayment of our obligations under the ABS Notes, we expect our New Revolving Credit Facility to have $196.2 million of availability.
(2)
Pro forma shares issued and outstanding excludes the shares of Common Stock to be issued in this offering.
Pro forma as adjusted shares issued and outstanding includes 13,200,000 shares of our Common Stock to be issued in this offering and excludes (i) 1,980,000 shares of our Common Stock issuable upon the exercise in full of the underwriters’ option to purchase additional shares of Common Stock and (ii) 1,722,719 shares of our Common Stock issuable in the future under the 2024 Equity Incentive Plan, as more fully described in “Executive Compensation — Material Terms of the 2024 Equity Incentive Plan”.
Pro forma and pro forma as adjusted shares issued and outstanding include an aggregate of 1,777,310 shares of Common Stock to be issued in connection with the U.S. common unit holders’ REIT Contribution Transactions.
(3)
Pro forma and pro forma as adjusted non-controlling interests includes (1) an aggregate of 5,742,303 OP Units to be issued in connection with the U.S. and Canadian common unit holders’ REIT Contribution Transactions, (2) an aggregate of 5,080,877 OP Units to be issued in connection with the preferred unit holders’ REIT Contribution Transactions, and (3) an aggregate of 931,490 OP Units to be issued in connection with the Internalization.
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DILUTION
Purchasers of our Common Stock offered by this prospectus will experience an immediate and substantial dilution of the net tangible book value of our Common Stock from the initial public offering price. As of June 30, 2024, our predecessor had a net tangible book value of approximately $92.7 million, or $12.32 per share. After giving effect to the REIT Contribution Transactions, the Internalization, this offering, and the deduction of underwriting discounts and commissions and estimated offering and other expenses, the pro forma net tangible book value of our Company as of June 30, 2024 would have been approximately $425.7 million, or $15.92 per share of our Common Stock and OP Units to be outstanding upon completion of this offering. This amount represents an immediate increase in net tangible book value of $3.60 per share to contributing investors and an immediate dilution in pro forma net tangible book value of $3.08 per share from the initial public offering price of $19.00 per share of our Common Stock to new public investors.
The following table illustrates these per share differences:
Initial public offering price per share of Common Stock
 
 
$19.00
Net tangible book value per share of our predecessor before the REIT Contribution Transactions, the Internalization, and this offering(1)
$12.32
 
 
Increase in net tangible book value per share attributable to the REIT Contribution Transactions and the Internalization(2)
$2.23
 
 
Net tangible book value per share after the REIT Contribution Transactions and the Internalization
 
$14.55
 
Increase in net tangible book value per share attributable to this offering(3)
 
$1.37
 
Pro forma net tangible book value per share of our Company after the REIT Contribution Transactions, the Internalization, and this offering
 
 
$15.92
Dilution in pro forma net tangible book value per share to new investors(4)
 
 
$3.08
(1)
Net tangible book value per share of our predecessor before the REIT Contribution Transactions, the Internalization and this offering is determined by dividing the net tangible book value of our predecessor as of June 30, 2024 of $196,392,138, less the $103,724,068 fixed liquidation value of the preferred units of our predecessor, by 7,519,613 shares of our Common Stock and OP Units.
(2)
Represents the difference between the net tangible book value per share after the REIT Contribution Transactions and the Internalization and the net tangible book value per share of our predecessor before the REIT Contribution Transactions, the Internalization, and this offering. The Company recognized $103,724,068 of additional net tangible book value and issued 5,080,877 OP Units in connection with the REIT Contribution Transactions. As part of the REIT Contribution Transactions, the preferred units of our predecessor are converted to 5,080,877 OP Units. The preferred conversion is calculated by dividing the $103,724,068 fixed liquidation preference of the preferred units by the sum of the $19.00 initial public offering price per share of our Common Stock and $1.41 (which represents the preferred unit holders’ proportional share of the cost of the Internalization). The Company recognized $579,234 of additional net tangible book value and issued 931,490 OP Units in connection with the Internalization. The net tangible book value per share after the REIT Contribution Transactions and the Internalization is determined by dividing the total net tangible book value of $196,971,372 by the total diluted share count of 13,531,980.
(3)
Represents the difference between the pro forma net tangible book value per share of our Company after the REIT Contribution Transactions, the Internalization, and this offering and the net tangible book value per share after the REIT Contribution Transactions and the Internalization. The Company recognized an additional $228,679,766 of net tangible book value as a result of this offering, representing $250,800,000 of gross proceeds net of $22,120,234 of underwriting fees, discounts, and commissions and offering expenses, but excluding shares and related proceeds that may be issued or received by us if the underwriters exercise in full their option to purchase additional shares of our Common Stock. The Company issued 13,200,000 shares of Common Stock as a result of this offering. The net tangible book value per share after the REIT Contribution Transactions, and the Internalization, and this offering is determined by dividing the total net tangible book value of $425,651,138 by the total diluted share count of 26,731,980.
(4)
Dilution is determined by subtracting pro forma net tangible book value per share of our Company after giving effect to the REIT Contribution Transactions, the Internalization, and this offering from the initial public offering price paid by a new investor for a share of our Common Stock.
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Differences between New Investors and Existing Investors in the Number of Shares and Amount Paid
The table below summarizes (i) the difference between the number of shares of Common Stock and OP Units to be received by our contributing investors and the number of shares of Common Stock to be received by new investors in this offering, and (ii) the difference between our pro forma net tangible book value as of June 30, 2024 after giving effect to the REIT Contribution Transactions and the Internalization, but prior to this offering and the total consideration paid in cash by new investors in this offering.
 
Shares/OP Units
Issued
Pro Forma
Net Tangible
Book Value
of
Contributions/
Cash(1)
Average
Price Per
Share/OP Unit
 
Number
Percent
Amount
Percent
Amount
Existing Investors(2)
13,531,980
50.6%
$196,971,372
44.0%
$14.55
New investors
13,200,000
49.4%
$250,800,000
56.0%
$19.00
Total
26,731,980
100.0%
$447,771,372
100.0%
$16.75
(1)
Represents pro forma net tangible book value as of June 30, 2024 after giving effect to the REIT Contribution Transactions, the Internalization and this offering.
(2)
Includes OP Units to be issued in connection with the REIT Contribution Transactions and the Internalization and shares of Common Stock to be issued in connection with the REIT Contribution Transactions, but excluding any shares that may be issued by us if the underwriters exercise in full their option to purchase additional shares of our Common Stock.
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SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
Set forth below is selected financial and other data presented on (i) a historical basis for our predecessor and its consolidated subsidiaries and (ii) a pro forma basis for our company after giving effect to the completion of this offering, the REIT Contribution Transactions, the Internalization and the other adjustments described in the unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. We have not presented historical data for FrontView REIT, Inc. because we have not had any corporate activity since our formation other than the issuance of shares of Common Stock in connection with our initial capitalization and activity in connection with this offering. Accordingly, we do not believe that a presentation of the historical results of FrontView REIT, Inc. would be meaningful. Upon completion of the REIT Contribution Transactions and Internalization, substantially all of our assets will be held by, and substantially all of our operations will be conducted through, the OP. We will contribute the net proceeds received by us from this to the OP in exchange for OP Units. For more information, please see “REIT Contribution Transactions and Internalization.”
Our predecessor’s historical consolidated balance sheet data as of December 31, 2023 and 2022 and consolidated results of operations for the years ended December 31, 2023 and 2022 have been derived from our predecessor’s audited historical consolidated financial statements included elsewhere in this prospectus. The financial information below also includes our predecessor’s historical unaudited condensed consolidated balance sheet data as of June 30, 2024 and unaudited condensed consolidated results of operations for the six months ended June 30, 2024 and 2023, which have been derived from our predecessor’s historical unaudited condensed consolidated financial statements contained elsewhere in this prospectus. The condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and Article 10 of Regulation S-X. We believe all adjustments necessary for a fair presentation have been included in these interim condensed consolidated financial statements (which include only normal recurring adjustments). The historical consolidated financial data included below and set forth elsewhere in this prospectus are not necessarily indicative of our future performance.
Our unaudited selected pro forma consolidated operating and balance sheet data as of and for the six months ended June 30, 2024 and for the year ended December 31, 2023, is presented (i) with respect to statements of operations data, giving effect to the REIT Contribution Transactions, the Internalization, and the completion of this offering and the use of proceeds described herein, assuming each of the transactions was completed on January 1, 2023, and (ii) with respect to balance sheet data, giving effect to the REIT Contribution Transactions, the Internalization, and the completion of this offering and the use of proceeds described herein, assuming each of the transactions was completed on June 30, 2024, in each case, giving effect to the other adjustments described in the unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. The preparation of the unaudited pro forma condensed consolidated financial statements requires management to make estimates and assumptions deemed appropriate. The unaudited pro forma condensed consolidated financial statements are not intended to represent, or be indicative of what our actual financial position and results of operations would have been as of the date and for the period indicated, nor does it purport to represent our future financial position or results of operations.
Statement of Operations Data:
 
Six months ended June 30,
Years ended December 31,
(in thousands, except share and per share amounts)
Company Pro
Forma Condensed
Consolidated
(unaudited)
2024
Historical
Condensed
Consolidated
(unaudited)
2024
Historical
Condensed
Consolidated
(unaudited)
2023
Company Pro
Forma
Consolidated
(unaudited)
2023
Historical
Consolidated
2023
Historical
Consolidated
2022
Revenues
 
 
 
 
 
 
Rental revenues
$29,156
$29,869
$22,300
$57,891
$48,266
$39,863
Operating expenses
 
 
 
 
 
 
Depreciation and amortization
14,249
14,296
11,156
28,860
24,730
21,801
Property operating expenses
3,664
3,691
2,627
6,549
5,826
4,498
Property management fees
1,007
725
1,616
918
Asset management fees
2,068
2,070
4,139
3,638
General and administrative expenses
6,471
1,361
3,081
12,475
8,054
1,184
Total operating expenses
24,384
22,423
19,659
47,884
44,365
32,039
Other expenses (income)
 
 
 
 
 
 
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Six months ended June 30,
Years ended December 31,
(in thousands, except share and per share amounts)
Company Pro
Forma Condensed
Consolidated
(unaudited)
2024
Historical
Condensed
Consolidated
(unaudited)
2024
Historical
Condensed
Consolidated
(unaudited)
2023
Company Pro
Forma
Consolidated
(unaudited)
2023
Historical
Consolidated
2023
Historical
Consolidated
2022
Interest expense
8,738
13,292
7,268
17,517
18,377
12,464
Loss/ (gain) on sale of real estate
(337)
332
(725)
201
Impairment loss
591
591
407
Income taxes
281
281
158
390
316
430
Management Internalization expense
16,498
Total other expenses
9,610
13,827
7,758
34,405
18,375
13,095
Operating loss
(4,838)
(6,381)
(5,117)
(24,398)
(14,474)
(5,271)
Gain from acquisition of equity method investment
12,988
Equity (loss)/ income from investment in an unconsolidated entity
60
(38)
(109)
Net loss
(4,838)
(6,381)
(5,057)
(24,398)
(1,524)
(5,380)
Net loss attributable to convertible non-controlling preferred interests
1,743
1,364
424
910
Net loss attributable to NADG NNN Property Fund LP
4,638
3,693
1,100
4,470
Net loss attributable to non-controlling interests
2,127
10,728
Net loss attributable to common stockholders
$(2,711)
$
$
$(13,670)
$
$
Basic and Diluted net loss per share
$(0.18)
 
 
$(0.91)
 
 
Balance Sheet Data (at period end):
 
As of June 30,
As of December 31,
(in thousands)
Company Pro
Forma Condensed
Consolidated
(unaudited)
2024
Historical
Condensed
Consolidated
(unaudited)
2024
Historical
Consolidated
2023
Historical
Consolidated
2022
Total real estate held for investment, at cost
$640,264
$640,264
$647,180
$462,923
Total assets
798,372
745,466
772,007
626,790
Total debt, net
249,869
427,435
436,452
281,307
Total liabilities
278,817
455,791
471,321
311,103
Total convertible non-controlling preferred interests, partners' capital and stockholders' equity
519,555
289,675
300,687
315,687
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Other Data:
 
Six months ended June 30,
Years ended December 31,
(in thousands)
Company Pro
Forma Condensed
Consolidated
(unaudited)
2024
Historical
Condensed
Consolidated