Depreciation and Amortization
Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets:
| | | | | |
Buildings | 13 – 35 years |
Building improvements | 15 years |
Tenant improvements | Shorter of the term of the related lease or useful life |
Acquired in-place leases or leasing commissions | Remaining terms of the respective leases |
Assembled workforce | 3 years |
Computer equipment and other corporate assets | 3 – 5 years |
Total depreciation and amortization expense was $11.0 million and $5.9 million during the three months ended March 31, 2022 and 2021, respectively.
Depreciation expense on real estate held for investment and computer equipment and other corporate assets was $7.3 million and $4.1 million during the three months ended March 31, 2022 and 2021, respectively.
Amortization expense on acquired in-place lease and assembled workforce intangible assets, and leasing commission costs were $3.6 million and $1.8 million during the three months ended March 31, 2022 and 2021, respectively.
Repairs and maintenance are charged to property operating expense as incurred; major renewals and betterments that extend the useful life or improve the operating capacity of the asset are capitalized. Upon the sale or disposition of a property, the asset and the related accumulated depreciation are removed from the condensed consolidated balance sheets with the difference between the proceeds received, net of sales costs, and the carrying value of the asset group recorded as a gain or loss on sale, subject to impairment considerations.
Assets Held for Sale
Properties classified as held for sale, including the related intangibles, on the condensed consolidated balance sheets include only those properties available for immediate sale in their present condition, which are actively being marketed, and for which management believes that it is probable that a sale of the property will be completed within one year. Properties held for sale are carried at the lower of cost or fair value, less estimated selling costs. No depreciation expense or amortization expense is recognized on properties held for sale and the related intangible assets or liabilities once they have been classified as such. Only disposals representing a strategic shift in operations are presented as discontinued operations. Accordingly, we have not reclassified results of operations for properties disposed during the interim period ended March 31, 2022 or held for sale as discontinued operations, as these events are a normal part of the Company’s operations and do not represent strategic shifts in the Company’s operations. As of March 31, 2022 and December 31, 2021, there was one property classified as held for sale.
Impairment of Long-Lived Assets
Fair value measurement of an asset group occurs when events or changes in circumstances related to an asset indicate that the carrying amount of the asset is no longer recoverable. An example of an event or changed circumstance is a reduction in the expected holding period of a property. If indicators are present, the Company will prepare a projection of the undiscounted future cash flows of the property, excluding interest charges, and determine if the carrying amount of the asset group is recoverable. When a carrying amount is not recoverable, an impairment loss is recognized to the extent that the carrying amount of the asset group exceeds its fair market value. The Company estimates fair value using data such as operating income, estimated capitalization rates or multiples, leasing prospects, local market information, and with regard to assets held for sale, based on the estimated or negotiated selling price, less estimated costs of disposal. Based on these unobservable inputs, the Company determined that its valuations of impaired real estate and intangible assets fall within Level 3 of the fair value hierarchy under ASC Topic 820.
The following table summarizes the provision for impairment during the periods indicated below (in thousands):
| | | | | | | | | | | |
| Three Months Ended
March 31, |
| 2022 | | 2021 |
| Total provision for impairment | $ | — | | | $ | 69 | |
Number of properties: (1) | | | |
| Classified as held for sale | — | | 1 |
| Disposed within the period | — | | — |
(1) Includes the number of properties that were impaired and classified as held for sale or impaired and disposed of during the respective periods. Excludes properties that did not have impairment recorded during the period.
Cash, Cash Equivalents and Restricted Cash
The Company considers all cash balances, money market accounts and highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Restricted cash includes cash restricted for property tenant improvements and cash proceeds from the sale of assets held by qualified intermediaries in anticipation of the acquisition of replacement properties in tax-free exchanges under Section 1031 of the Code. Restricted cash is included in cash, cash equivalents, and restricted cash on the condensed consolidated balance sheets. The Company had no restricted cash as of March 31, 2022 or December 31, 2021.
The Company’s bank balances as of March 31, 2022 and December 31, 2021 include certain amounts over the Federal Deposit Insurance Corporation limits.
Revenue Recognition and Related Matters
The Company’s rental revenue is primarily related to rent received from tenants under leases accounted for as operating leases. Rent from leases that have fixed and determinable rent increases is recognized on a straight-line basis over the non-cancellable initial term of the lease and reasonably certain renewal periods, from the later of the date of the commencement of the lease or the date of acquisition of the property subject to the lease. The difference between rental revenue recognized and the cash rent
due under the provisions of the lease is recorded as deferred rent receivable and included as a component of other assets in the condensed consolidated balance sheets.
Variable lease revenues include tenant reimbursements, lease termination fees, changes in the index or market-based indices after the inception of the lease or percentage rents. Variable lease revenues are not recognized until the specific events that trigger the variable payments have occurred. The Company recognized variable lease revenue related to tenant reimbursements and lease termination fees for the periods presented.
Capitalized above-market and below-market lease values are amortized on a straight-line basis as a reduction or increase of rental revenue as appropriate over the remaining non-cancellable terms of the respective leases.
Reserves for uncollectible amounts are provided against the portion of accounts receivable, net including straight-line rents, which is estimated to be uncollectible, which includes a portfolio-based reserve and reserves for specifically disputed amounts. Such reserves are reviewed each period based upon recovery experience and the specific facts of each outstanding amount. As of March 31, 2022 and December 31, 2021, the Company had an immaterial reserve for uncollectible amounts specific to uncharged reimbursable expenses.
Mortgage Loan Receivable
The Company holds one loan receivable, which is a mortgage loan secured by real estate, for long-term investment. The loan receivable is carried at amortized cost.
The Company recognizes interest income on the loan receivable using the effective-interest method. Direct costs associated with originating loans, along with any premium or discount, is deferred and amortized as an adjustment to interest income over the term of the related loan receivable using the effective interest method. The Company evaluates its loans receivable balance, including accrued interest, for potential credit losses by analyzing the credit of the borrower, the remaining time to maturity of the loan, collateral value and quality (if any), and other relevant factors. A loan receivable is placed on nonaccrual status when management determines that full recovery of the contractually specified payments of principal and interest is doubtful.
Stock-Based Compensation
The Company has a share-based compensation award program for our employees and directors. Stock-based compensation expense associated with these awards is recognized in general and administrative expenses in our condensed consolidated statements of operations and comprehensive income. We classify stock-based payment awards either as equity awards or liability awards based upon an analysis of ASC 718 and ASC 480. Equity classified awards are measured based on the fair value on the date of grant. Liability classified awards are remeasured to fair value each reporting period. Stock-based compensation expense is recognized over the requisite service or performance period. The Company recognizes forfeitures as they occur.
Forward Equity Sales
The Company occasionally sells shares of common stock through forward sale agreements to enable the Company to set the price of such shares upon pricing the offering (subject to certain adjustments) while delaying the issuance of such shares and the receipt of the net proceeds by the Company.
To account for the forward sale agreements, the Company considers the accounting guidance governing financial instruments and derivatives. To date, the Company has concluded that its forward sale agreements are not liabilities as they do not embody obligations to repurchase its shares nor do they embody obligations to issue a variable number of shares for which the monetary value are predominantly fixed, varying with something other than the fair value of the shares, or varying inversely in relation to its shares. The Company then evaluates whether the agreements meet the derivatives and hedging guidance scope exception to be accounted for as equity instruments. The Company has concluded that the agreements are classifiable as equity contracts based on the following assessments: (i) none of the agreements’ exercise contingencies are based on observable markets or indices besides those related to the market for the Company’s own stock price and operations; and (ii) none of the settlement provisions precluded the agreements from being indexed to its own stock.
The Company also considers the potential dilution resulting from the forward sale agreements on the earnings per share calculations. Prior to settlement, a forward sale agreement will be reflected in the diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of the Company’s common stock used in diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares of the Company’s common stock that would be issued upon full physical settlement of such forward sale agreement over the number of shares of the Company’s common stock that could be purchased by the Company in the market (based on the average market price during the period) using the proceeds receivable upon full physical settlement (based on the adjusted forward sale price at the end of the reporting period). Consequently, prior to settlement of a forward sale agreement, there will be no dilutive effect on the Company’s earnings per share except during periods when the average market price of the Company’s common stock is above the adjusted forward sale price. However, upon settlement of a forward sales agreement, if the Company’s elects to physically settle or net share settle such forward sale agreement, delivery of the Company’s shares will result in dilution to the Company’s earnings per share.
Transaction Costs
Transaction costs were $0.2 million for each of the three months ended March 31, 2022 and 2021, respectively, and represent acquisition related expenses, including costs associated with abandoned acquisitions.
Income Taxes
The Company elected to be treated and qualify as a REIT for U.S. federal income tax purposes beginning with its short taxable year ended December 31, 2019. To qualify as a REIT, the Company must meet certain organizational, income, asset and distribution tests. Accordingly, the Company will generally not be subject to corporate U.S. federal or state income tax to the extent that it makes qualifying distributions of all of its taxable income to its stockholders and provided it satisfies on a continuing basis, through actual investment and operating results, the REIT requirements, including certain asset, income, distribution and share ownership tests. The Company intends to make sufficient distributions during 2022 to receive a full dividends paid deduction.
NETSTREIT TRS is treated as a taxable REIT subsidiary which may be subject to U.S. federal, state, and local income taxes on its taxable income. In general, NETSTREIT TRS may perform services for tenants of the Company, hold assets that the Company cannot hold directly and may engage in any real estate or non-real estate-related business.
The Company recognizes franchise and other state and local tax expenses in general and administrative and recognized state and federal income tax expense in income tax expense in the accompanying condensed consolidated statements of operations and comprehensive income.
All provisions for federal income taxes in the accompanying condensed consolidated financial statements are attributable to NETSTREIT TRS. Deferred income tax expense and its ending balance in deferred tax assets and liabilities were immaterial for the years and periods presented.
The Company has elected to record related interest and penalties, if any, as general and administrative expense or as income tax expense based on the nature of the tax on the condensed consolidated statements of operations and comprehensive income. The Company had no material interest or penalties relating to income, franchise, and other state and local taxes for the years and periods presented. Additionally, there were no material accruals for interest or penalties as of March 31, 2022 and December 31, 2021.
The Company files federal, state and local income tax returns. The Company regularly analyzes its various federal and state filing positions and only recognizes the income tax effect in its financial statements when certain criteria regarding uncertain income tax positions have been met. The Company believes that its income tax positions would more likely than not be sustained upon examination by all relevant taxing authorities. Therefore, no provisions for uncertain income tax positions have been recorded in the condensed consolidated financial statements.
All federal tax returns for years prior to 2019 are no longer subject to examination. Additionally, state tax returns for years prior to 2017 are generally no longer subject to examination.
Earnings Per Share
Earnings per common share has been computed pursuant to the guidance in FASB ASC Topic 260, Earnings per Share. Basic earnings per share (“EPS”) is computed by dividing net income allocated to common stockholders by the weighted-average number of common shares outstanding for the reporting period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. No effect is shown for any securities that are anti-dilutive. Net income allocated to common stockholders represents net income less income allocated to participating securities and noncontrolling interests. None of the Company’s equity awards are participating securities.
Fair Value Measurement
Fair value measurements are utilized in the accounting of the Company’s assets acquired and liabilities assumed in an asset acquisition and also affect the Company’s accounting for certain of its financial assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The hierarchy described below prioritizes inputs to the valuation techniques used in measuring the fair value of assets and liabilities. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs to be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows: Level 1 inputs, such as quoted prices in an active market; Level 2 inputs, which are observable inputs for similar assets; or Level 3 inputs, which are unobservable inputs.
The Company uses the following inputs in its fair value measurements:
–Level 2 inputs for its debt and derivative financial instrument fair value disclosures. See “Note 6 - Debt” and “Note 7 - Derivative Financial Instruments,” respectively; and
–Level 2 and Level 3 inputs when assessing the fair value of assets and liabilities in connection with real estate acquisitions and impairment. See “Note 4 - Real Estate Investments.”
The fair value of the Company’s cash, cash equivalents and restricted cash (including money market accounts), other assets and accounts payable, accrued expenses and other liabilities approximate their carrying value because of the short-term nature of these instruments. Provisions for impairment recognized in the three months ended March 31, 2021 related to an asset held for sale and the impairment was determined based on the estimated or negotiated selling price, less costs of disposal, compared to the carrying value of the property.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company is exposed to credit risk with respect to cash held at various financial institutions, access to its Credit Facility, amounts due under the mortgage loan receivable, and amounts due or payable under derivative contracts. The credit risk exposure with regard to the Company’s cash, credit facilities, and derivative instruments is spread among a diversified group of investment grade financial institutions.
During the three months ended March 31, 2022, the Company’s rental revenues were derived from 71 separate tenants leasing 354 total properties. During this period there were no tenants with rental revenue that exceeded 10% of total rental revenue.
During the three months ended March 31, 2021, the Company’s rental revenues were derived from 63 separate tenants leasing 234 total properties. During this period there were no tenants with rental revenue that exceeded 10% of total rental revenue.
Segment Reporting
The Company considers each one of its properties to be an operating segment, none of which meets the threshold for a reportable segment. The Company allocates resources and assesses operating performance based on individual property needs. All of the Company’s operating segments meet the aggregation criteria, and thus, the Company reports one segment, rental operations. There were no intersegment sales during the periods presented.
Recent Accounting Pronouncements Adopted
In March 2020, the FASB issued ASU 2020-04 “Topic 848: Reference Rate Reform.” ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives, and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. On July 1, 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company determined these elections have not materially impacted the Company's condensed consolidated financial statements. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
In August 2020, the FASB issued ASU 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models currently required. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. ASU 2020-06 also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted earnings per share calculation in certain areas. Effective January 1, 2022 the Company adopted this standard with no material impact to the condensed consolidated financial statements.
Note 3 – Leases
The Company acquires, owns and manages commercial single-tenant lease properties, with the majority being long-term triple-net leases where the tenant is generally responsible for all improvements and contractually obligated to pay all operating costs (such as real estate taxes, utilities and repairs and maintenance costs). As of March 31, 2022, the Company had investments in 361 single-tenant retail net leased properties spanning 42 states, with 71 different tenants represented across 23 retail sectors. As of March 31, 2022, the remaining terms of leases range from one to 32 years, with weighted average lease term of 9.6 years.
The Company’s property leases have been classified as operating leases and some have scheduled rent increases throughout the lease term. The Company’s leases typically provide the tenant one or more multi-year renewal options to extend their leases, subject to generally the same terms and conditions, including rent increases, consistent with the initial lease term.
All lease-related income is reported as a single line item, rental revenue (including reimbursable), in the condensed consolidated statements of operations and comprehensive income and is presented net of any reserves for uncollectible amounts. There were no material reserves for uncollectible amounts during the three months ended March 31, 2022.
The following table provides a disaggregation of lease income recognized under ASC 842 (in thousands):
| | | | | | | | | | | |
| Three Months Ended
March 31, |
| 2022 | | 2021 |
| Rental revenue | | | |
Fixed lease income (1) | $ | 18,067 | | | $ | 10,953 | |
Variable lease income (2) | 2,689 | | | 789 | |
| Other rental revenue: | | | |
| Above/below market lease amortization, net | 283 | | | 190 | |
| Lease incentives | (118) | | | — | |
| Rental revenue (including reimbursable) | $ | 20,921 | | | $ | 11,932 | |
(1) Fixed lease income includes contractual rents under lease agreements with tenants recognized on a straight-line basis over the lease term.
(2) Variable lease income primarily includes tenant reimbursements for real estate taxes, insurance, common area maintenance, and lease termination fees, and the write-off of uncollectible amounts.
Scheduled future minimum base rental payments (excluding base rental payments from properties classified as held for sale and straight-line rent adjustments for all properties) due to be received under the remaining non-cancelable term of the operating leases in place as of March 31, 2022 are as follows (in thousands):
| | | | | |
| Future Minimum Base
Rental Receipts |
| Remainder of 2022 | $ | 56,738 | |
| 2023 | 75,995 | |
| 2024 | 76,606 | |
| 2025 | 76,332 | |
| 2026 | 73,436 | |
| Thereafter | 406,911 | |
| $ | 766,018 | |
Future minimum rentals exclude amounts that may be received from tenants for reimbursements of operating costs and property taxes. In addition, the future minimum rents do not include any contingent rents based on a percentage of the lessees' gross sales or lease escalations based on future changes in the Consumer Price Index (“CPI”) or other stipulated reference rate.
Corporate Office Lease
In August 2021, the Company entered into a lease agreement on a new corporate office space, which commenced in October 2021 and is classified as an operating lease. The Company began operating out of the new office in February 2022. The lease has a remaining noncancellable lease term of 10.3 years that expires on July 31, 2032, with a one-time option to terminate in 2029 exercisable by the Company. The lease is also renewable at the Company’s option for two additional periods of five years. No renewals were incorporated in the calculation of the corporate lease right-of-use asset and liability as it is not reasonably certain that the Company will exercise the options. Further, the lease agreement does not contain any material residual value guarantees or material restrictive covenants. The corporate office lease contains variable lease costs related to the lease of parking spaces and non-lease components related to the reimbursement of property operating expenses and certain common area maintenance expenses, all of which are recognized as incurred. The Company elected to use the component practical expedient, which permits the Company to not separate non-lease components from lease components if timing and pattern of transfer is the same.
The following table presents the lease expense components for the three months ended March 31, 2022 (in thousands):
| | | | | | | | | | | |
| Three Months Ended
March 31, |
| 2022 | | 2021 |
| Operating lease cost | $ | 135 | | | $ | — | |
Variable lease cost | $ | 3 | | | $ | — | |
The Company recorded a right-of-use asset and operating lease liability of approximately $4.5 million at lease commencement. As of March 31, 2022, the right-of-use asset and operating lease liability were $4.5 million and $5.5 million, respectively. The right-of-use asset is included in other assets, net and the operating lease liability is included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.
The following table reflects the maturity analysis of payments due from the Company over the next five years and thereafter for the corporate office lease obligation as of March 31, 2022 (in thousands):
| | | | | |
| Future Minimum Lease Payments |
| Remainder of 2022 | $ | 150 | |
| 2023 | 533 | |
| 2024 | 617 | |
| 2025 | 636 | |
| 2026 | 653 | |
| Thereafter | 3,981 | |
| Total lease payments | 6,570 | |
Less: amount representing interest (1) | (1,090) | |
| Present value of operating lease liabilities | $ | 5,480 | |
(1) Imputed interest was calculated using a discount rate of 3.25%. The discount rate is based on the estimated incremental borrowing rate, calculated as the treasury rate for the same period as the underlying lease term, plus a spread determined using factors including REIT industry performance.
Note 4 – Real Estate Investments
As of March 31, 2022, the Company owned or had investments in 363 properties, including nine properties currently under development. The gross real estate investment portfolio, including properties under development, totaled approximately $1.15 billion and consisted of the gross acquisition cost of land, buildings, improvements, and lease intangible assets and liabilities. The investment portfolio is geographically dispersed throughout 42 states with gross real estate investments in Texas and Illinois representing 11.2% and 10.5%, respectively, of the total gross real estate investment of the Company’s entire portfolio.
Acquisitions
During the three months ended March 31, 2022, the Company acquired 34 properties for a total purchase price of $90.0 million, inclusive of $1.2 million of capitalized acquisition costs. During the three months ended March 31, 2021, the Company acquired 31 properties for a total purchase price of $88.2 million, inclusive of $1.1 million of capitalized acquisition costs.
The acquisitions were all accounted for as asset acquisitions. An allocation of the purchase price and acquisition costs paid for the completed acquisitions is as follows (in thousands):
| | | | | | | | | | | |
| Three Months Ended
March 31, |
| 2022 | | 2021 |
| Land | $ | 14,654 | | | $ | 21,490 | |
| Buildings | 60,088 | | | 48,999 | |
| Site improvements | 6,538 | | | 7,545 | |
| Tenant improvements | 1,160 | | | 1,587 | |
| In-place lease intangible assets | 8,872 | | | 10,942 | |
| Above-market lease intangible assets | 108 | | | — | |
| Construction-in-progress assets | — | | | — | |
| 91,420 | | | 90,563 | |
| Liabilities assumed | | | |
| Below-market lease intangible liabilities | (1,423) | | | (2,338) | |
| Accounts payable, accrued expense and other liabilities | (24) | | | — | |
| Purchase price (including acquisition costs) | $ | 89,973 | | | $ | 88,225 | |
Development
As of March 31, 2022, the Company had nine property developments under construction. During the three months ended March 31, 2022, the Company invested $5.0 million in property developments, including the acquisition of one new build-to-suit project with an initial purchase price of $1.0 million. During the three months ended March 31, 2022, the Company completed development on one project under development and reclassified approximately $4.7 million from property under development to land, building, and improvements in the accompanying condensed consolidated balance sheets. Additionally, on January 1, 2022, rent commenced on a development that was previously completed in the fourth quarter of 2021. The remaining nine developments in progress are expected to be substantially completed with rent commencing at various points throughout 2022. The purchase price, including acquisition costs, and subsequent development are included in property under development in the accompanying condensed consolidated balance sheets as of March 31, 2022.
Additionally, during the first three months of 2022, the Company capitalized less than $0.1 million of interest expense associated with properties under development. No interest expense was capitalized during the first three months of 2021.
During the three months ended March 31, 2021, the Company invested a combined total of $1.3 million in a development project in Yuma, Arizona. The Company has a non-binding purchase option to acquire the property upon completion. The Company’s total investment is expected to be $4.4 million with the sole tenant in the property commencing lease payments in 2022. These amounts are included in property under development in the accompanying condensed consolidated balance sheets as of December 31, 2021.
Dispositions
During the three months ended March 31, 2022, the Company sold one property for a total sales price, net of disposal costs, of $2.3 million, recognizing a net gain of $0.2 million on the sale.
There were no dispositions for the three months ended March 31, 2021.
Investment in Mortgage Loan Receivable
On January 26, 2022, the Company executed a fully collateralized $40.3 million loan receivable with a stated interest rate of 6.0%. The scheduled maturity date is July 26, 2023, however the Company has the right, subject to certain terms and conditions, to purchase a portion of the underlying collateralized property. The loan receivable is collateralized by real estate that is leased by three separate investment-grade tenants. The funds provided under the loan, in addition to loan origination costs of $0.1 million, are included in loan receivable, net in the accompanying condensed consolidated balance sheets as of March 31, 2022.
Note 5 – Intangible Assets and Liabilities
Intangible assets and liabilities consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Gross
Carrying
Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross
Carrying
Amount | | Accumulated Amortization | | Net Carrying Amount |
| Assets: | | | | | | | | | | | |
| In-place leases | $ | 124,605 | | | $ | (16,724) | | | $ | 107,881 | | | $ | 116,368 | | | $ | (13,408) | | | $ | 102,960 | |
| Above-market leases | 17,455 | | | (1,843) | | | 15,612 | | | 17,348 | | | (1,516) | | | 15,832 | |
| Assembled workforce | 873 | | | (665) | | | 208 | | | 873 | | | (592) | | | 281 | |
| Lease incentives | 5,343 | | | (188) | | | 5,155 | | | 5,821 | | | (122) | | | 5,699 | |
| Total intangible assets | $ | 148,276 | | | $ | (19,420) | | | $ | 128,856 | | | $ | 140,410 | | | $ | (15,638) | | | $ | 124,772 | |
| | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | |
| Below-market leases | $ | 27,425 | | | $ | (3,410) | | | $ | 24,015 | | | $ | 26,185 | | | $ | (2,869) | | | $ | 23,316 | |
The remaining weighted average amortization period for the Company’s intangible assets and liabilities as of March 31, 2022 and as of December 31, 2021 by category were as follows:
| | | | | | | | | | | |
| Years Remaining |
| March 31, 2022 | | December 31, 2021 |
| In-place leases | 7.3 | | 9.7 |
| Above-market leases | 11.8 | | 12.8 |
| Below-market leases | 9.8 | | 12.3 |
| Assembled workforce | 0.8 | | 1.0 |
| Lease incentives | 11.8 | | 12.7 |
The Company records amortization of in-place lease assets and assembled workforce intangible assets to amortization expense, and records net amortization of above-market and below-market lease intangibles as well as amortization of lease incentives to rental revenue. The following amounts in the accompanying condensed consolidated statements of operations and comprehensive income related to the amortization of intangibles assets and liabilities for all property and ground leases (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Amortization: | | | |
| Amortization of in-place leases | $ | 3,555 | | | $ | 1,719 | |
| Amortization of assembled workforce | 73 | | | 73 | |
| $ | 3,628 | | | $ | 1,792 | |
| | | |
| Net adjustment to rental revenue: | | | |
| Above-market lease assets | (327) | | | (183) | |
| Below-market lease liabilities | 610 | | | 373 | |
| Lease incentives | (118) | | | — | |
| $ | 165 | | | $ | 190 | |
The following table provides the projected amortization of in-place lease assets and assembled workforce intangible assets to amortization expense, and the net amortization of above-market, below-market, and lease incentive lease intangibles to rental revenue as of March 31, 2022, for the next five years and thereafter (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Remainder of 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total |
| In-place leases | $ | 11,034 | | | $ | 13,704 | | | $ | 12,933 | | | $ | 12,642 | | | $ | 11,430 | | | $ | 46,138 | | | $ | 107,881 | |
| Assembled workforce | 208 | | | — | | | — | | | — | | | — | | | — | | | 208 | |
| Amortization expense | $ | 11,242 | | | $ | 13,704 | | | $ | 12,933 | | | $ | 12,642 | | | $ | 11,430 | | | $ | 46,138 | | | $ | 108,089 | |
| Above-market lease assets | (997) | | | (1,330) | | | (1,326) | | | (1,325) | | | (1,324) | | | (9,310) | | | (15,612) | |
| Below-market lease liabilities | 1,830 | | | 2,375 | | | 2,317 | | | 2,294 | | | 2,178 | | | 13,021 | | | 24,015 | |
| Lease incentives | $ | (322) | | | $ | (428) | | | $ | (428) | | | $ | (428) | | | $ | (428) | | | $ | (3,121) | | | $ | (5,155) | |
| Net adjustment to rental revenue | $ | 511 | | | $ | 617 | | | $ | 563 | | | $ | 541 | | | $ | 426 | | | $ | 590 | | | $ | 3,248 | |
Note 6 – Debt
Debt consists of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maturity Date | | Interest Rate | | March 31, 2022 | | December 31, 2021 |
Term Loan (1) | | December 23, 2024 | | 1.36% | | $ | 175,000 | | | $ | 175,000 | |
Revolver (2) | | December 23, 2023 | | 1.64% | | 120,000 | | | 64,000 | |
| Total debt | | | | | | 295,000 | | | 239,000 | |
| Unamortized discount and debt issuance costs | | | | | | (613) | | | (670) | |
Unamortized deferred financing costs, net (3) | | | | | | (696) | | | (796) | |
| Total debt, net | | | | | | $ | 293,691 | | | $ | 237,534 | |
(1) Interest rate includes the effect of a variable interest rate that has been swapped to a fixed interest rate.
(2) The annual interest rate of the Revolver assumes one-month LIBOR as of March 31, 2022 of 0.44%. Additionally, the Revolver may be extended up to one year.
(3) The Company records deferred financing costs for the Revolver in other assets, net on its condensed consolidated balance sheets.
Credit Facility
In December 2019, the Company entered into a senior credit facility consisting of (i) a $175.0 million senior secured term loan (“Term Loan”) and (ii) a $250.0 million senior secured revolving credit facility (“Revolver”, and collectively with the Term Loan, the “Credit Facility”). Wells Fargo Securities, LLC is lead arranger and bookrunner and Wells Fargo Bank, National Association is administrative agent under the Credit Facility (the “Administrative Agent”).
The Term Loan matures on December 23, 2024 and the Revolver matures on December 23, 2023, subject to extension up to one year. The Credit Facility, effective during the fourth quarter of 2020, is unsecured as the Administrative Agent released the collateral in connection with the Company’s satisfaction of the collateral release requirements. Therefore interest rates under the Credit Facility are based on the Company’s consolidated total leverage ratio, and are determined by (A) in the case of Term Loan either (i) LIBOR, plus a margin ranging from 1.15% to 1.60%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.15% to 0.60%, based on the Company’s consolidated total leverage ratio and (B) in the case of Revolving Loans either (i) LIBOR, plus a margin ranging from 1.20% to 1.80%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.20% to 0.80%, based on the Company’s consolidated total leverage ratio. Interest is payable monthly or at the end of the applicable interest period in arrears on any outstanding borrowings.
The Company is required to pay a Revolver facility fee at an annual rate of 0.15% of the unused capacity if usage exceeds 50% of the total available facility, or 0.25% of the unused facility if usage does not exceed 50%. Loans from the Revolver are generally restricted if, among other things, the proposed usage of the proceeds from the loan do not meet certain criteria as outlined in the Credit Facility Agreement, if an event of default exists, or if the requested loan will create an event of default. Loans from the Revolver may not exceed the total revolving commitments.
Effective September 28, 2020, the Company entered into an interest rate derivative contract to fix the base interest rate (one-month LIBOR) on the Term Loan. The total interest rate includes the fixed base interest rate of 0.21% plus a leverage-based margin of 1.15% as of March 31, 2022. The interest rate hedge is further described in “Note 7 - Derivative Financial Instruments.”
Deferred financing, discount and debt issuance costs are being amortized over the remaining terms of each respective loan. Total costs amortized on the Term Loan and Revolver were $0.2 million for each of the three months ended March 31, 2022 and March 31, 2021, respectively. This is included in interest expense, net on the Company’s condensed consolidated statements of operations and comprehensive income
For the three months ended March 31, 2022 and 2021, the Term Loan had a weighted average interest rate, exclusive of amortization of deferred financing costs and the effects of the interest rate hedge, of 1.32% and 1.30%, respectively.
The Company incurred interest expense of $0.6 million in connection with the Term Loan for each of the three months ended March 31, 2022 and 2021, respectively.
The estimated fair value of the Company’s Term Loan has been derived based on market observable inputs such as interest rates and discounted cash flow analysis using estimates of the amount and timing of future cash flows. These measurements are classified as Level 2 within the fair value hierarchy. The Company determined that the carrying value materially approximated the estimated fair value of the Term Loan as of March 31, 2022 and December 31, 2021.
During the three months ended March 31, 2022 and March 31, 2021, the Company incurred interest expense, exclusive of facility fees for unused capacity, on borrowings under the Revolver of $0.4 million and less than $0.1 million, respectively, with a weighted average interest rate, exclusive of amortization of deferred financing costs, of 1.39% and 1.29%, respectively. As of March 31, 2022 and December 31, 2021, the Company had $120.0 million and $64.0 million in borrowings outstanding under the Revolver. The Company also incurred interest expense in connection with unused capacity for the three months ended March 31, 2022 and 2021 of $0.1 million and $0.2 million, respectively.
During the first three months of 2022, the Company capitalized less than $0.1 million of interest expense associated with properties under development. No interest expense was capitalized during the first three months of 2021.
The Company was in compliance with all of its debt covenants as of March 31, 2022 and expects to be in compliance for the following twelve-month period.
Debt Maturity
Payments on the Term Loan are interest only through maturity. All outstanding amounts on the Term Loan are due on December 23, 2024.
Note 7 – Derivative Financial Instruments
The Company uses interest rate derivative contracts to manage its exposure to changes in interest rates on its variable rate debt. These derivatives are considered cash flow hedges and are recorded on a gross basis at fair value. Assessments of hedge effectiveness are performed quarterly using either a qualitative or quantitative approach. The Company recognizes the entire change in the fair value in Accumulated Other Comprehensive Income (“AOCI”) and the change is reflected as cash flow hedge changes in fair value in the supplemental disclosures of non-cash investing and financing activities in the consolidated statement of cash flows. Effective September 28, 2020, such derivatives were initiated to hedge the variable cash flows associated with Term Loan. Accordingly, the interest rate for the variable rate Term Loan is based on the hedged fixed rate (one-month) of 0.21% compared to the variable Term Loan one-month LIBOR rate as of March 31, 2022 of 0.23%, plus a margin of 1.15%. The maturity date of the interest rate swaps coincide with the maturity date of the Term Loan.
Amounts will subsequently be reclassified to earnings when the hedged item affects earnings. The Company does not enter into derivative contracts for speculative or trading purposes and does not have derivative netting arrangements.
The Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company evaluates counterparty credit risk through monitoring the creditworthiness of counterparties, which includes review of debt ratings and financial performance. To mitigate credit risk, the Company enters into agreements with counterparties it considers credit-worthy, such as large financial institutions with favorable credit ratings.
The Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (in thousands, except number of instruments):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Instruments | | Notional |
| Interest Rate Derivatives | | March 31, 2022 | | December 31, 2021 | | March 31, 2022 | | December 31, 2021 |
| Interest rate swaps | | 4 | | | 4 | | | $ | 175,000 | | | $ | 175,000 | |
The following table presents the fair value of the Company's derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Derivative Assets |
| | | | Fair Value at |
| Derivatives Designated as Hedging Instruments: | | Balance Sheet Location | | March 31, 2022 | | December 31, 2021 |
| Interest rate swaps | | Other assets, net | | $ | 10,520 | | | $ | 4,310 | |
The following table presents the effect of the Company's interest rate swaps on the condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) | | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Amount of (Loss) Reclassified from Accumulated OCI into Income
(Effective Portion) |
| | | |
| | | |
| | | |
| Derivatives in Cash Flow Hedging Relationships | | 2022 | | 2021 | | | | 2022 | | 2021 |
| For the Three Months Ended March 31 | | | | | | | | | | |
| Interest Rate Products | | $ | 6,188 | | | $ | 2,290 | | | Interest expense, net | | $ | (23) | | | $ | (34) | |
The Company did not exclude any amounts from the assessment of hedge effectiveness for the three months ended March 31, 2022 and 2021. During the next twelve months, the Company estimates that $2.8 million will be reclassified as a decrease to interest expense.
The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves.
To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2022, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The table below presents the Company’s derivative liabilities measured at fair value on a recurring basis as of March 31, 2022, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Hierarchy Level | | |
| Description | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
| March 31, 2022 | | | | | | | | |
| Derivative assets | | $ | — | | | $ | 10,520 | | | $ | — | | | $ | 10,520 | |
| | | | | | | | |
| December 31, 2021 | | | | | | | | |
| Derivative assets | | — | | | 4,310 | | | — | | | 4,310 | |
Note 8 – Supplemental Detail for Certain Components of the Condensed Consolidated Balance Sheets
Other assets, net consist of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Accounts receivable, net | $ | 4,147 | | | $ | 2,801 | |
| Deferred rent receivable | 2,918 | | | 2,263 | |
| Prepaid assets | 2,589 | | | 1,473 | |
| Earnest money deposits | 1,483 | | | 853 | |
| Fair value of interest rate swaps | 10,520 | | | 4,309 | |
| Deferred offering costs | 598 | | | 615 | |
| Deferred financing costs, net | 696 | | | 796 | |
| Right-of-use asset | 4,490 | | | 4,581 | |
| Leasehold improvements and other corporate assets | 2,212 | | | 1,657 | |
| Interest receivable | 202 | | | — | |
| Other assets, net | 673 | | | 1,003 | |
| $ | 30,528 | | | $ | 20,351 | |
Accounts payable, accrued expenses and other liabilities consists of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Accrued expenses | $ | 5,851 | | | $ | 6,254 | |
| Accrued bonus | 396 | | | 1,742 | |
| Prepaid rent | 1,791 | | | 1,918 | |
| Operating lease liability | 5,480 | | | 5,442 | |
| Accounts payable | 1,014 | | | 419 | |
| Other liabilities | 1,634 | | | 1,205 | |
| $ | 16,166 | | | $ | 16,980 | |
Note 9 – Shareholders’ Equity, Partners’ Capital and Preferred Equity
Common Stock
On January 13, 2022, the Company completed a registered public offering of 10,350,000 shares of its common stock at a public offering price of $22.25 per share. In connection with the offering, the Company entered into forward sale agreements for 10,350,000 shares of its common stock. The Company did not initially receive any proceeds from the sale of shares of common stock by the forward purchasers. The Company expects to physically settle the forward sale agreements (by the delivery of shares of common stock) and receive proceeds from the sale of those shares upon one or more forward settlement dates, which shall occur no later than January 10, 2023. The Company may also elect to cash settle or net share settle all or a portion of its obligations under a forward sale agreement if it concludes it is in its best interest to do so. If the Company elects to cash settle a forward sale agreement, it may not receive any proceeds and may owe cash to the relevant forward counterparty in certain circumstances.
On March 30, 2022, the Company settled 3,440,962 shares of common stock at a price of $22.25 per share in accordance with the forward sale agreements. The Company received net proceeds from the offering of $72.0 million, net of underwriting discounts and offering costs of $4.6 million. The Company contributed the net proceeds to the Operating Partnership in exchange for 3,440,962 Class A OP Units.
On September 1, 2021, the Company entered into a new $250.0 million at-the-market equity program (the “ATM Program”) through which, from time to time, it may sell shares of its common stock in registered transactions. For the three months ended March 31, 2022, the Company issued 163,774 shares of common stock at a weighted average price of $22.08 per share in connection with the ATM Program for net proceeds of approximately $3.5 million, net of sales commissions and offering costs
of less than $0.1 million. The Company contributed the net proceeds to the Operating Partnership in exchange for 163,774 Class A OP Units.
During the three months ended March 31, 2022, portions of restricted stock unit awards (“RSUs”) granted to certain of the Company’s officers, directors, and employees vested. The vesting of these awards, granted pursuant to the NETSTREIT Corp. 2019 Omnibus Incentive Compensation Plan (the “Omnibus Incentive Plan”), resulted in federal and state income tax liabilities for the recipients. As permitted by the terms of the Omnibus Incentive Plan and the award grants, certain executive officers and employees elected to surrender 17 thousand RSUs valued at approximately $0.4 million, solely to pay the associated statutory tax withholding. The surrendered RSUs are included in the row entitled “repurchase of shares of common stock” on the condensed consolidated statements of cash flows.
Dividends
During the three months ended March 31, 2022, the Company declared and paid the following common stock dividends (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Declaration Date | | Dividend Per Share | | Record Date | | Total Amount | | Payment Date |
| February 22, 2022 | | $ | 0.20 | | | March 15, 2022 | | $ | 8,888 | | | March 30, 2022 |
The holders of OP Units are entitled to an equal distribution per Class A OP Unit and Class B OP Unit held as of each record date. Accordingly, during the three months ended March 31, 2022, the Operating Partnership paid distributions of $0.1 million to holders of OP Units.
Noncontrolling Interests
Noncontrolling interests represent noncontrolling holders of OP Units in the Operating Partnership. OP Units are convertible into common stock as the OP Units may be redeemed for cash or, at the Company’s election, exchanged for shares of the Company’s common stock on a one-for-one basis. As of March 31, 2022 and December 31, 2021, noncontrolling interests represented 1.1% and 1.3%, respectively, of OP Units. During the three months ended March 31, 2022, OP Unit holders redeemed 25,629 OP units into shares of common stock on a one-for-one basis. During the three months ended March 31, 2021, OP Unit holders redeemed 253,344 OP units into shares of common stock on a one-for-one basis.
Note 10 – Stock-Based Compensation
Under the Omnibus Incentive Plan 2,094,976 shares of common stock are reserved for issuance. The Omnibus Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted shares, RSUs, long-term incentive plan units, dividend equivalent rights, and other share-based, share-related or cash-based awards, including performance-based awards, to employees, directors and consultants, with each grant evidenced by an award agreement providing the terms of the award. The Omnibus Incentive Plan is administered by the Compensation Committee of the Board of Directors.
As of March 31, 2022, the only stock-based compensation granted by the Company were RSUs. The total amount of stock-based compensation costs recognized in general and administrative expense in the accompanying condensed consolidated statements of operations and comprehensive income was $1.0 million and $0.6 million for the three months ended March 31, 2022 and 2021. All awards of unvested RSUs are expected to fully vest over the next one to five years.
Performance-Based RSUs (effectiveness of shelf registration)
Pursuant to the Omnibus Incentive Plan, the Company granted performance-based RSUs to certain employees and non-employee directors. The performance condition required the Company to effectively file a shelf registration statement. Up until the point of filing the registration statement, performance was not deemed probable and accordingly, no RSUs had the capability of vesting, and no stock-based compensation expense was recorded. As a result of the Company's initial public offering in August 2020, the performance condition was satisfied, and the Company recorded a stock-based compensation expense catch-up adjustment of $1.4 million. The vesting terms of these grants are specific to the individual grant and vest in equal annual installments over the next one to three years.
The following table summarizes performance-based restricted stock unit activity for the period ended March 31, 2022:
| | | | | | | | | | | |
| Shares | | Weighted Average Grant Date Fair Value per Share |
| Unvested restricted stock grants outstanding as of December 31, 2021 | 157,380 | | | $ | 19.75 | |
| Vested during the period | (15,190) | | | 19.75 | |
| Unvested restricted stock grants outstanding as of March 31, 2022 | 142,190 | | | $ | 19.75 | |
For the three months ended March 31, 2022, the Company recognized $0.2 million in stock-based compensation expense associated with performance-based RSUs. As of March 31, 2022 and December 31, 2021, the remaining unamortized stock-based compensation expense totaled $1.1 million and $1.3 million, respectively, and as of March 31, 2022, these awards are expected to be recognized over a remaining weighted average period of 2.0 years. These units are subject to graded vesting and amortization is recognized ratably over the requisite service period for each vesting tranche in the award.
The weighted average grant date fair value of unvested restricted units is calculated as the per share price determined on December 23, 2019, through a series of completed transactions (collectively the “Private Offering”).
Service-Based RSUs
Pursuant to the Omnibus Incentive Plan, the Company has granted service-based restricted stock unit grants to certain employees and non-employee directors. The vesting terms of these grants are specific to the individual grant and vest in equal annual installments over the next one to five years.
The following table summarizes service-based restricted stock unit activity for the period ended March 31, 2022:
| | | | | | | | | | | |
| Shares | | Weighted Average Grant Date Fair Value per Share |
| Unvested restricted stock grants outstanding as of December 31, 2021 | 295,207 | | | $ | 17.84 | |
| Granted during the period | 141,833 | | | 22.14 | |
| Forfeited during the period | (12,082) | | | 18.62 | |
| Vested during the period | (70,034) | | | 17.47 | |
| Unvested restricted stock grants outstanding as of March 31, 2022 | 354,924 | | | $ | 19.23 | |
For the three months ended March 31, 2022, the Company recognized $0.6 million in stock-based compensation expense associated with service-based RSUs. As of March 31, 2022 and December 31, 2021, the remaining unamortized stock-based compensation expense totaled $5.5 million and $4.1 million, respectively, and as of March 31, 2022, these awards are expected to be recognized over a remaining weighted average period of 2.6 years. Amortization is recognized on a straight-line basis over the total requisite service period for the entire award.
The grant date fair value of service based unvested restricted units is calculated as the per share price determined in the initial public offering for awards granted in 2020 and as the per share price of the Company’s stock on the date of grant for those granted in 2021.
Performance-Based RSUs (total shareholder return)
Pursuant to the Omnibus Incentive Plan, the Company has granted performance-based RSUs to certain employees. These grants are subject to the participant’s continued service over a three-year period with 40% of the award based on the Company’s total shareholder return (“TSR”) as compared to the TSR of 32 peer companies and 60% of the award based on total absolute TSR over the cumulative three-year period. The performance periods of these grants run through March 8, 2024 and February 28, 2025. Grant date fair values of the performance-based share awards were calculated using the Monte Carlo simulation model, which incorporated stock price volatility of the Company and each of the Company’s peers and other variables over the performance period. Significant inputs for the 2022 calculation were expected volatility of the Company of 36.3% and expected volatility of the Company's peers, ranging from 28.7% to 95.3%, with an average volatility of 46.6% and a risk-free interest rate of 1.61%. The fair value per share on the grant date specific to the target TSR relative to the Company’s peers was $26.13 and the target absolute TSR was $20.42 for a weighted average grant date fair value of $22.38 per share. Stock-based compensation expense associated with unvested performance-based share awards is recognized on a straight-line basis over the minimum required service period, which is three years.
The following table summarizes performance-based restricted stock unit activity for the period ended March 31, 2022:
| | | | | | | | | | | |
| Shares | | Weighted Average Grant Date Fair Value per Share |
| Unvested restricted stock grants outstanding as of December 31, 2021 | 134,467 | | | $ | 17.77 | |
| Granted during the period | 106,645 | | | 22.38 | |
| Forfeited during the period | (1,722) | | | 17.77 | |
| Unvested restricted stock grants outstanding as of March 31, 2022 | 239,390 | | | $ | 19.82 | |
For the three months ended March 31, 2022, the Company recognized $0.3 million in stock-based compensation expense associated with performance-based RSUs. As of March 31, 2022, the remaining unamortized stock-based compensation expense totaled $3.8 million and as of March 31, 2022, these awards are expected to be recognized over a remaining weighted average period of 2.6 years.
Alignment of Interest Program
During March 2021, the Company adopted the Alignment of Interest Program (the “Program”), which allows employees to elect to receive a portion of their annual bonus in unvested RSUs in the first quarter of the following year that would then vest over a four-year service period beginning in the period that the bonus relates. The Program is deemed to be a liability-classified award (accounted for as an equity-classified award as the service date precedes the grant date and the award would otherwise by classified as equity on grant date), which will be fair-valued and accrued over the applicable service period. The total estimated fair value of the elections made for 2022 under the Program as of March 31, 2022 was approximately $0.9 million. The award will be remeasured to fair value each reporting period until the unvested RSUs are granted. For the three months ended March 31, 2022, the Company recognized approximately $0.1 million in stock-based compensation expense associated with these awards. Previous awards under the Program that have been granted are included within service based RSUs above.
Note 11 – Earnings Per Share
Net income per common share has been computed pursuant to the guidance in the FASB ASC Topic 260, Earnings per Share. Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is similarly calculated except that the denominator is increased by using the treasury stock method to determine the potential dilutive effect of the Company’s outstanding unvested RSUs and unsettled shares under open forward equity contracts and using the if-converted method to determine the potential dilutive effect of the OP Units. The Company has noncontrolling interests in the form of OP Units which are convertible into common stock and represent potentially dilutive securities, as the OP Units may be redeemed for cash or, at the Company’s election, exchanged for shares of the Company’s common stock on a one-for-one basis. The following table is a reconciliation of the numerator and denominator used in the computation of basic and diluted net income per common share for the three months ended March 31, 2022 and 2021.
| | | | | | | | | | | |
| Three Months Ended March 31, |
| (In thousands, except share and per share data) | 2022 | | 2021 |
| Numerator: | | | |
| Net income | $ | 1,966 | | | $ | 741 | |
| Net (income) attributable to noncontrolling interest | (24) | | | (40) | |
| Net income attributable to common shares, basic | 1,942 | | | 701 | |
| Net (income) attributable to noncontrolling interest | (24) | | | (40) | |
| Net income attributable to common shares, diluted | $ | 1,966 | | | $ | 741 | |
| | | |
| Denominator: | | | |
| Weighted average common shares outstanding, basic | 44,415,807 | | | 28,348,975 | |
| Effect of dilutive shares for diluted net income per common share: | | | |
| OP Units | 550,673 | | | 1,616,005 | |
| Unvested RSUs | 294,272 | | | 87,960 | |
| Unsettled shares under open forward equity contracts | 340,058 | | | — | |
| Weighted average common shares outstanding, diluted | 45,600,810 | | | 30,052,940 | |
| | | |
| Net income available to common stockholders per common share, basic | $ | 0.04 | | | $ | 0.02 | |
| Net income available to common stockholders per common share, diluted | $ | 0.04 | | | $ | 0.02 | |
As of March 31, 2022 and December 31, 2021, there were 537,155 and 562,784 of OP Units outstanding, respectively.
Note 12 – Commitments and Contingencies
Litigation and Regulatory Matters
In the ordinary course of business, from time to time, the Company may be subject to litigation, claims and regulatory matters, none of which are currently outstanding, which the Company believes could have, individually or in the aggregate, a material adverse effect on its business, financial condition or results of operations, liquidity or cash flows.
Environmental Matters
The Company is subject to environmental regulations related to the ownership of real estate. The cost of complying with the environmental regulations was not material to the Company’s results of operations for any of the periods presented. The Company is not aware of any environmental condition on any of its properties that is likely to have a material adverse effect on the condensed consolidated financial statements when the fair value of such liability can be reasonably estimated and is required to be recognized.
Commitments
In the normal course of business, the Company enters into various types of commitments to purchase real estate properties or fund development projects. These commitments are generally subject to the Company’s customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated or receives an option to purchase the properties. Additionally, as of March 31, 2022, the Company had commitments to fund nine properties under development totaling $20.9 million which is expected to be funded over the next twelve months.
In August 2021, the Company entered into a lease agreement on a new corporate office space, which is classified as an operating lease. The Company began operating out of the new office in February 2022. The lease has an initial noncancellable term of 10.3 years that expires on July 31, 2032 and is renewable at the Company’s option for two additional periods of five years. Future minimum base rental payments under the lease are outlined in “Note - 3 - Leases.” Annual rent expense, excluding operating expenses, is expected to be approximately $0.5 million during the initial term.
As of March 31, 2022, the Company did not have any other material commitments for re-leasing costs, recurring capital expenditures, non-recurring building improvements, or similar types of costs.
Note 13 – Related-Party Transactions
Effective with the Private Offering and commencement of the Company’s operations on December 23, 2019, the Company executed a facilities agreement with a subsidiary of EB Arrow Holdings, LLC, which was subsequently amended in April 2021 and ultimately terminated in July 2021. Under the facilities agreement, the Company shared in office rent by paying a fixed monthly rate and office related expenses based on employee headcount. For the three months ended March 31, 2021, the Company incurred less than $0.1 million in related expenses.
Note 14 – Subsequent Events
The Company has evaluated all events that occurred subsequent to March 31, 2022 through the date on which these condensed consolidated financial statements were issued to determine whether any of these events required disclosure in the financial statements.
Common Stock Dividend
On April 26, 2022, the Company's Board of Directors declared a cash dividend of $0.20 per share for the second quarter of 2022. The dividend will be paid on June 15, 2022 to stockholders of record on June 1, 2022.
Revolver Activity
In April 2022, the Company borrowed $20.0 million on the Revolver which will be used for general corporate purposes, including the acquisition of properties in the Company’s pipeline.