The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report. We make statements in this report that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Likewise, our statements regarding anticipated growth in our funds from operations and anticipated market and regulatory conditions, our strategic direction, demographics, results of operations, plans and objectives are forward-looking statements. Forward-looking statements involve numerous risks and uncertainties, and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates" or "anticipates" or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: the impact of the ongoing COVID-19 pandemic, or future pandemics, on us, our business, our tenants, or the economy generally; war and other hostilities, including the conflict inUkraine ; our business and investment strategy; our projected operating results; actions and initiatives of theU.S. or state governments and changes to government policies and the execution and impact of these actions, initiatives and policies, including the fact that cannabis remains illegal under federal law; rates of default on leases for our assets; availability of suitable investment opportunities in the regulated cannabis industry; our understanding of our competition and our potential tenants' alternative financing sources; the demand for regulated cannabis facilities; concentration of our portfolio of assets and limited number of tenants; the estimated growth in and evolving market dynamics of the regulated cannabis market; the expected medical-use or adult-use cannabis legalization in certain states; shifts in public opinion regarding regulated cannabis; the additional risks that may be associated with certain of our tenants cultivating, processing and/or dispensing adult-use cannabis in our facilities; the state of theU.S. economy generally or in specific geographic areas; economic trends and economic recoveries; our ability to access equity or debt capital; financing rates for our target assets; our expected leverage; our level of indebtedness, which could reduce funds available for other business purposes and reduce our operational flexibility; covenants in our debt instruments, which may limit our flexibility and adversely affect our financial condition; our ability to maintain our investment grade credit rating; changes in the values of our assets; our expected portfolio of assets; our expected investments; interest rate mismatches between our assets and our borrowings used to fund such investments; changes in interest rates and the market value of our assets; inflation dynamics; the degree to which any interest rate or other hedging strategies may or may not protect us from interest rate volatility; the impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; our ability to maintain our qualification as a REIT; our ability to maintain our exemption from registration under the Investment Company Act of 1940; availability of qualified personnel; and market trends in our industry, interest rates, real estate values, the securities markets or the general economy. The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this report. In addition, we discussed a number of material risks in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , and in Part II, Item 1A below. Those risks continue to be relevant to our performance and financial condition. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Any forward-looking statement made by us speaks only of the date on which we make it. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company's filings and reports. The purpose of this Management's Discussion and Analysis ("MD&A") is to provide an understanding of the Company's consolidated financial condition, results of operations and cash. MD&A is provided as a supplement to, and should be read in conjunction with, the Company's condensed consolidated financial statements
and accompanying notes. Overview
As used herein, the terms "we", "us", "our" or the "Company" refer to
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We are an internally-managed REIT focused on the acquisition, ownership and management of specialized properties leased to experienced, state-licensed operators for their regulated cannabis facilities. We have leased and expect to continue to lease our properties on a triple-net lease basis, where the tenant is responsible for all aspects of and costs related to the property and its operation during the lease term, including structural repairs, maintenance, real estate taxes and insurance. We were incorporated inMaryland onJune 15, 2016 . We conduct our business through a traditional umbrella partnership real estate investment trust, or UPREIT structure, in which our properties are owned by ourOperating Partnership , directly or through subsidiaries. We are the sole general partner of ourOperating Partnership and own, directly or through subsidiaries, 100% of the limited partnership interests in ourOperating Partnership . As ofMarch 31, 2022 , we had 21 full-time employees. As ofMarch 31, 2022 , we owned 107 properties that were 100% leased to state-licensed cannabis operators and comprising an aggregate of approximately 8.0 million rentable square feet (including approximately 2.4 million rentable square feet under development/redevelopment) in 19 states, with a weighted-average remaining lease term of approximately 16.5 years. As ofMarch 31, 2022 , we had invested approximately$1.9 billion in the aggregate (consisting of purchase price and construction funding and improvements reimbursed to tenants, if any, but excluding transaction costs) and had committed an additional approximately$228.7 million to reimburse certain tenants and sellers for completion of construction and improvements at our properties. Of the approximately$228.7 million committed to reimburse certain tenants and sellers for the completion of construction and improvements at our properties, approximately$43.4 million was incurred as ofMarch 31, 2022 . These statistics do not include an$18.5 million loan from us to a developer for construction of a regulated cannabis cultivation and processing facility inCalifornia and up to$55.0 million that may be funded betweenJune 15, 2022 andJuly 31, 2022 pursuant to our lease with a tenant at one of ourPennsylvania properties, as the tenant at that property may not elect to have us disburse those funds and pay us the corresponding base rent on those funds.
Factors Impacting Our Operating Results
Our results of operations are affected by a number of factors and depend on the rental revenues we receive from the properties that we acquire, the timing of lease expirations, general market conditions, the regulatory environment in the regulated cannabis industry, and the competitive environment for real estate assets that support the regulated cannabis industry.
Rental Revenues
We receive income primarily from rental revenues generated by the properties that we acquire. The amount of rental revenues depends upon a number of factors, including:
? our ability to enter into leases with increasing or market value rents for the
properties that we acquire; and
? rent collection, which primarily relates to each of our tenant's financial
condition and ability to make rent payments to us on time.
The properties that we acquire consist of real estate assets that support the regulated cannabis industry. Changes in federal law and current favorable state or local laws in the cannabis industry may impair our ability to renew or re-lease properties and the ability of our tenants to fulfill their lease obligations and could materially and adversely affect our ability to maintain or increase rental rates for our properties.
Conditions in Our Markets
Positive or negative changes in regulatory, economic or other conditions, drought, and natural disasters in the markets where we acquire properties may affect our overall financial performance.
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The ongoing COVID-19 pandemic, or the future outbreak of any other highly infectious or contagious diseases, could materially and adversely impact or cause disruption to our tenants and their operations, and in turn our performance, financial condition, results of operations and cash flows. The extent to which the ongoing COVID-19 pandemic impacts our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the outbreak and containment measures, among others. Furthermore, the impacts of a potential worsening of global economic conditions, acts of war or other hostilities, including the conflict inUkraine , and the continued disruptions to, and volatility in, the credit and financial markets, supply chains and consumer spending as well as other unanticipated consequences remain unknown. Our tenants' ability to pay their rent obligations to us depends, in part, on whether our tenants can continue their regulated cannabis operations and the ability and willingness of consumers to visit dispensary businesses. In the large majority of states that have legalized cannabis, state governmental authorities have recognized both medical-use and adult-use cannabis operations, including supply chain activities such as cultivation, processing, distribution and dispensary activities, as "essential businesses", allowing them to remain open and operational. While laws and practices vary from state to state, state and local governmental authorities and regulated cannabis businesses have taken additional measures to ensure the safety and well-being of employees, patients and consumers, including but not limited to restrictions associated with social distancing requirements and additional levels of protection for medical cannabis patients with more vulnerability to health complications from COVID-19. Despite these measures, cannabis dispensaries may experience declines in customer traffic or may be required to close in response to new government regulatory orders, which may result from a prolonged outbreak or resurgence of COVID-19 cases, and could have a significant adverse financial impact on certain of our tenants.
Significant Tenants and Concentrations of Risk
As ofMarch 31, 2022 , we owned 107 properties located in 19 states. Many of our tenants are tenants at multiple properties. We seek to manage our portfolio-level risk through geographic diversification and by minimizing dependence on any single property or tenant. AtMarch 31, 2022 , none of our properties accounted for 5% or more of our net real estate held for investment. See Note 2 in the notes to the condensed consolidated financial statements for further information regarding the tenants in our portfolio that represented the largest percentage of our total rental revenues for the three months ended
March 31, 2022 . Competitive Environment We face competition from a diverse mix of market participants, including but not limited to, other companies with similar business models, independent investors, hedge funds, lenders and other real estate investors, as well as potential tenants (cannabis operators themselves), all of whom may compete with us in our efforts to acquire real estate zoned for regulated cannabis operations. Competition from others may diminish our opportunities to acquire a desired property on favorable terms or at all. In addition, this competition may put pressure on us to reduce the rental rates below those that we expect to charge for the properties that we acquire, which would adversely affect our financial results. Operating Expenses Our operating expenses include general and administrative expenses, including personnel costs, stock-based compensation, and legal, accounting and other expenses related to corporate governance, public reporting and compliance with the various provisions ofU.S. securities laws. We generally structure our leases so that the tenant is responsible for taxes, maintenance, insurance and structural repairs with respect to the premises throughout the lease term. Increases or decreases in such operating expenses will impact our overall financial performance.
Our Qualification as a REIT
We have been organized and operate our business so as to qualify to be taxed as a REIT forU.S. federal income tax purposes. Shares of our common stock and Series A Preferred Stock are subject to restrictions on ownership and transfer that are intended, among other purposes, to assist us in qualifying and maintaining our qualification as a REIT. In order for us to qualify as a REIT under the Code, the relevant sections of our charter provide that, subject to certain exceptions, no person or entity may own, or be deemed to own, by virtue of the applicable constructive ownership provisions of the Code, more than 9.8% (in value or number of shares, whichever is more restrictive) of the aggregate of our outstanding shares of stock or Series A Preferred Stock or more than 9.8% (in value or number of shares, whichever is more restrictive) of our outstanding common stock or any class or series of our outstanding preferred stock. 23 Table of Contents Results of Operations
Investments in Real Estate
See Note 6 in the notes to the condensed consolidated financial statements for
information regarding our investments in real estate activity and property
portfolio activity during the three months ended
Comparison of the Three Months Ended
The following table sets forth the results of our operations (in thousands): For the Three Months EndedMarch 31, 2022 2021 Revenues:
Rental (including tenant reimbursements)
42,885 Other revenue 390 - Total revenues 64,504 42,885 Expenses: Property expenses 1,982 770
General and administrative expense 8,777
5,600
Depreciation and amortization expense 13,868
8,839 Total expenses 24,627 15,209 Income from operations 39,877 27,676 Interest and other income 57 124 Interest expense (4,766) (1,873)
Loss on exchange of Exchangeable Senior Notes (118)
- Net income 35,050 25,927 Preferred stock dividends (338) (338)
Net income attributable to common stockholders
25,589 Revenues. Rental revenues for the three months endedMarch 31, 2022 increased by approximately$21.2 million , or 50%, to approximately$64.1 million , compared to approximately$42.9 million for the three months endedMarch 31, 2021 . Approximately$532,000 of the increase in rental revenues was generated by the properties acquired during the three months endedMarch 31, 2022 . The remaining approximately$20.7 million increase in rental revenues was generated by properties we acquired in prior periods, including contractual rent escalations and amendments to leases for additional improvement allowances and construction funding at existing properties that resulted in adjustments to rent. Rental revenues for the three months endedMarch 31, 2022 and 2021 included approximately$1.9 million and$727,000 , respectively, of tenant reimbursements for property insurance premiums and property taxes. Other revenue for the three months endedMarch 31, 2022 consists of interest revenue from property acquisitions that did not satisfy the requirements for sale-leaseback accounting. Expenses. Property Expenses. Property expenses for the three months endedMarch 31, 2022 increased by approximately$1.2 million compared to the three months endedMarch 31, 2021 . The increase was due to property insurance premiums and property taxes paid for newly acquired properties. General and Administrative Expense. General and administrative expense for the three months endedMarch 31, 2022 increased by approximately$3.2 million to approximately$8.8 million , compared to approximately$5.6 million for the three months endedMarch 31, 2021 . The increase in general and administrative expense was primarily due to higher compensation to employees, the hiring of additional employees and higher public company costs, travel and occupancy costs. Compensation expense for the three months endedMarch 31, 2022 included approximately$4.4 million of non-cash stock-based compensation. Compensation expense for the three months endedMarch 31, 2021 included approximately$2.1 million of non-cash stock-based compensation. 24
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Depreciation and Amortization Expense. The increase in depreciation and amortization expense was related to depreciation on properties that we acquired and the placement into service of construction and improvements at certain of our properties. Interest and Other Income. Interest and other income for the three months endedMarch 31, 2022 decreased by approximately$67,000 compared to the three months endedMarch 31, 2021 . The decrease was due to lower interest rates on our interest-bearing investments and lower balances of interest bearing investments. Interest Expense. Interest expense consists of interest on our Exchangeable Senior Notes issued inFebruary 2019 and our Notes due 2026 issued inMay 2021 . Interest expense for the three months endedMarch 31, 2022 and 2021 included approximately$365,000 and$525,000 , respectively, of non-cash interest expense.
Cash Flows
Comparison of the Three Months Ended
Three months
ended
2022 2021 Change Net cash provided by operating activities$ 59,884 $ 42,608 $ 17,276 Net cash used in investing activities (81,094) (13,032) (68,062) Net cash used in financing activities (20,185) (33,449) 13,264 Ending cash, cash equivalents and restricted cash 45,024
122,133 (77,109)
Operating Activities
Cash flows provided by operating activities for the three months endedMarch 31, 2022 and 2021 were approximately$59.9 million and$42.6 million , respectively. Cash flows provided by operating activities were generally from contractual rent and security deposits from our properties, partially offset by our general
and administrative expense. Investing Activities Cash flows used in investing activities for the three months endedMarch 31, 2022 were approximately$81.1 million , of which approximately$196.1 million related to investments in real estate and funding of a portion of the improvement allowances, construction funding at our properties and other investments, partially offset by$115.0 million related to maturities of short-term investments. Cash flows used in investing activities for the three months endedMarch 31, 2021 were approximately$13.0 million , of which approximately$93.1 million primarily related to the purchase of investment in real estate and funding of a portion of the improvement allowances and construction funding at our properties, partially offset by cash provided by investing activities of approximately$80.1 million related to the net purchases and maturities of short-term investments.
Financing Activities
Net cash used by financing activities of approximately$20.2 million during the three months endedMarch 31, 2022 was the result of approximately$21.1 million in net proceeds from the issuance of our common stock, partially offset by dividend payments of approximately$38.9 million to common and preferred stockholders and approximately$2.4 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees. Net cash used by financing activities of approximately$33.4 million during the three months endedMarch 31, 2021 was the result of dividend payments of approximately$30.1 million to common and preferred stockholders and approximately$3.3 million related to net share settlement of equity awards to pay the required withholding taxes upon vesting of restricted stock for certain employees.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements. We expect to use significant cash to acquire additional properties, develop and redevelop existing properties, pay dividends to our stockholders, fund our operations, service our Exchangeable Senior Notes and Notes due 2026, and meet other general business needs. 25 Table of Contents Sources and Uses of Cash We derive all of our revenues from the leasing of our properties and collecting rental income, which includes operating expense reimbursements, based on contractual arrangements with our tenants. This source of revenue represents our primary source of liquidity to fund our dividends, interest payments on Exchangeable Senior Notes and Notes due 2026, general and administrative expenses, property development and redevelopment activities, property operating expenses and other expenses incurred related to managing our existing portfolio and investing in additional properties. To the extent additional resources are needed, we expect to fund our investment activity generally through equity or debt issuances either in the public or private markets. Where possible, we also may issue limited partnership interests in ourOperating Partnership to acquire properties from existing owners seeking a tax-deferred transaction. InMay 2021 , we received an investment grade rating from a ratings agency. We sought to obtain an investment grade rating to facilitate access to the investment grade unsecured debt market as part of our overall strategy to maximize our financial flexibility and manage our overall cost of capital. OnMay 25, 2021 , ourOperating Partnership issued$300.0 million aggregate principal amount of Notes due 2026. The Notes due 2026 are theOperating Partnership's general unsecured and unsubordinated obligations, are fully and unconditionally guaranteed by us and all of the direct and indirect subsidiaries of theOperating Partnership , and rank equally in right of payment with all of theOperating Partnership's existing and future senior unsecured indebtedness, including the Exchangeable Senior Notes. The terms of the Notes due 2026 are governed by an indenture, which requires compliance with various financial covenants including limits on the amount of total leverage and secured debt maintained by theOperating Partnership and which require theOperating Partnership to maintain minimum levels of debt service coverage. Management believes that it was in compliance with those covenants as ofMarch 31, 2022 . Subject to the terms of the indenture, any new subsidiary of theOperating Partnership will also guarantee the Notes due 2026. In addition, the terms of the indenture provide that if the debt rating on the Notes due 2026 is downgraded or withdrawn entirely, interest on the Notes due 2026 will increase to a range of 6.0% to 6.5% based on such debt rating.
During the three months ended
We are party to equity distribution agreements with six sales agents, pursuant to which we may offer and sell from time to time through an "at-the-market" offering program, or ATM Program, up to$500.0 million in shares of our common stock. InMarch 2022 , we sold 117,023 shares of our common stock for net proceeds of approximately$21.1 million under the ATM Program. As ofMarch 31, 2022 , the remaining amount available to be sold under the ATM Program was approximately$209.9 million .
Subsequent to
Subsequent toMarch 31, 2022 , we issued 47,059 shares of our common stock upon exchanges by a holder of approximately$3.1 million of outstanding principal amount of our Exchangeable Senior Notes. We have filed an automatic shelf registration statement, which may permit us, from time to time, to offer and sell common stock, preferred stock, warrants and other securities to the extent necessary or advisable to meet our liquidity needs. We expect to meet our liquidity needs through cash and short-term investments on hand, cash flows from operations and cash flow from sources discussed above. We believe that our liquidity and sources of capital are adequate to satisfy our cash requirements. We cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet our liquidity needs. Our investment guidelines also provide that our aggregate borrowings (secured and unsecured) will not exceed 50% of the cost of our tangible assets at the time of any new borrowing, subject to our board of directors' discretion.
Dividends
The Company is required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to qualify and maintain its qualification as a REIT. As a result of this distribution requirement, ourOperating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs can. Our ability to continue to pay dividends is dependent upon our ability to continue to generate cash flows, service any debt obligations we have, including our Exchangeable Senior Notes and Notes due 2026, and make accretive new investments. 26 Table of Contents
The following table describes the dividends declared by the Company during the
three months ended
Amount Declaration Per Dividend Date Security Class Share Period Covered Paid Date Dividend Amount (In thousands) January 1, 2022 to March 14, 2022 Common stock$ 1.75 March 31, 2022 April 14, 2022 $ 45,830 Series A preferred January 15, 2022 to March 14, 2022 stock$ 0.5625 April 14, 2022 April 14, 2022 $ 338 Contractual Obligations The following table summarizes our contractual obligations as ofMarch 31, 2022 (in thousands): Payments Due Exchangeable by Year Notes due 2026 Senior Notes Interest Office Rent Total 2022 (nine months ending December 31) $ - $ -$ 12,642 $ 342$ 12,984 2023 - - 16,856 496 17,352 2024 - 9,503 16,551 511 26,565 2025 - - 16,500 526 17,026 2026 300,000 - 6,646 543 307,189 Thereafter - - - 45 45 Total$ 300,000 $ 9,503 $ 69,195 $ 2,463 $ 381,161 Additionally, as ofMarch 31, 2022 , we had approximately$185.3 million outstanding in commitments related to improvement allowances, which generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease. As ofMarch 31, 2022 , we also had approximately$3.0 million outstanding in commitments to fund a construction loan, which the developer is required to complete byJune 2022 , subject to extension in certain circumstances. In addition, we are obligated to fund up to$55.0 million betweenJune 15, 2022 andJuly 31, 2022 pursuant to our lease with a tenant at one of ourPennsylvania properties, if the tenant at that property elects to have us disburse those funds. As ofMarch 31, 2022 , these amounts had not been requested. The commitments discussed in this paragraph are excluded from the table of contractual obligations above, as improvement allowances generally may be requested by the tenants at any time up until a date that is near the expiration of the initial term of the applicable lease and construction loan funding generally may be requested by the borrower from time to time, subject to satisfaction of certain conditions.
Non-GAAP Financial Information
In addition to the required GAAP presentations, we use certain non-GAAP performance measures as we believe these measures improve the understanding of our operational results. We continually evaluate the usefulness, relevance, limitations, and calculation of our reported non-GAAP performance measures to determine how best to provide relevant information to the public and thus such reported measures could change.
Funds from Operations, Normalized Funds from Operations and Adjusted Funds from Operations
Funds from operations ("FFO") and FFO per share are operating performance measures adopted by theNational Association of Real Estate Investment Trusts, Inc. ("NAREIT"). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT's operating performance equal to net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, depreciation and amortization and impairment related to real estate properties, and after adjustments for unconsolidated partnerships and joint ventures. Management believes that net income, as defined by GAAP, is the most appropriate earnings measurement. However, management believes FFO and FFO per share to be supplemental measures of a REIT's performance because they provide an understanding of the operating performance of our properties without giving effect to certain significant non-cash items, primarily depreciation expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. We believe that by excluding the effect of depreciation, FFO and FFO per share can facilitate comparisons of operating performance between periods. We report FFO and FFO per share because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs and because FFO per share is consistently reported, 27 Table of Contents discussed, and compared by research analysts in their notes and publications about REITs. For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share. We compute normalized funds from operations ("Normalized FFO") by adjusting FFO, as defined by NAREIT, to exclude certain GAAP income and expense amounts that we believe are infrequent and unusual in nature and/or not related to our core real estate operations. Exclusion of these items from similar FFO-type metrics is common within the equity REIT industry, and management believes that presentation of Normalized FFO and Normalized FFO per share provides investors with a metric to assist in their evaluation of our operating performance across multiple periods and in comparison to the operating performance of other companies, because it removes the effect of unusual items that are not expected to impact our operating performance on an ongoing basis. Normalized FFO is used by management in evaluating the performance of our core business operations. Items included in calculating FFO that may be excluded in calculating Normalized FFO include certain transaction-related gains, losses, income or expense or other non-core amounts as they occur. Management believes that adjusted funds from operations ("AFFO") and AFFO per share are also appropriate supplemental measures of a REIT's operating performance. We calculate AFFO by adjusting Normalized FFO for certain non-cash items. For the three months endedMarch 31, 2022 , FFO (diluted), Normalized FFO and AFFO, and FFO, Normalized FFO and AFFO per diluted share include the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes for shares of common stock. As a result, for purposes of calculating FFO (diluted), cash and non-cash interest expense of the Exchangeable Senior Notes was added back to FFO, and the total diluted weighted-average common shares outstanding increased by 507,181 shares, which were the potentially issuable shares as if the Exchangeable Senior Notes were exchanged at the beginning of the period. For the three months endedMarch 31, 2021 , FFO (diluted), Normalized FFO, and AFFO, and FFO, Normalized FFO and AFFO per diluted share include the dilutive impact of the assumed full exchange of the Exchangeable Senior Notes for shares of common stock. As a result, for purposes of calculating FFO (diluted), cash and non-cash interest expense of the Exchangeable Senior Notes was added back to FFO, and the total diluted weighted-average common shares outstanding increased by 2,170,959 shares, which were the potentially issuable shares as if the Exchangeable Senior Notes were exchanged at the beginning of the period. For the three endedMarch 31, 2022 , 102,333 shares issuable upon vesting PSUs granted to certain employees were dilutive, as the performance thresholds for vesting of these PSUs were met as measured as ofMarch 31, 2022 . For the three months endedMarch 31, 2021 , the performance thresholds for vesting of these PSUs were not met as measured as ofMarch 31, 2021 . Our computation of FFO, Normalized FFO, and AFFO may differ from the methodology for calculating FFO, Normalized FFO and AFFO utilized by other equity REITs and, accordingly, may not be comparable to such REITs. Further, FFO and AFFO do not represent cash flow available for management's discretionary use. FFO, Normalized FFO and AFFO should not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. FFO, Normalized FFO and AFFO should be considered only as supplements to net income computed in accordance with GAAP as measures of operations. 28
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The table below is a reconciliation of net income attributable to common
stockholders to FFO, Normalized FFO and AFFO for the three months ended
For the Three Months EndedMarch 31, 2022 2021
Net income attributable to common stockholders$ 34,712 $ 25,589 Real estate depreciation and amortization 13,868
8,839
FFO attributable to common stockholders (basic) 48,580
34,428
Cash and non-cash interest expense on Exchangeable Senior Notes 334
1,873
FFO attributable to common stockholders (diluted) 48,914
36,301
Acquisition-related expense 95 8 Loss on exchange of Exchangeable Senior Notes 118 - Normalized FFO attributable to common stockholders (diluted) 49,127 36,309 Stock-based compensation 4,379 2,101 Non-cash interest expense 307 -
Above-market lease amortization 23 - AFFO attributable to common stockholders (diluted)$ 53,836 $ 38,410 FFO per common share - diluted $ 1.86$ 1.39 Normalized FFO per common share - diluted $ 1.87$ 1.39 AFFO per common share - diluted $ 2.04$ 1.47 Weighted average common shares outstanding - basic 25,620,253
23,889,398 Restricted stock and RSUs 110,457 92,194 PSUs 102,333 -
Dilutive effect of Exchangeable Senior Notes 507,181
2,170,959
Weighted average common shares outstanding - diluted 26,340,224
26,152,551
Critical Accounting Estimates
Our condensed consolidated financial statements have been prepared in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates and assumptions. We continually evaluate the estimates and assumptions we use to prepare our consolidated financial statements. Our critical accounting estimates are defined as accounting estimates or assumptions made in accordance with GAAP, which involve a significant level of estimation uncertainty or subjectivity and have had or are reasonably likely to have a material impact on our financial condition or results of operations. The following critical accounting estimates discussion reflects what we believe are the most significant estimates and assumptions used in the preparation of our consolidated financial statements. This discussion of our critical accounting estimates is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates and assumptions. For further discussion of our significant accounting policies, see Note 2 "Significant Accounting Policies and Procedures" to our condensed consolidated financial statements included in this report.
Acquisition of Rental Property, Depreciation and Impairment
All of our acquisitions of rental properties to date were accounted for as asset acquisitions and not business combinations because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings, and related intangible assets). The accounting model for asset acquisitions requires that the acquisition consideration (including acquisition costs) be allocated to the individual assets acquired and liabilities assumed on a relative fair value basis. We exercise judgement to determine key assumptions used in each valuation technique. For example, we are required to use judgment and make a number of assumptions, including those related to projected growth in rental rates and operating expenses, anticipated trends and market/economic conditions. The use of different assumptions can affect the amount of consideration allocated to the acquired depreciable/amortizable asset, which in turn can impact our net income due to the recognition of the related depreciation/amortization expense in our condensed consolidated statements of income. 29
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We depreciate buildings and improvements and tenant improvements where we are considered the owner for accounting purposes based on our evaluation of the estimated useful life of each specific asset, not to exceed 40 years. Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant judgment. The determination of whether we are or the tenant is the owner of tenant improvements for accounting purposes is subject to significant judgment. In making that determination, we consider numerous factors and perform a detailed evaluation of each individual lease. No one factor is determinative in reaching a conclusion. The factors we evaluate include but are not limited to the following:
whether the lease agreement requires landlord approval of how the tenant
? improvement allowance is spent prior to installation of the tenant
improvements;
whether the lease agreement requires the tenant to provide evidence to the
? landlord supporting the cost and what the tenant improvement allowance was
spent on prior to payment by the landlord for such tenant improvements;
? whether the tenant improvements are unique to the tenant or reusable by other
tenants;
whether the tenant is permitted to alter or remove the tenant improvements
? without the consent of the landlord or without compensating the landlord for
any lost utility or diminution in fair value; and
? whether the ownership of the tenant improvements remains with the landlord or
remains with the tenant at the end of the lease term.
When we conclude that we are the owner of tenant improvements for accounting purposes using the factors discussed above, we record the cost to construct the tenant improvements as our capital asset. We evaluate our real estate assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a given asset may not be recoverable. We evaluate our real estate assets for impairment on a property-by-property basis. Indicators we use to determine whether an impairment evaluation is necessary include:
? deterioration in rental rates for a specific property;
? deterioration of a given rental submarket;
significant change in strategy or use of a specific property or any other event
? that could result in a decreased holding period, including classifying a
property as held for sale, or significant development delay;
? evidence of material physical damage to the property; and
? default by a significant tenant when any of the other indicators above are
present.
When we evaluate for potential impairment our real estate assets to be held and used, we first evaluate whether there are any indicators of impairment. If any impairment indicators are present for a specific real estate asset, we then perform an undiscounted cash flow analysis and compare the net carrying amount of the real estate asset to the real estate asset's estimated undiscounted future cash flow over the anticipated holding period. If the estimated undiscounted future cash flow is less than the net carrying amount of the real estate asset, we perform an impairment loss calculation to determine if the fair value of the real estate asset is less than the net carrying value of the real estate asset. Our impairment loss calculation compares the net carrying amount of the real estate asset to the real estate asset's estimated fair value, which may be based on estimated discounted future cash flow calculations or third-party valuations or appraisals. We recognize an impairment loss if the amount of the asset's net carrying amount exceeds the asset's estimated fair value. If we recognize an impairment loss, the estimated fair value of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis would be depreciated (amortized) over the remaining useful life of that asset. If a real estate asset is designated as real estate held for sale, it is carried at the lower of the net carrying value or estimated fair value less costs to sell, and depreciation ceases. Our undiscounted cash flow and fair value calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flow and property fair values, including determining our estimated holding period and selecting the discount or capitalization rate that reflects the risk inherent in future cash flow. Estimating projected cash flow is highly subjective as it requires assumptions related to future rental rates, tenant allowances, operating expenditures, property taxes, capital improvements, and occupancy levels. We are also required to make a number of assumptions relating to future economic and market events and prospective operating trends. Determining the appropriate capitalization rate also requires significant judgment and is typically based on many factors including the prevailing rate for the market or submarket, as well as the quality and location of the properties. Further, capitalization rates can fluctuate resulting from a variety of factors in the overall economy or within regional markets. If the actual net cash flow or actual market capitalization rates significantly differ from our estimates, the impairment evaluation for an individual asset could be materially affected. 30 Table of Contents For each property where such an indicator occurred, we completed an impairment evaluation. After completing this process, we determined that for each of the operating properties evaluated, undiscounted cash flows over the holding period were in excess of carrying value and, therefore, we did not record any impairment losses for these properties for the three months endedMarch 31 ,
2022 and 2021. Stock-Based Compensation Compensation cost for all share-based awards requires an estimate of fair value on the grant date and compensation cost is recognized on a straight-line basis over the service vesting period, which represents the requisite service period. The grant date fair value for compensation programs that contain market conditions, like modifiers based on total stockholder return (a "market condition"), are performed using complex pricing valuation models that require the input of assumptions, including judgments to estimate expected stock price volatility, expected life, and forfeiture rate. See Note 10 "Common Stock Incentive Plan" to our condensed consolidated financial statements included in this report for further discussion the assumptions and estimates.
Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain periods, theU.S. credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate andU.S. credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly.
Interest Rate Risk
As ofMarch 31, 2022 , we had$300.0 million principal amount of Notes due 2026 and approximately$9.5 million principal amount of Exchangeable Senior Notes outstanding at fixed interest rates, and therefore, if interest rates decline, our required payments may exceed those based on current market rates. It is possible that a property we acquire in the future would be subject to a mortgage, which we may assume.
Impact of Inflation
We enter into leases that generally provide for fixed increases in rent. During times when inflation is greater than the fixed increases in rent, as provided for in the leases, rent increases may not keep up with the rate of inflation.
Seasonality
Our business has not been, and we do not expect our business in the future to be, subject to material seasonal fluctuations.
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