SEC Filing | The Necessity Retail REIT, Inc.

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afin-20220930

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2022


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

For the transition period from _________ to __________

Commission file number: 001-38597

https://cdn.kscope.io/357318e7beea1dddd9ebc3b20d612d09-afin-20220930_g1.jpg

The Necessity Retail REIT, Inc.

(Exact name of registrant as specified in its charter)

Maryland

90-0929989

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

650 Fifth Ave., 30th Floor, New York, NY 10019 ____________________________________________________ _________________________________________________

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (212) 415-6500

Former name, former address and former fiscal year, if changed since last report: Not Applicable

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

Title of each class

Trading Symbols

Name of each exchange on which registered

Class A Common Stock, $0.01 par value per share

RTL

The Nasdaq Global Select Market

7.50% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value per share

RTLPP

The Nasdaq Global Select Market

7.375% Series C Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value per share

RTLPO

The Nasdaq Global Select Market

Preferred Stock Purchase Rights

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of October 31, 2022, the registrant had 134,224,313 shares of common stock outstanding.

THE NECESSITY RETAIL REIT, INC.

TABLE OF CONTENTS

FORM 10-Q


			Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (Unaudited)			3
Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)			4
Consolidated Statements of Changes in Equity for the Three and Nine Months Ended September 30, 2022 (Unaudited)			5
Consolidated Statements of Changes in Equity for the Three and Nine Months Ended September 3 0, 2021 (Unaudited)			6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (Unaudited)			7
Notes to Consolidated Financial Statements (Unaudited)			9

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.			48

Item 3. Quantitative and Qualitative Disclosures About Market Risk.			82

Item 4. Controls and Procedures.			82

PART II - OTHER INFORMATION			83

Item 1. Legal Proceedings.			83

Item 1A. Risk Factors.			83

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.			83

Item 3. Defaults Upon Senior Securities.			84

Item 4. Mine Safety Disclosures.			84

Item 5. Other Information.			84

Item 6. Exhibits.			84

Signatures			86

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

THE NECESSITY RETAIL REIT, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)


	September 30, 2022		December 31, 2021
ASSETS
Real estate investments, at cost:
Land	$	1,009,048	$	729,048
Buildings, fixtures and improvements	3,515,775		2,729,719
Acquired intangible lease assets	654,735		402,673
Total real estate investments, at cost	5,179,558		3,861,440
Less: accumulated depreciation and amortization	(744,265)		(654,667)
Total real estate investments, net	4,435,293		3,206,773
Cash and cash equivalents	41,150		214,853
Restricted cash	19,288		21,996
Deposits for real estate investments	—		41,928

Deferred costs, net	22,176		25,587
Straight-line rent receivable	67,953		70,789
Operating lease right-of-use assets	17,964		18,194
Prepaid expenses and other assets	46,732		26,877
Assets held for sale	1,525		187,213
Total assets	$	4,652,081	$	3,814,210

LIABILITIES AND EQUITY
Mortgage notes payable, net	$	1,807,533	$	1,464,930
Credit facility	478,000		—
Senior notes, net	491,983		491,015
Below market lease liabilities, net	140,241		78,073
Accounts payable and accrued expenses (including $2,864 and $1,016 due to related parties as of September 30, 2022 and December 31, 2021, respectively)	55,506		32,907
Operating lease liabilities	19,153		19,195
Derivative liabilities, at fair value	—		2,250
Deferred rent and other liabilities	7,919		9,524
Dividends payable	5,837		6,038
Total liabilities	3,006,172		2,103,932




7.50% Series A cumulative redeemable perpetual preferred stock, $0.01 par value, liquidation preference $25.00 per share, 12,796,000 shares authorized, 7,933,711 issued and outstanding as of September 30, 2022 and December 31, 2021	79		79
7.375% Series C cumulative redeemable perpetual preferred stock, $0.01 par value, liquidation preference $25.00 per share, 11,536,000 shares authorized, 4,595,175 and 4,594,498 issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	46		46
Common stock, $0.01 par value per share, 300,000,000 shares authorized, 134,244,502 and 123,783,060 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	1,343		1,238
Additional paid-in capital	2,999,273		2,915,926

Distributions in excess of accumulated earnings	(1,374,378)		(1,217,435)
Total stockholders’ equity	1,626,363		1,699,854
Non-controlling interests	19,546		10,424
Total equity	1,645,909		1,710,278
Total liabilities and equity	$	4,652,081	$	3,814,210

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

Table of Contents

THE NECESSITY RETAIL REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue from tenants	$	116,176	$	91,915	$	328,048	$	252,679

Operating expenses:
Asset management fees to related party	7,939		9,880		24,061		25,123
Property operating expense	28,051		13,384		74,710		40,152
Impairment of real estate investments	30,046		4,554		94,942		4,645
Acquisition, transaction and other costs	210		3,426		695		3,604
Equity-based compensation	3,857		4,149		10,878		13,779
General and administrative	8,499		5,589		23,722		15,578
Depreciation and amortization	57,494		32,762		141,755		97,509
Total operating expenses	136,096		73,744		370,763		200,390
Operating (loss) income before gain on sale of real estate investments	(19,920)		18,171		(42,715)		52,289
Gain on sale of real estate investments	1,608		478		68,615		775
Operating (loss) income	(18,312)		18,649		25,900		53,064
Other (expense) income:
Interest expense	(32,402)		(19,232)		(84,471)		(58,927)
Other income	25		18		987		62
Gain on non-designated derivatives	—		—		2,250		—
Total other expense, net	(32,377)		(19,214)		(81,234)		(58,865)
Net loss	(50,689)		(565)		(55,334)		(5,801)
Net loss (income) attributable to non-controlling interests	60		(4)		54		4
Allocation for preferred stock	(5,837)		(5,837)		(17,511)		(17,425)
Net loss attributable to common stockholders	(56,466)		(6,406)		(72,791)		(23,222)

Other comprehensive income (loss):
Change in unrealized income on derivatives	—		98		—		2,151
Comprehensive loss attributable to common stockholders	$	(56,466)	$	(6,308)	$	(72,791)	$	(21,071)

Weighted-average shares outstanding — Basic	133,115,729		118,862,852		131,478,484		112,770,685

Weighted-average shares outstanding — Diluted	133,115,729		118,862,852		131,478,484		112,770,685
Net loss per share attributable to common stockholders — Basic and Diluted	$	(0.43)	$	(0.06)	$	(0.56)	$	(0.21)

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

Table of Contents

THE NECESSITY RETAIL REIT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands, except share data)

(Unaudited)


	Nine Months Ended September 30, 2022
	Mezzanine Equity		Total Equity
			Series A Preferred Stock			Series C Preferred Stock			Common Stock
	Shares Subject to Repurchase		Number of Shares	Par Value		Number of Shares	Par Value		Number of Shares	Par Value		Additional Paid-in Capital		Distributions in excess of accumulated earnings		Total Stockholders’ Equity		Non-controlling Interests		Total Equity
Balance, December 31, 2021	$	—	7,933,711	$	79	4,594,498	$	46	123,783,060	$	1,238	$	2,915,926	$	(1,217,435)	$	1,699,854	$	10,424	$	1,710,278
Issuance of Common Stock, net	—		—	—		—	—		3,762,559	38		32,450		—		32,488		—		32,488
Issuance of Shares subject to repurchase, at fair market value upon closing	49,965		—	—		—	—		6,450,107	—		—		—		—		—		—
Adjustments to redemption value	3,423		—	—		—	—		—	—		(3,423)		—		(3,423)		—		(3,423)
Reclassification of Shares upon termination of repurchase rights	(53,388)		—	—		—	—		—	65		53,323		—		53,388		—		53,388
Issuance of Series A Preferred Stock, net	—		—	—		—	—		—	—		(166)		—		(166)		—		(166)
Issuance of Series C Preferred Stock, net	—		—	—		677	—		—	—		(149)		—		(149)		—		(149)
Equity-based compensation (1)	—		—	—		—	—		287,735	2		1,348		—		1,350		9,528		10,878
Common stock shares withheld upon vesting of restricted stock	—		—	—		—	—		(38,959)	—		(278)		—		(278)		—		(278)
Dividends declared on Common Stock,$0.64 per share	—		—	—		—	—		—	—		—		(83,607)		(83,607)		—		(83,607)
Dividends declared on Series A Preferred Stock, $1.41 per share	—		—	—		—	—		—	—		—		(11,157)		(11,157)		—		(11,157)
Dividends declared on Series C Preferred Stock, $1.38 per share	—		—	—		—	—		—	—		—		(6,354)		(6,354)		—		(6,354)
Distributions to non-controlling interest holders	—		—	—		—	—		—	—		—		(545)		(545)		(110)		(655)
Net loss	—		—	—		—	—		—	—		—		(55,280)		(55,280)		(54)		(55,334)

Rebalancing of ownership percentage	—		—	—		—	—		—	—		242		—		242		(242)		—
Balance, September 30, 2022	$	—	7,933,711	$	79	4,595,175	$	46	134,244,502	$	1,343	$	2,999,273	$	(1,374,378)	$	1,626,363	$	19,546	$	1,645,909

(1)Presented net of forfeitures. During the nine months ended September 30, 2022, 64,205 restricted shares with a fair value of approximately $0.5 million were forfeited.


	Three Months Ended September 30, 2022
	Mezzanine Equity		Total Equity
			Series A Preferred Stock			Series C Preferred Stock			Common Stock
	Shares Subject to Repurchase		Number of Shares	Par Value		Number of Shares	Par Value		Number of Shares	Par Value		Additional Paid-in Capital		Distributions in excess of accumulated earnings		Total Stockholders’ Equity		Non-controlling Interests		Total Equity
Balance, June 30, 2022	$	53,388	7,933,711	$	79	4,595,175	$	46	133,272,305	$	1,268	$	2,937,395	$	(1,289,400)	$	1,649,388	$	16,843	$	1,666,231
Issuance of Common Stock, net	—		—	—		—	—		997,230	11		7,850		—		7,861		—		7,861


Reclassification of Shares upon termination of repurchase rights	(53,388)		—	—		—	—		—	65		53,323		—		53,388		—		53,388
Issuance of Series A Preferred Stock, net	—		—	—		—	—		—	—		(44)		—		(44)		—		(44)
Issuance of Series C Preferred Stock, net	—		—	—		—	—		—	—		(31)		—		(31)		—		(31)
Equity-based compensation (1)	—		—	—		—	—		13,926	(1)		682		—		681		3,176		3,857
Common stock shares withheld upon vesting of restricted stock	—		—	—		—	—		(38,959)	—		(278)		—		(278)		—		(278)
Dividends declared on Common Stock,$0.21 per share	—		—	—		—	—		—	—		—		(28,331)		(28,331)		—		(28,331)
Dividends declared on Series A Preferred Stock, $0.47 per share	—		—	—		—	—		—	—		—		(3,719)		(3,719)		—		(3,719)
Dividends declared on Series C Preferred Stock, $0.46 per share	—		—	—		—	—		—	—		—		(2,118)		(2,118)		—		(2,118)
Distributions to non-controlling interest holders	—		—	—		—	—		—	—		—		(181)		(181)		(37)		(218)
Net loss	—		—	—		—	—		—	—		—		(50,629)		(50,629)		(60)		(50,689)

Rebalancing of ownership percentage	—		—	—		—	—		—	—		376		—		376		(376)		—
Balance, September 30, 2022	$	—	7,933,711	$	79	4,595,175	$	46	134,244,502	$	1,343	$	2,999,273	$	(1,374,378)	$	1,626,363	$	19,546	$	1,645,909

(1)Presented net of forfeitures. During the three months ended September 30, 2022, 63,930 restricted shares with a fair value of approximately $0.5 million were forfeited.

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

Table of Contents

THE NECESSITY RETAIL REIT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands, except share data)

(Unaudited)


	Nine Months Ended September 30, 2021
	Series A Preferred Stock			Series C Preferred Stock			Common Stock
	Number of Shares	Par Value		Number of Shares	Par Value		Number of Shares	Par Value		Additional Paid-in Capital		Accumulated Other Comprehensive income (loss)		Distributions in excess of accumulated earnings		Total Stockholders’ Equity		Non-controlling Interests		Total Equity
Balance, December 31, 2020	7,842,008	$	79	3,535,700	$	35	108,837,209	$	1,088	$	2,723,678	$	(123)	$	(1,055,680)	$	1,669,077	$	30,522	$	1,699,599
Issuance of Common Stock, net	—	—		—	—		14,456,837	145		125,937		—		—		126,082		—		126,082
Issuance of Series A Preferred Stock, net	91,703	—		—	—		—	—		2,047		—		—		2,047		—		2,047
Issuance of Series C Preferred Stock, net	—	—		1,058,798	11		—	—		25,492		—		—		25,503		—		25,503
Equity-based compensation (1)	—	—		—	—		289,449	3		2,075		—		—		2,078		11,701		13,779
Common stock shares withheld upon vesting of restricted shares	—	—		—	—		(77,021)	(1)		(723)		—		—		(724)		—		(724)
Dividends declared on Common Stock, $0.63 per share	—	—		—	—		—	—		—		—		(71,287)		(71,287)		—		(71,287)
Dividends declared on Series A Preferred Stock, $1.41 per share	—	—		—	—		—	—		—		—		(11,172)		(11,172)		—		(11,172)
Dividends declared on Series C Preferred Stock, $1.45 per share	—	—		—	—		—	—		—		—		(6,499)		(6,499)		—		(6,499)
Distributions to non-controlling interest holders	—	—		—	—		—	—		—		—		(354)		(354)		(110)		(464)
Net loss	—	—		—	—		—	—		—		—		(5,797)		(5,797)		(4)		(5,801)
Other comprehensive loss	—	—		—	—		—	—		—		2,151		—		2,151		—		2,151
Forfeiture of 2018 LTIP Units	—	—		—	—		—	—		34,826		—		—		34,826		(34,826)