GETTY REALTY CORP /MD/ (GTY) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand our operations and our present business environment from the perspective of management. The following discussion and analysis should be read in conjunction with the “Cautionary Note Regarding Forward-Looking Statements”; the sections in Part I entitled “Item 1A. Risk Factors”; and the consolidated financial statements and related notes in “Item 8. Financial Statements and Supplementary Data”. We use certain non-GAAP measures that are more fully described below under the caption “—Supplemental Non-GAAP Measures,” which we believe are appropriate supplemental non-GAAP measures of the performance of REITs used by our management, as well as REIT analysts.
This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
General
Real Estate Investment Trust
We are a REIT specializing in the acquisition, financing and development of convenience, automotive and other single tenant retail real estate. Our portfolio includes convenience stores, express car washes, automotive service centers (including instant oil change, tire and battery, gas and repair, and other related centers), automotive parts retailers, drive-thru quick service restaurants and select other properties. As of December 31, 2021, our portfolio included 1,028 properties, including 981 properties owned by us and 47 properties that we leased from third-party landlords. As a REIT, we are not subject to federal corporate income tax on the taxable income we distribute to our stockholders. In order to continue to qualify for taxation as a REIT, we are required, among other things, to distribute at least 90% of our ordinary taxable income to our stockholders each year.
COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic. The impact from the rapidly changing market and economic conditions due to the COVID-19 pandemic remains uncertain. While we have not incurred significant disruptions to our financial results thus far from the COVID-19 pandemic, we are unable to accurately predict the impact that COVID-19 will have on our business, operations and financial result due to numerous evolving factors, including the severity of the disease, the duration of the pandemic, actions that may be taken by governmental authorities, the impact to our tenants, including the ability of our tenants to make their rental payments and any closures of tenants’ facilities. Additionally, while we expect to continue our overall growth strategy during the 2022 and to fund our business operations from cash flows from our properties and our Revolving Facility, the rapid developments and fluidity of COVID-19 may cause us to re-evaluate, if not suspend, our growth strategy and/or to rely more heavily on borrowings under our Revolving Facility, proceeds from the sale of shares of our common stock under our ATM Program, or other sources of liquidity. See “Part I. Item. 1A. Risk Factors” in this Annual Report on Form 10-K for additional information.
Our Triple-Net Leases
Substantially all of our properties are leased on a triple-net basis to convenience store operators, petroleum distributors, car wash operators and other automotive-related and retail tenants. Our tenants either operate their business at our properties directly or, in the case of certain convenience stores and gasoline and repair stations, sublet our properties and supply fuel to third parties that operate the businesses. Our triple-net lease tenants are responsible for the payment of all taxes, maintenance, repairs, insurance and other operating expenses relating to our properties, and are also responsible for environmental contamination occurring during the terms of their leases and in certain cases also for environmental contamination that existed before their leases commenced.
Significant portion of our tenants’ financial results depend on convenience store sales, the sale of refined petroleum products and/or the sale of automotive services and parts. As a result, our tenants’ financial results can be dependent on the performance of the automobile manufacturing, petroleum marketing and automobile aftermarket industries, each of which are highly competitive and can be subject to variability. (For additional information regarding risks related to our tenants’ dependence on the performance of the petroleum industry, see “Item 1A. Risk Factors – Significant number of our tenants depend on the same industry for their revenues” in this Form 10-K.) During the terms of our leases, we monitor the credit quality of our triple-net lease tenants by reviewing their published credit rating, if available, reviewing publicly available financial statements, or reviewing financial or other operating statements which are delivered to us pursuant to applicable lease agreements, monitoring news reports regarding our tenants and their respective businesses, and monitoring the timeliness of lease payments and the performance of other financial covenants under their leases.
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Our Properties
Net Lease. As of December 31, 2021, we leased 1,019 of our properties to tenants under triple-net leases.
Our net lease properties include 845 properties leased under 33 separate unitary or master triple-net leases and 174 properties leased under single unit triple-net leases. These leases generally provide for an initial term of 15 or 20 years with options for successive renewal terms of up to 20 years and periodic rent escalations. Several of our leases provide for additional rent based on the aggregate volume of fuel sold. In addition, certain of our leases require the tenants to invest capital in our properties, substantially all of which is related to the replacement of USTs that are owned by our tenants.
Redevelopment. As of December 31, 2021, we were actively redeveloping four of our properties as new convenience stores or for alternative single tenant retail uses.
Vacancies. As of December 31, 2021, five of our properties were vacant. We expect that we will either sell or enter into new leases on these properties over time.
Investment Strategy and Activity
As part of our strategy to grow and diversify our portfolio, we regularly review acquisition and financing opportunities to invest in additional convenience, automotive and other single tenant retail real estate. We primarily pursue sale leaseback transactions with existing and prospective tenants and will pursue other transactions, including forward commitments to acquire new-to-industry construction and the acquisition of assets with in-place leases, that result in us owning fee simple interests in our properties. Our investment activities may also include purchase money financing with respect to properties we sell, real property loans relating to our leasehold properties and construction loans. Our investment strategy seeks to generate current income and benefit from long-term appreciation in the underlying value of our real estate. To achieve that goal, we seek to invest in well-located, freestanding properties that support automobility and provide convenience and service to consumers in major markets across the country. A key element of our investment strategy is to invest in properties that will enhance our property type, tenant and geographic diversification.
During the year ended December 31, 2021, we invested $200.0 million across 100 properties, including the acquisition of fee simple interests in 97 properties for an aggregate purchase price of $194.3 million and $5.7 million of outstanding construction loans, including accrued interest, for three new-to-industry developments. During the year ended December 31, 2020, we acquired fee simple interests in 34 properties for an aggregate purchase price of $150.0 million. We accounted for the acquisitions of fee simple interests as asset acquisitions. For additional information regarding our property acquisitions, see Note 13 in “Item 8. Financial Statements and Supplementary Data” in this Form 10-K.
Redevelopment Strategy and Activity
We believe that certain of our properties, primarily those currently being occupied by gas and repair businesses, are well-suited to be redeveloped as new convenience stores or other single tenant retail uses, such as automotive parts, quick service restaurants, bank branches and specialty retail. We believe that the redeveloped properties can be leased or sold at higher values than their current use.
During the years ended December 31, 2021 and 2020, rent commenced on five and six completed redevelopment projects, respectively, that were placed back into service in our net lease portfolio. Since the inception of our redevelopment program in 2015, we have completed 24 redevelopment projects.
For the year ended December 31, 2021, we spent $0.3 million (net of write-offs) of construction-in-progress costs related to our redevelopment activities and transferred $0.4 million of construction-in-progress to buildings and improvements on our consolidated balance sheet. For the year ended December 31, 2020, we spent $0.3 million (net of write-offs) of construction-in-progress costs related to our redevelopment activities and transferred $1.6 million of construction-in-progress to buildings and improvements on our consolidated balance sheet.
As of December 31, 2021, we had four properties under active redevelopment and others in various stages of feasibility planning for potential recapture from our net lease portfolio, including three properties for which we have signed new leases or letters of intent and which will be transferred to redevelopment when the appropriate entitlements, permits and approvals have been secured.
Asset Impairment
We perform an impairment analysis for the carrying amounts of our properties in accordance with GAAP when indicators of impairment exist. We reduced the carrying amounts to fair value, and recorded impairment charges aggregating $4.4 million and $4.3 million for the years ended December 31, 2021 and 2020, respectively, where the carrying amounts of the properties exceeded the estimated undiscounted cash flows expected to be received during the assumed holding period which includes the estimated sales value expected to be received at disposition. The impairment charges were attributable to (i) the effect of adding asset retirement costs to certain properties due to changes in estimates associated with our environmental liabilities, which increased the carrying values of
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these properties in excess of their fair values, (ii) reductions in estimated undiscounted cash flows expected to be received during the assumed holding period for certain of our properties, and (iii) reductions in estimated sales prices from third-party offers based on signed contracts, letters of intent or indicative bids for certain of our properties. The evaluation and estimates of anticipated cash flows used to conduct our impairment analysis are highly subjective and actual results could vary significantly from our estimates. For a discussion of the risks associated with asset impairments, see “Item 1A. Risk Factors – Our assets may be subject to impairment charges.”
Supplemental Non-GAAP Measures
We manage our business to enhance the value of our real estate portfolio and, as a REIT, place particular emphasis on minimizing risk, to the extent feasible, and generating cash sufficient to make required distributions to stockholders of at least 90% of our ordinary taxable income each year. In addition to measurements defined by accounting principles generally accepted in the United States of America (“GAAP”), we also focus on Funds From Operations (“FFO”) and Adjusted Funds From Operations (“AFFO”) (both AFFO and AFFO excluding stock-based compensation and amortization of debt issuance costs) to measure our performance. We are updating our definition of AFFO to include adjustments for stock-based compensation and amortization of debt issuance costs and are providing AFFO using both methods for the quarter and year ended December 31, 2021. We believe that conforming to this market practice for calculating AFFO will improve the comparability of this measure of performance to other net lease REITs, and we will report AFFO pursuant to this updated definition beginning in the first quarter of 2022.
FFO and AFFO are generally considered by analysts and investors to be appropriate supplemental non-GAAP measures of the performance of REITs. FFO and AFFO are not in accordance with, or a substitute for, measures prepared in accordance with GAAP. In addition, FFO and AFFO are not based on any comprehensive set of accounting rules or principles. Neither FFO nor AFFO represent cash generated from operating activities calculated in accordance with GAAP and therefore these measures should not be considered an alternative for GAAP net earnings or as a measure of liquidity. These measures should only be used to evaluate our performance in conjunction with corresponding GAAP measures.
FFO is defined by the National Association of Real Estate Investment Trusts (“NAREIT”) as GAAP net earnings before (i) depreciation and amortization of real estate assets, (ii) gains or losses on dispositions of real estate assets, (iii) impairment charges, and (iv) the cumulative effect of accounting changes.
Our definition of AFFO is defined as FFO plus or minus (i) certain revenue recognition adjustments (defined below), (ii) certain environmental adjustments (defined below), (iii) other non-cash and/or unusual items that are not reflective of our core operating performance, and (iv) beginning with our results for the quarter and year ended December 31, 2021, stock-based compensation and amortization of debt issuance costs.
Other REITs may use definitions of FFO and/or AFFO that are different than ours and, accordingly, may not be comparable.
We believe that FFO and AFFO are helpful to analysts and investors in measuring our performance because both FFO and AFFO exclude various items included in GAAP net earnings that do not relate to, or are not indicative of, the core operating performance of our portfolio. Specifically, FFO excludes items such as depreciation and amortization of real estate assets, gains or losses on dispositions of real estate assets, and impairment charges. With respect to AFFO, we further exclude the impact of (i) deferred rental revenue (straight-line rent), the net amortization of above-market and below-market leases, adjustments recorded for the recognition of rental income from direct financing leases, and the amortization of deferred lease incentives (collectively, “Revenue Recognition Adjustments”), (ii) environmental accretion expenses, environmental litigation accruals, insurance reimbursements, legal settlements and judgments, and changes in environmental remediation estimates (collectively, “Environmental Adjustments”), (iii) other items, which may include allowances for credit losses on notes and mortgages receivable and direct financing leases, losses on extinguishment of debt, retirement and severance costs, and other items that do not impact our recurring cash flow and which are not indicative of our core operating performance and (iv) beginning with our results for the quarter and year ended December 31, 2021, stock-based compensation and amortization of debt issuance costs.
We pay particular attention to AFFO which it believes provides the most useful depiction of the core operating performance of its portfolio. By providing AFFO, we believe we are presenting information that assists analysts and investors in their assessment of our core operating performance, as well as the sustainability of our core operating performance with the sustainability of the core operating performance of other real estate companies.
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A reconciliation of net earnings to FFO and AFFO is as follows (in thousands, except per share amounts):
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| Net earnings | $ | 62,860 | $ | 69,388 | $ | 49,723 | ||||||
| Depreciation and amortization of real estate assets | 35,518 | 30,191 | 25,161 | |||||||||
| Gains on dispositions of real estate | (16,718 | ) | (4,548 | ) | (1,063 | ) | ||||||
| Impairments | 4,404 | 4,258 | 4,012 | |||||||||
| Funds from operations (FFO) | 86,064 | 99,289 | 77,833 | |||||||||
| Revenue recognition adjustments | 1,964 | 895 | (960 | ) | ||||||||
| Allowance for credit loss on notes and mortgages receivable and direct financing leases | (132 | ) | 368 | — | ||||||||
| Loss on extinguishment of debt | — | 1,233 | — | |||||||||
| Changes in environmental estimates | (1,768 | ) | (3,135 | ) | (5,386 | ) | ||||||
| Accretion expense | 1,705 | 1,841 | 2,006 | |||||||||
| Environmental litigation accruals | 1,909 | 85 | 5,896 | |||||||||
| Insurance reimbursements | (92 | ) | (142 | ) | (4,866 | ) | ||||||
| Legal settlements and judgments | (493 | ) | (21,300 | ) | (2,707 | ) | ||||||
| Retirement and severance costs | 800 | — | — | |||||||||
| Adjusted funds from operations (AFFO) | $ | 89,957 | $ | 79,134 | $ | 71,816 | ||||||
| Stock-based compensation expense | 3,997 | 3,130 | 2,468 | |||||||||
| Amortization of debt issuance costs | 1,013 | 1,053 | 970 | |||||||||
| AFFO (excluding stock-based compensation and amortization of debt issuance costs) | $ | 94,967 | $ | 83,317 | $ | 75,254 | ||||||
| Basic per share amounts: | ||||||||||||
| Net earnings | $ | 1.37 | $ | 1.62 | $ | 1.19 | ||||||
| FFO (1) | 1.88 | 2.32 | 1.86 | |||||||||
| AFFO (1) | 1.97 | 1.85 | 1.72 | |||||||||
| AFFO (excluding stock-based compensation and amortization of debt issuance costs) (1) | 2.08 | 1.94 | 1.80 | |||||||||
| Diluted per share amounts: | ||||||||||||
| Net earnings | $ | 1.37 | $ | 1.62 | $ | 1.19 | ||||||
| FFO (1) | 1.88 | 2.31 | 1.86 | |||||||||
| AFFO (1) | 1.97 | 1.84 | 1.72 | |||||||||
| AFFO (excluding stock-based compensation and amortization of debt issuance costs) (1) | 2.08 | 1.94 | 1.80 | |||||||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 44,782 | 42,040 | 41,072 | |||||||||
| Diluted | 44,819 | 42,070 | 41,110 |
| Column 1 | Column 2 |
|---|---|
| (1) | Dividends paid and undistributed earnings allocated, if any, to unvested restricted stockholders are deducted from FFO and AFFO for the computation of the per share amounts. The following amounts were deducted: |
| Year ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | |||||||||
| FFO | 1,771 | 1,939 | 1,308 | ||||||||
| AFFO | $ | 1,814 | $ | 1,546 | $ | 1,207 | |||||
| AFFO (excluding stock-based compensation and amortization of debt issuance costs) | 1,915 | 1,627 | 1,265 |
Results of Operations
Year ended December 31, 2021, compared to year ended December 31, 2020
Revenues from rental properties increased by $9.3 million to $153.9 million for the year ended December 31, 2021, as compared to $144.6 million for the year ended December 31, 2020. The increase in revenues from rental properties was primarily due
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to incremental rental income from acquired properties, as well as rent commencements from completed redevelopments and contractual rent increases for certain in-place leases .
Rental income contractually due from our tenants included in revenues from rental properties was $138.7 million for the year ended December 31, 2021, as compared to $128.2 million for the year ended December 31, 2020.
In accordance with GAAP, we recognize revenues from rental properties in amounts which vary from the amount of rent contractually due during the periods presented. As a result, revenues from rental properties include Revenue Recognition Adjustments comprised of non-cash adjustments recorded for deferred rental revenue due to the recognition of rental income on a straight-line basis over the current lease term, the net amortization of above-market and below-market leases, recognition of rental income under direct financing leases using the effective interest rate method which produces a constant periodic rate of return on the net investments in the leased properties and the amortization of deferred lease incentives. Revenues from rental properties include Revenue Recognition Adjustments which decreased rental revenue by $2.0 million and by $0.9 million for the years ended December 31, 2021 and 2020, respectively.
Tenant reimbursements, which are included in revenues from rental properties, and which consist of real estate taxes and other municipal charges paid by us which are reimbursable by our tenants pursuant to the terms of triple-net lease agreements, were $17.2 million and $17.3 million for the years ended December 31, 2021 and 2020, respectively.
Interest income on notes and mortgages receivable was $1.5 million for the year ended December 31, 2021, as compared to $2.7 million for the year ended December 31, 2020.
Property costs, which are primarily comprised of rent expense, real estate and other state and local taxes, municipal charges, professional fees, maintenance expense and reimbursable tenant expenses, were $22.0 million for the year ended December 31, 2021, as compared to $23.5 million for the year ended December 31, 2020. The decrease in property costs for the year ended December 31, 2021, was principally due to a decrease in rent expense, professional fees related to property redevelopments, non-reimbursable real estate taxes, maintenance expenses and other professional fees.
Impairment charges were $4.4 million for the year ended December 31, 2021, as compared to $4.3 million for the year ended December 31, 2020. Impairment charges are recorded when the carrying value of a property is reduced to fair value. Impairment charges for the years ended December 31, 2021 and 2020, were attributable to the effect of adding asset retirement costs to certain properties due to changes in estimates associated with our environmental liabilities, which increased the carrying values of these properties in excess of their fair values, reductions in estimated undiscounted cash flows expected to be received during the assumed holding period for certain of our properties, and reductions in estimated sales prices from third-party offers based on signed contracts, letters of intent or indicative bids for certain of our properties.
Environmental expenses were $3.5 million for the year ended December 31, 2021, as compared to $1.1 million for the year ended December 31, 2020. The increase in environmental expenses for the year ended December 31, 2021, was principally due to a $1.8 million increase in environmental litigation accruals and a $1.2 million increase in net environmental remediation costs and estimates, partially offset by a $0.5 million decrease in environmental legal and professional fees. Environmental expenses vary from period to period and, accordingly, undue reliance should not be placed on the magnitude or the direction of change in reported environmental expenses for one period, as compared to prior periods.
General and administrative expense was $20.2 million for the year ended December 31, 2021, as compared to $17.3 million for the year ended December 31, 2020. The increase in general and administrative expense for the year ended December 31, 2021, was principally due to a $0.9 million increase in stock-based compensation, a $0.8 million increase in non-recurring employee-related expenses and a $0.7 million increase in other employee-related expenses.
Depreciation and amortization expense was $35.5 million for the year ended December 31, 2021, as compared to $30.2 million for the year ended December 31, 2020. The increase in depreciation and amortization expense was primarily due to depreciation and amortization of properties acquired offset by a decrease in depreciation charges related to asset retirement costs, the effect of certain assets becoming fully depreciated, lease terminations and dispositions of real estate.
Gains on dispositions of real estate were $16.7 million for the year ended December 31, 2021, as compared to $4.5 million for the year ended December 31, 2020. The gains were primarily the result of the sale of 16 and 11 properties during the years ended December 31, 2021 and 2020, respectively.
Other income was $1.1 million for the year ended December 31, 2021, as compared to $21.1 million for the year ended December 31, 2020. For the year ended December 31, 2021, other income was primarily attributable to $0.5 million received from legal settlements and judgments and $0.4 million received for lease considerations and easements. Other income for the year ended December 31, 2020, was primarily attributable to $21.3 million received from legal settlements and judgments, partially offset by a $0.4 million allowance for credit loss on notes and mortgages receivable and direct financings leases.
Interest expense was $24.7 million for the year ended December 31, 2021, as compared to $26.1 million for the year ended December 31, 2020. The decrease was due to lower average interest rates for the year ended December 31, 2021, as compared to the year ended December 31, 2020.
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Liquidity and Capital Resources
General
Our principal sources of liquidity are the cash flows from our operations, funds available under our Revolving Facility (which is scheduled to mature in October 2025), proceeds from the sale of shares of our common stock through offerings under our ATM Program, and available cash and cash equivalents. Our business operations and liquidity are dependent on our ability to generate cash flow from our properties. Our principal uses for liquidity include normal operating activities, payments of interest on outstanding debt, redevelopment projects, real estate acquisitions, and environmental remediation. We believe that our operating cash needs for the next twelve months, as well as our long-term liquidity requirements, can be met by cash flows from operations, borrowings under our Revolving Facility, proceeds from the sale of shares of our common stock under our ATM Program and available cash and cash equivalents. We have not historically incurred significant capital expenditures other than those related to acquisitions. For a discussion of our capital expenditures, see “—Property Acquisitions and Capital Expenditures.
As of December 31, 2021, we had $60 million outstanding on our Revolving Facility and our total cash and cash equivalents were $26.5 million. During the year ended December 31, 2021, we raised gross proceeds of $94.1 million through our ATM equity program pursuant to which we are able to issue and sell shares of our common stock with an aggregate sales price of up to $250.0 million. We expect existing cash and cash equivalents, net cash from operating activities, proceeds from real estate asset sales, borrowings under our unsecured Revolving Facility, issuances under our ATM Program, issuances of unsecured notes and issuances of common stock to continue to be sufficient to fund our operating activities and cash needed for investing and financing activities, such as regular quarterly dividends, scheduled debt repayments, acquisitions, and certain capital expenditures, including expenditures related to redevelopment activities. We also expect to continue meeting our short-term liquidity and capital requirements, generally through our working capital and net cash provided by operating activities. We believe that the net cash provided by operating activities will continue to be sufficient to enable us to make the distributions necessary to continue qualifying as a REIT.
On February 22, 2022, we closed on the private placement of $225 million of senior unsecured notes, including (i) $100 million of 3.45% notes funded at closing and maturing in February 2032, and (ii) $125 million of 3.65% notes to be funded in January 2023 and mature in January 2033. Proceeds from the notes funded at closing were used to repay all amounts outstanding on the Revolving Facility and for general corporate purposes, including to fund investment activity. Proceeds from the delayed funding notes will be used to prepay $75 million of 5.35% senior unsecured notes maturing in June 2023 and for general corporate purposes, including to fund investment activity.
Our cash flow activities for the years ended December 31, 2021 and 2020 are summarized as follows (in thousands):
| Year ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| Net cash flow provided by operating activities | $ | 86,818 | $ | 82,827 | ||||
| Net cash flow used in investing activities | (169,732 | ) | (127,417 | ) | ||||
| Net cash flow provided by (used in) financing activities | $ | 52,321 | $ | 77,980 |
Operating Activities
Net cash flow from operating activities increased by $4.0 million for the year ended December 31, 2021, to $86.8 million, as compared to $82.8 million for the year ended December 31, 2020. Net cash provided by operating activities represents cash received primarily from rental and interest income less cash used for property costs, environmental expense, general and administrative expense and interest expense. The change in net cash flow provided by operating activities for the years ended December 31, 2021, 2020 is primarily the result of changes in revenues and expenses as discussed in “Results of Operations” above and the other changes in assets and liabilities on our consolidated statements of cash flows.
Investing Activities
Our investing activities are primarily real estate-related transactions. Because we generally lease our properties to tenants on a triple-net basis, we have not historically incurred significant capital expenditures other than those related to investments in real estate and our redevelopment activities. Net cash flow used in investing activities increased by $42.3 million for the year ended December 31, 2021, to a use of $169.7 million, as compared to a use of $127.4 million for the year ended December 31, 2020. The increase in net cash flow used in investing activities for the year ended December 31, 2021, was primarily due to an increase of $44.3 million of property acquisitions, a $10.6 million increase in issuance of notes receivable, and a decrease of $12.4 million in collections of notes and mortgages receivable, partially offset by an increase of $19.4 million in proceeds from dispositions of real estate and an increase of $5.7 million in deposits for property acquisitions.
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Financing Activities
Net cash flow provided by financing activities decreased by $25.7 million for the year ended December 31, 2021, to $52.3 million, as compared to $78.0 million for the year ended December 31, 2020. The decrease in net cash flow from financing activities for the year ended December 31, 2021, was primarily due to a decrease in net borrowings of $44.0 million and an increase in dividends paid of $8.2 million, partially offset by an increase in net proceeds from issuances of common stock of $29.1 million.
Credit Agreement
On June 2, 2015, we entered into a $225.0 million senior unsecured credit agreement (the “Credit Agreement”) with a group of banks led by Bank of America, N.A. The Credit Agreement consisted of a $175.0 million unsecured revolving credit facility (the “Revolving Facility”) and a $50.0 million unsecured term loan (the “Term Loan”).
On March 23, 2018, we entered in to an amended and restated credit agreement (as amended, the “Restated Credit Agreement”) amending and restating our Credit Agreement. Pursuant to the Restated Credit Agreement, we (a) increased the borrowing capacity under the Revolving Facility from $175.0 million to $250.0 million, (b) extended the maturity date of the Revolving Facility from June 2018 to March 2022, (c) extended the maturity date of the Term Loan from June 2020 to March 2023 and (d) amended certain financial covenants and provisions.
On September 19, 2018, we entered into an amendment (the “First Amendment”) of our Restated Credit Agreement. The First Amendment modified the Restated Credit Agreement to, among other things: (i) reflect that we had previously entered into (a) an amended and restated note purchase and guarantee agreement with The Prudential Insurance Company of America (“Prudential”) and certain of its affiliates and (b) a note purchase and guarantee agreement with the Metropolitan Life Insurance Company (“MetLife”) and certain of its affiliates; and (ii) permit borrowings under each of the Revolving Facility and the Term Loan at three different interest rates, including a rate based on the LIBOR Daily Floating Rate (as defined in the First Amendment) plus the Applicable Rate (as defined in the First Amendment) for such facility.
On September 12, 2019, in connection with prepayment of the Term Loan, we entered into a consent and amendment (the “Second Amendment”) of our Restated Credit Agreement. The Second Amendment modifies the Restated Credit Agreement to, among other things, (a) increase our borrowing capacity under the Revolving Facility from $250.0 million to $300.0 million and (b) decrease lender commitments under the Term Loan to $0.0 million.
On October 27, 2021, we entered into second amended and restated credit agreement (as amended, the “Second Restated Credit Agreement”) amending and restating our Restated Credit Agreement. Pursuant to the Second Restated Credit Agreement, we (i) extended the maturity date of the Revolving Facility from March 2022 to October 2025, (ii) reduced the interest rate for borrowings under the Revolving Facility and (iii) amended certain financial covenants and other provisions.
The Second Restated Credit Agreement provides for the Revolving Facility in an aggregate principal amount of $300.0 and includes an accordion feature to increase the revolving commitments or add one or more tranches of term loans up to an additional aggregate amount not to exceed $300 million, subject to certain conditions, including one or more new or existing lenders agreeing to provide commitments for such increased amount and that no default or event of default shall have occurred and be continuing under the terms of the Revolving Facility.
The Revolving Facility matures October 27, 2025, subject to two six-month extensions (for a total of 12 months) exercisable at the Company's option. The Company's exercise of an extension option is subject to the absence of any default under the Second Restated Credit Agreement and the Company's compliance with certain conditions, including the payment of extension fees to the Lenders under the Revolving Facility and that no default or event of default shall have occurred and be continuing under the terms of the Revolving Facility.
The Second Restated Credit Agreement reflects reductions in the interest rates for borrowings under the Revolving Facility and permits borrowings at an interest rate equal to the sum of a base rate plus a margin of 0.30% to 0.90% or a LIBOR rate plus a margin of 1.30% to 1.90% based on the Company’s consolidated total indebtedness to total asset value ratio at the end of each quarterly reporting period. The Revolving Facility includes customary LIBOR transition language that addresses the succession of LIBOR at a future date.
The per annum rate of the unused line fee on the undrawn funds under the Revolving Facility is 0.15% to 0.25% based on the Company’s daily unused portion of the available Revolving Facility.
The Second Restated Credit Agreement contains customary financial covenants, including covenants with respect to total leverage, secured leverage and unsecured leverage ratios, fixed charge and interest coverage ratios, and minimum tangible net worth, as well as limitations on restricted payments, which may limit the Company’s ability to incur additional debt or pay dividends. The Second Restated Credit Agreement contains customary events of default, including cross default provisions with respect to the Company’s existing senior unsecured notes. Any event of default, if not cured or waived in a timely manner, could result in the acceleration of the Company’s indebtedness under the Second Restated Credit Agreement and could also give rise to an event of default and the acceleration of the Company’s existing senior unsecured notes.
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Senior Unsecured Notes
On December 4, 2020, we entered into a fifth amended and restated note purchase and guarantee agreement (the “Fifth Amended and Restated Prudential Agreement”) with Prudential and certain of its affiliates amending and restating our existing fourth amended and restated note purchase and guarantee agreement. Pursuant to the Fifth Amended and Restated Prudential Agreement, we issued $100.0 million of 3.43% Series I Guaranteed Senior Notes due November 25, 2030 (the “Series I Notes”) to Prudential, and completed the early redemption of our 6.0% Series A Guaranteed Senior Notes due February 25, 2021 in the original aggregate principal amount of $100.0 million. The other senior unsecured notes outstanding under the fourth amended and restated note purchase and guarantee agreement with Prudential, including (i) $75.0 million of 5.35% Series B Guaranteed Senior Notes due June 2, 2023 (the “Series B Notes”), (ii) $50.0 million of 4.75% Series C Guaranteed Senior Notes due February 25, 2025 (the “Series C Notes”), (iii) $50.0 million of 5.47% Series D Guaranteed Senior Notes due June 21, 2028 (the “Series D Notes”), and (iv) $50.0 million of 3.52% Series F Guaranteed Senior Notes due September 12, 2029 (the “Series F Notes”) remain outstanding under the Fifth Amended and Restated Prudential Agreement.
On December 4, 2020, we entered into a first amended and restated note purchase and guarantee agreement (the “First Amended and Restated AIG Agreement”) with American General Life Insurance Company amending and restating our existing note purchase and guarantee agreement. Pursuant to the First Amended and Restated AIG Agreement, we issued $50.0 million of 3.43% Series J Guaranteed Senior Notes due November 25, 2030 (the “Series J Notes”) to AIG. The $50.0 million of 3.52% Series G Guaranteed Senior Notes due September 12, 2029 (the “Series G Notes”) that were outstanding under the existing note purchase and guarantee agreement remain outstanding under the First Amended and Restated AIG Agreement.
On December 4, 2020, we entered into a first amended and restated note purchase and guarantee agreement (the “First Amended and Restated MassMutual Agreement”) with Massachusetts Mutual Life Insurance Company and certain of its affiliates amending and restating our existing note purchase and guarantee agreement. Pursuant to the First Amended and Restated MassMutual Agreement, we issued $25.0 million of 3.43% Series K Guaranteed Senior Notes due November 25, 2030 (the “Series K Notes”) to MassMutual. The $25.0 million of 3.52% Series H Guaranteed Senior Notes due September 12, 2029 (the “Series H Notes”) that were outstanding under the existing note purchase and guarantee agreement remain outstanding under the First Amended and Restated MassMutual.
On June 21, 2018, we entered into a note purchase and guarantee agreement (the “MetLife Note Agreement”) with MetLife and certain of its affiliates. Pursuant to the MetLife Note Agreement, we issued $50.0 million of 5.47% Series E Guaranteed Senior Notes due June 21, 2028 (the “Series E Notes”).
The Series B Notes, Series C Notes, Series D Notes, Series E Notes, Series F Note, Series G Notes, Series H Notes, Series I Notes, Series J Notes, and Series K Notes are collectively referred to as the “senior unsecured notes.”
On October 27, 2021, we entered into amendments to each of the note purchase and guarantee agreements governing the senior unsecured notes in order to conform the financial covenants therein to the corresponding provisions in the Second Restated Credit Agreement.
Debt Maturities
The amounts outstanding under our Second Restated Credit Agreement and our senior unsecured notes, exclusive of extension options, are as follows (in thousands):
| Maturity Date | Interest Rate | December 31, 2021 | December 31, 2020 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revolving Facility | October 2025 | 1.40 | % | $ | 60,000 | $ | 25,000 | |||||||
| Series B Notes | June 2023 | 5.35 | % | 75,000 | 75,000 | |||||||||
| Series C Notes | February 2025 | 4.75 | % | 50,000 | 50,000 | |||||||||
| Series D Notes | June 2028 | 5.47 | % | 50,000 | 50,000 | |||||||||
| Series E Notes | June 2028 | 5.47 | % | 50,000 | 50,000 | |||||||||
| Series F Notes | September 2029 | 3.52 | % | 50,000 | 50,000 | |||||||||
| Series G Notes | September 2029 | 3.52 | % | 50,000 | 50,000 | |||||||||
| Series H Notes | September 2029 | 3.52 | % | 25,000 | 25,000 | |||||||||
| Series I Notes | November 2030 | 3.43 | % | 100,000 | 100,000 | |||||||||
| Series J Notes | November 2030 | 3.43 | % | 50,000 | 50,000 | |||||||||
| Series K Notes | November 2030 | 3.43 | % | 25,000 | 25,000 | |||||||||
| Total debt | 585,000 | 550,000 | ||||||||||||
| Unamortized debt issuance costs, net (a) | (3,880 | ) | (2,307 | ) | ||||||||||
| Total debt, net | $ | 581,120 | $ | 547,693 |
| Column 1 | Column 2 |
|---|---|
| (a) | Unamortized debt issuance costs, related to the Revolving Facility, at December 31, 2021 and 2020, of $2,730 and $1,135, respectively, are included in prepaid expenses and other assets on our consolidated balance sheets. |
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As of December 31, 2021, we are in compliance with all of the material terms of the Second Restated Credit Agreement and our senior unsecured notes.
ATM Program
In March 2018, we established an at-the-market equity offering program (the “2018 ATM Program”), pursuant to which we are able to issue and sell shares of our common stock with an aggregate sales price of up to $125.0 million through a consortium of banks acting as agents. The 2018 ATM Program was terminated in January 2021.
In February 2021, we established a new at-the-market equity offering program (the “ATM Program”), pursuant to which we are able to issue and sell shares of our common stock with an aggregate sales price of up to $250.0 million through a consortium of banks acting as agents. Sales of the shares of common stock may be made, as needed, from time to time in at-the-market offerings as defined in Rule 415 of the Securities Act, including by means of ordinary brokers’ transactions on the New York Stock Exchange or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or as otherwise agreed to with the applicable agent. In connection with the expansion of the ATM Program, we may also sell shares of common stock under forward sale agreements. The use of a forward sale agreement would allow us to lock in a price on the sale of shares of common stock at the time the agreement is executed, but defer receiving the proceeds from the sale until a later date.
During the years ended December 31, 2021 and 2020, we issued 3.0 million and 2.2 million shares of common stock and received net proceeds of $92.3 million and $63.2 million, respectively, under the 2018 ATM Program and the ATM Program. Future sales, if any, will depend on a variety of factors to be determined by us from time to time, including among others, market conditions, the trading price of our common stock, determinations by us of the appropriate sources of funding for us and potential uses of funding available to us. We have not entered into any forward sale agreements.
Property Acquisitions and Capital Expenditures
As part of our overall business strategy, we regularly review acquisition and financing opportunities to invest in additional convenience, automotive and other single tenant retail real estate, and we expect to continue to pursue acquisitions that we believe will benefit our financial performance.
During the year ended December 31, 2021, we invested $200.0 million across 100 properties, including the acquisition of fee simple interests in 97 properties for an aggregate purchase price of $194.3 million and $5.7 million of outstanding loans, including accrued interest, for three new-to-industry developments . During the year ended December 31, 2020, we acquired fee simple interests in 34 properties for an aggregate purchase price of $150.0 million. We accounted for the acquisitions of fee simple interests as asset acquisitions. For additional information regarding our property acquisitions, see Note 13 in “Item 8. Financial Statements and Supplementary Data” in this Form 10-K.
We also seek opportunities to recapture select properties from our net lease portfolio and redevelop such properties as new convenience stores or other single tenant retail uses. For the year ended December 31, 2021, we spent $0.3 million (net of write-offs) of construction-in-progress costs related to our redevelopment activities. For the year ended December 31, 2020, we spent $0.3 million (net of write-offs) of construction-in-progress costs related to our redevelopment activities.
Because we generally lease our properties to tenants on a triple-net basis, we have not historically incurred significant capital expenditures other than those related to acquisitions. However, our tenants frequently make improvements to the properties leased from us at their expense. As of December 31, 2021, we have a commitment to fund up to $7.0 million in the aggregate in capital improvements in certain properties with our tenants.
Dividends
We elected to be treated as a REIT under the federal income tax laws with the year beginning January 1, 2001. To qualify for taxation as a REIT, we must, among other requirements such as those related to the composition of our assets and gross income, distribute annually to our stockholders at least 90% of our taxable income, including taxable income that is accrued by us without a corresponding receipt of cash. We cannot provide any assurance that our cash flows will permit us to continue paying cash dividends.
It is also possible that instead of distributing 100% of our taxable income on an annual basis, we may decide to retain a portion of our taxable income and to pay taxes on such amounts as permitted by the Internal Revenue Service. Payment of dividends is subject to market conditions, our financial condition, including but not limited to, our continued compliance with the provisions of the Second Restated Credit Agreement, our senior unsecured notes and other factors, and therefore is not assured. In particular, the Second Restated Credit Agreement and our senior unsecured notes prohibit the payment of dividends during certain events of default.
Regular quarterly dividends paid to our stockholders aggregated $70.8 million, $62.6 million and $56.9 million for the years ended December 31, 2021, 2020 and 2019, respectively. There can be no assurance that we will continue to pay dividends at historical rates.
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Contractual Obligations
Our significant contractual obligations and commitments, excluding extension options and unamortized debt issuance costs, as of December 31, 2021, were comprised of borrowings under the Second Restated Credit Agreement, our senior unsecured notes, operating and finance lease payments due to landlords, estimated environmental remediation expenditures and our funding commitments for capital improvements at certain properties. Our contractual obligations and commitments as of December 31, 2021, exclusive of extension options and unamortized debt issuance costs, are summarized below (in thousands):
| Total | Less Than One Year | One to Three Years | Three to Five Years | More Than Five Years | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating and finance leases | $ | 15,736 | $ | 3,821 | $ | 5,881 | $ | 3,296 | $ | 2,738 | |||||||||
| Credit agreement | 60,000 | — | — | 60,000 | — | ||||||||||||||
| Senior unsecured notes | 525,000 | — | 75,000 | 50,000 | 400,000 | ||||||||||||||
| Interest on debt (a) | 139,297 | 23,101 | 40,072 | 32,793 | 43,331 | ||||||||||||||
| Estimated environmental remediation expenditures (b) | 47,597 | 6,613 | 17,870 | 8,683 | 14,431 | ||||||||||||||
| Capital improvements (c) | 7,016 | 809 | 1,807 | 4,400 | — | ||||||||||||||
| Total | $ | 794,646 | $ | 34,344 | $ | 140,630 | $ | 159,172 | $ | 460,500 |
| Column 1 | Column 2 |
|---|---|
| (a) | For our Second Restated Credit Agreement, which bears interest at variable rates, future interest expense was calculated using the cost of borrowing as of December 31, 2021. |
| Column 1 | Column 2 |
|---|---|
| (b) | Estimated environmental remediation expenditures have been adjusted for inflation and discounted to present value. |
| Column 1 | Column 2 |
|---|---|
| (c) | The actual timing of funding of capital improvements is dependent on the timing of such capital improvement projects and the terms of our leases. Our commitments provide us with the option to either reimburse our tenants, or to offset rent when these capital expenditures are made. |
Generally, leases with our tenants are triple-net leases with the tenant responsible for the operations conducted at our properties and for the payment of taxes, maintenance, repair, insurance, environmental remediation and other operating expenses.
We have no significant contractual obligations that are not fully recorded on our consolidated balance sheets or fully disclosed in the notes to our consolidated financial statements. We have no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the Exchange Act.
Critical Accounting Policies and Estimates
The consolidated financial statements included in this Form 10-K have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of consolidated financial statements in accordance with GAAP requires us to make estimates, judgments and assumptions that affect the amounts reported in our consolidated financial statements. Although we have made estimates, judgments and assumptions regarding future uncertainties relating to the information included in our consolidated financial statements, giving due consideration to the accounting policies selected and materiality, actual results could differ from these estimates, judgments and assumptions and such differences could be material.
Estimates, judgments and assumptions underlying the accompanying consolidated financial statements include, but are not limited to, real estate, receivables, deferred rent receivable, direct financing leases, depreciation and amortization, impairment of long-lived assets, environmental remediation obligations, litigation, accrued liabilities, income taxes and the allocation of the purchase price of properties acquired to the assets acquired and liabilities assumed. The information included in our consolidated financial statements that is based on estimates, judgments and assumptions is subject to significant change and is adjusted as circumstances change and as the uncertainties become more clearly defined.
Our accounting policies are described in Note 1 in “Item 8. Financial Statements and Supplementary Data”. The SEC’s Financial Reporting Release (“FRR”) No. 60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies (“FRR 60”), suggests that companies provide additional disclosure on those accounting policies considered most critical. FRR 60 considers an accounting policy to be critical if it is important to our financial condition and results of operations and requires significant judgment and estimates on the part of management in its application. We believe that our most critical accounting policies relate to revenue recognition and deferred rent receivable, direct financing leases, impairment of long-lived assets, environmental remediation obligations, litigation, income taxes, and the allocation of the purchase price of properties acquired to the assets acquired and liabilities assumed as described below.
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Revenue Recognition and Deferred Rent Receivable
We earn revenue primarily from operating leases with our tenants. We recognize income under leases with our tenants, on the straight-line method, which effectively recognizes contractual lease payments evenly over the current term of the leases. The present value of the difference between the fair market rent and the contractual rent for in-place leases at the time properties are acquired is amortized into revenue from rental properties over the remaining lives of the in-place leases. A critical assumption in applying the straight-line accounting method is that the tenant will make all contractual lease payments during the current lease term and that the net deferred rent receivable balance will be collected when the payment is due, in accordance with the annual rent escalations provided for in the leases. We may be required to reserve, or provide reserves for a portion of, the recorded deferred rent receivable if it becomes apparent that the tenant may not make all of its contractual lease payments when due during the current term of the lease.
In April 2020, the FASB issued interpretive guidance relating to the accounting for lease concessions provided as a result of COVID-19. In this guidance, entities can elect not to apply lease modification accounting with respect to such lease concessions and instead, treat the concession as if it was a part of the existing contract. This guidance is only applicable to COVID-19 related lease concessions that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. Some concessions will provide a deferral of payments with no substantive changes to the consideration in the original contract. A deferral affects the timing of cash receipts, but the amount of the consideration is substantially the same as that required by the original contract. The FASB staff provides two ways to account for those deferrals:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (1) | Account for the concessions as if no changes to the lease contract were made. Under that accounting, a lessor would increase its lease receivable. In its income statement, a lessor would continue to recognize income during the deferral period. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (2) | Account for the deferred payments as variable lease payments. |
We elected to treat lease concessions with option (1) above for the year ended December 31, 2021. There were no outstanding balances for lease concessions provided as a result of COVID-19 at December 31, 2021.
The present value of the difference between the fair market rent and the contractual rent for above-market and below-market leases at the time properties are acquired is amortized into revenues from rental properties over the remaining terms of the in-place leases. Lease termination fees are recognized as other income when earned upon the termination of a tenant’s lease and relinquishment of space in which we have no further obligation to the tenant.
The sales of nonfinancial assets, such as real estate, are to be recognized when control of the asset transfers to the buyer, which will occur when the buyer has the ability to direct the use of or obtain substantially all of the remaining benefits from the asset. This generally occurs when the transaction closes and consideration is exchanged for control of the property.
Direct Financing Leases
Income under direct financing leases is included in revenues from rental properties and is recognized over the lease terms using the effective interest rate method which produces a constant periodic rate of return on the net investments in the leased properties. The investments in direct financing leases represents the investments in leased assets accounted for as direct financing leases. The investments in direct financing leases are increased for interest income earned and amortized over the life of the leases and reduced by the receipt of lease payments.
Impairment of Long-Lived Assets
Real estate assets represent “long-lived” assets for accounting purposes. We review the recorded value of long-lived assets for impairment in value whenever any events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We may become aware of indicators of potentially impaired assets upon tenant or landlord lease renewals, upon receipt of notices of potential governmental takings and zoning issues, or upon other events that occur in the normal course of business that would cause us to review the operating results of the property. We believe our real estate assets are not carried at amounts in excess of their estimated net realizable fair value amounts.
Environmental Remediation Obligations
We provide for the estimated fair value of future environmental remediation obligations when it is probable that a liability has been incurred and a reasonable estimate of fair value can be made. See “Environmental Matters” below for additional information. Environmental liabilities net of related recoveries are measured based on their expected future cash flows which have been adjusted for inflation and discounted to present value. Since environmental exposures are difficult to assess and estimate and knowledge about these liabilities is not known upon the occurrence of a single event, but rather is gained over a continuum of events, we believe that it is appropriate that our accrual estimates are adjusted as the remediation treatment progresses, as circumstances change and as environmental contingencies become more clearly defined and reasonably estimable. A critical assumption in accruing for these liabilities is that the state environmental laws and regulations will be administered and enforced in the future in a manner that is
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consistent with past practices. Environmental liabilities are estimated net of recoveries of environmental costs from state UST remediation funds, with respect to past and future spending based on estimated recovery rates developed from our experience with the funds when such recoveries are considered probable. A critical assumption in accruing for these recoveries is that the state UST fund programs will be administered and funded in the future in a manner that is consistent with past practices and that future environmental spending will be eligible for reimbursement at historical rates under these programs. We accrue environmental liabilities based on our share of responsibility as defined in our lease contracts with our tenants and under various other agreements with others or if circumstances indicate that our counterparty may not have the financial resources to pay its share of the costs. It is possible that our assumptions regarding the ultimate allocation method and share of responsibility that we used to allocate environmental liabilities may change, which may result in material adjustments to the amounts recorded for environmental litigation accruals and environmental remediation liabilities. We may ultimately be responsible to pay for environmental liabilities as the property owner if our tenants or other counterparties fail to pay them. In certain environmental matters the effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists both in terms of the probability of loss and the estimate of such loss. The ultimate liabilities resulting from such lawsuits and claims, if any, may be material to our results of operations in the period in which they are recognized.
Litigation
Legal fees related to litigation are expensed as legal services are performed. We provide for litigation accruals, including certain litigation related to environmental matters (see “Environmental Litigation” below for additional information), when it is probable that a liability has been incurred and a reasonable estimate of the liability can be made. If the estimate of the liability can only be identified as a range, and no amount within the range is a better estimate than any other amount, the minimum of the range is accrued for the liability.
Income Taxes
Our financial results generally do not reflect provisions for current or deferred federal income taxes because we elected to be treated as a REIT under the federal income tax laws effective January 1, 2001. Our intention is to operate in a manner that will allow us to continue to be treated as a REIT and, as a result, we do not expect to pay substantial corporate-level federal income taxes. Many of the REIT requirements, however, are highly technical and complex. If we were to fail to meet the requirements, we may be subject to federal income tax, excise taxes, penalties and interest or we may have to pay a deficiency dividend to eliminate any earnings and profits that were not distributed. Certain states do not follow the federal REIT rules and we have included provisions for these taxes in property costs.
Allocation of the Purchase Price of Properties Acquired
Upon acquisition of real estate and leasehold interests, we estimate the fair value of acquired tangible assets (consisting of land, buildings and improvements) “as if vacant” and identified intangible assets and liabilities (consisting of leasehold interests, above-market and below-market leases, in-place leases and tenant relationships) and assumed debt. Based on these estimates, we allocate the purchase price to the applicable assets and liabilities. Assumptions used are property and geographic specific and may include, among other things, capitalization rates, market rental rates and EBITDA to rent coverage ratios.
Environmental Matters
General
We are subject to numerous federal, state and local laws and regulations, including matters relating to the protection of the environment such as the remediation of known contamination and the retirement and decommissioning or removal of long-lived assets including buildings containing hazardous materials, USTs and other equipment. Environmental costs are principally attributable to remediation costs which are incurred for, among other things, removing USTs, excavation of contaminated soil and water, installing, operating, maintaining and decommissioning remediation systems, monitoring contamination and governmental agency compliance reporting required in connection with contaminated properties.
We enter into leases and various other agreements which contractually allocate responsibility between the parties for known and unknown environmental liabilities at or relating to the subject properties. We are contingently liable for these environmental obligations in the event that our tenant does not satisfy them, and we are required to accrue for environmental liabilities that we believe are allocable to others under our leases if we determine that it is probable that our tenant will not meet its environmental obligations. It is possible that our assumptions regarding the ultimate allocation method and share of responsibility that we used to allocate environmental liabilities may change, which may result in material adjustments to the amounts recorded for environmental litigation accruals and environmental remediation liabilities. We assess whether to accrue for environmental liabilities based upon relevant factors including our tenants’ histories of paying for such obligations, our assessment of their financial capability, and their intent to pay for such obligations. However, there can be no assurance that our assessments are correct or that our tenants who have
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paid their obligations in the past will continue to do so. We may ultimately be responsible to pay for environmental liabilities as the property owner if our tenant fails to pay them.
The estimated future costs for known environmental remediation requirements are accrued when it is probable that a liability has been incurred and a reasonable estimate of fair value can be made. The accrued liability is the aggregate of our estimate of the fair value of cost for each component of the liability, net of estimated recoveries from state UST remediation funds considering estimated recovery rates developed from prior experience with the funds.
For substantially all of our triple-net leases, our tenants are contractually responsible for compliance with environmental laws and regulations, removal of USTs at the end of their lease term (the cost of which in certain cases is partially borne by us) and remediation of any environmental contamination that arises during the term of their tenancy. Under the terms of our leases covering properties previously leased to Marketing (substantially all of which commenced in 2012), we have agreed to be responsible for environmental contamination at the premises that was known at the time the lease commenced, and for environmental contamination which existed prior to commencement of the lease and is discovered (other than as a result of a voluntary site investigation) during the first 10 years of the lease term (or a shorter period for a minority of such leases). After expiration of such 10-year (or, in certain cases, shorter) period, responsibility for all newly discovered contamination, even if it relates to periods prior to commencement of the lease, is contractually allocated to our tenant. Our tenants at properties previously leased to Marketing are in all cases responsible for the cost of any remediation of contamination that results from their use and occupancy of our properties. Under substantially all of our other triple-net leases, responsibility for remediation of all environmental contamination discovered during the term of the lease (including known and unknown contamination that existed prior to commencement of the lease) is the responsibility of our tenant.
We anticipate that USTs at a number of properties we currently own and which were previously leased to Marketing will be replaced in the years ahead as these USTs near the end of their useful lives. For long-term, triple-net leases covering sites previously leased to Marketing, our tenants are responsible for the cost of removal and replacement of USTs and for remediation of contamination found during such UST removal and replacement, unless such contamination was found during the first 10 years of the lease term and also existed prior to commencement of the lease. In those cases, we are responsible for costs associated with the remediation of such preexisting contamination. We have also agreed to be responsible for environmental contamination that existed prior to the sale of certain properties assuming the contamination is discovered (other than as a result of a voluntary site investigation) during the first five years after the sale of the properties.
In the course of certain UST removals and replacements at properties previously leased to Marketing where we retained continuing responsibility for preexisting environmental obligations, previously unknown environmental contamination was and continues to be discovered. As a result, we have developed an estimate of fair value for the prospective future environmental liability resulting from preexisting unknown environmental contamination and have accrued for these estimated costs. These estimates are based primarily upon quantifiable trends which we believe allow us to make reasonable estimates of fair value for the future costs of environmental remediation resulting from the removal and replacement of USTs. Our accrual of the additional liability represents our estimate of the fair value of cost for each component of the liability, net of estimated recoveries from state UST remediation funds considering estimated recovery rates developed from prior experience with the funds. In arriving at our accrual, we analyzed the ages of USTs at properties where we would be responsible for preexisting contamination found within 10 years after commencement of a lease (for properties subject to long-term triple-net leases) or five years from a sale (for divested properties), and projected a cost to closure for preexisting unknown environmental contamination.
We measure our environmental remediation liabilities at fair value based on expected future net cash flows, adjusted for inflation (using a range of 2.0% to 2.75%), and then discount them to present value (using a range of 4.0% to 7.0%). We adjust our environmental remediation liabilities quarterly to reflect changes in projected expenditures, changes in present value due to the passage of time and reductions in estimated liabilities as a result of actual expenditures incurred during each quarter. As of December 31, 2021, we had accrued a total of $47.6 million for our prospective environmental remediation obligations. This accrual consisted of (a) $11.4 million, which was our estimate of reasonably estimable environmental remediation liability, including obligations to remove USTs for which we are responsible, net of estimated recoveries and (b) $36.2 million for future environmental liabilities related to preexisting unknown contamination. As of December 31, 2020, we had accrued a total of $48.1 million for our prospective environmental remediation obligations. This accrual consisted of (a) $11.7 million, which was our estimate of reasonably estimable environmental remediation liability, including obligations to remove USTs for which we are responsible, net of estimated recoveries and (b) $36.4 million for future environmental liabilities related to preexisting unknown contamination.
Environmental liabilities are accreted for the change in present value due to the passage of time and, accordingly, $1.7 million, $1.8 million and $2.0 million of net accretion expense was recorded for the years ended December 31, 2021, 2020 and 2019, respectively, which is included in environmental expenses. In addition, during the years ended December 31, 2021, 2020 and 2019, we recorded credits to environmental expenses aggregating $1.8 million, $3.1 million and $5.4 million, respectively, where decreases in estimated remediation costs exceeded the depreciated carrying value of previously capitalized asset retirement costs. Environmental expenses also include project management fees, legal fees and environmental litigation accruals.
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During the years ended December 31, 2021 and 2020, we increased the carrying values of certain of our properties by $3.0 million and $2.6 million, respectively, due to changes in estimated environmental remediation costs. The recognition and subsequent changes in estimates in environmental liabilities and the increase or decrease in carrying values of the properties are non-cash transactions which do not appear on our consolidated statements of cash flows.
Capitalized asset retirement costs are being depreciated over the estimated remaining life of the UST, a 10-year period if the increase in carrying value is related to environmental remediation obligations or such shorter period if circumstances warrant, such as the remaining lease term for properties we lease from others. Depreciation and amortization expense related to capitalized asset retirement costs in our consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019, were $4.0 million, $4.0 million and $4.1 million, respectively. Capitalized asset retirement costs were $39.7 million (consisting of $24.1 million of known environmental liabilities and $15.6 million of reserves for future environmental liabilities) as of December 31, 2021, and $39.6 million (consisting of $23.6 million of known environmental liabilities and $16.0 million of reserves for future environmental liabilities) as of December 31, 2020. We recorded impairment charges aggregating $3.1 million and $3.5 million for the years ended December 31, 2021 and 2020, respectively, for capitalized asset retirement costs.
Environmental exposures are difficult to assess and estimate for numerous reasons, including the amount of data available upon initial assessment of contamination, alternative treatment methods that may be applied, location of the property which subjects it to differing local laws and regulations and their interpretations, changes in costs associated with environmental remediation services and equipment, the availability of state UST remediation funds and the possibility of existing legal claims giving rise to allocation of responsibilities to others, as well as the time it takes to remediate contamination and receive regulatory approval. In developing our liability for estimated environmental remediation obligations on a property by property basis, we consider, among other things, laws and regulations, assessments of contamination and surrounding geology, quality of information available, currently available technologies for treatment, alternative methods of remediation and prior experience. Environmental accruals are based on estimates derived upon facts known to us at this time, which are subject to significant change as circumstances change, and as environmental contingencies become more clearly defined and reasonably estimable.
Any changes to our estimates or our assumptions that form the basis of our estimates may result in our providing an accrual, or adjustments to the amounts recorded, for environmental remediation liabilities.
In July 2012, we purchased a 10-year pollution legal liability insurance policy covering substantially all of our properties at that time for preexisting unknown environmental liabilities and new environmental events. The policy has a $50.0 million aggregate limit and is subject to various self-insured retentions and other conditions and limitations. Our intention in purchasing this policy was to obtain protection predominantly for significant events. In addition to the environmental insurance policy purchased by the Company, we also took assignment of certain environmental insurance policies, and rights to reimbursement for claims made thereunder, from Marketing, by order of the U.S. Bankruptcy Court during Marketing’s bankruptcy proceedings. Under these assigned polices, we have received and expect to continue to receive reimbursement of certain remediation expenses for covered claims.
In light of the uncertainties associated with environmental expenditure contingencies, we are unable to estimate ranges in excess of the amount accrued with any certainty; however, we believe that it is possible that the fair value of future actual net expenditures could be substantially higher than amounts currently recorded by us. Adjustments to accrued liabilities for environmental remediation obligations will be reflected in our consolidated financial statements as they become probable and a reasonable estimate of fair value can be made.
Environmental Litigation
We are subject to various legal proceedings and claims which arise in the ordinary course of our business. As of December 31, 2021 and 2020, we had accrued $1.9 million and $4.3 million, respectively, for certain of these matters which we believe were appropriate based on information then currently available. It is possible that our assumptions regarding the ultimate allocation method and share of responsibility that we used to allocate environmental liabilities may change, which may result in our providing an accrual, or adjustments to the amounts recorded, for environmental litigation accruals. Matters related to our former Newark, New Jersey Terminal and the Lower Passaic River and MTBE litigations in the states of Pennsylvania and Maryland, in particular, could cause a material adverse effect on our business, financial condition, results of operations, liquidity, ability to pay dividends or stock price. For additional information with respect to these and other pending environmental lawsuits and claims, see “Item 3. Legal Proceedings” and Note 3 in “Item 8. Financial Statements and Supplementary Data” in this Form 10-K.