ESSENTIAL PROPERTIES REALTY TRUST, INC. 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes included elsewhere in this report, as well as the "Business" section of this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategies for our business, includes forward‑looking statements that involve risks and uncertainties. You should read "Item 1A. Risk Factors" and the "Special Note Regarding Forward‑Looking Statements" sections of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by these forward‑looking statements. Overview We are an internally managed real estate company that acquires, owns and manages primarily single-tenant properties that are net leased on a long-term basis to middle-market companies operating service-oriented or experience-based businesses. We generally invest in and lease freestanding, single-tenant commercial real estate facilities where a tenant services its customers and conducts activities that are essential to the generation of the tenant’s sales and profits. As of December 31, 2022, 93.0% of our $297.2 million of annualized base rent was attributable to properties operated by tenants in service-oriented and experience-based businesses. "Annualized base rent" means annualized contractually specified cash base rent in effect on December 31, 2022 for all of our leases (including those accounted for as loans or direct financing leases) commenced as of that date and annualized cash interest on our mortgage loans receivable as of that date. We were organized on January 12, 2018 as a Maryland corporation. We have elected to be taxed as a REIT for federal income tax purposes beginning with the year ended December 31, 2018, and we believe that our current organization, operations and intended distributions will allow us to continue to so qualify. We completed our initial public offering in June 2018. Our common stock is listed on the New York Stock Exchange under the symbol “EPRT”. Our primary business objective is to maximize stockholder value by generating attractive risk-adjusted returns through owning, managing and growing a diversified portfolio of commercially desirable properties. We have grown significantly since commencing our operations and investment activities in June 2016. As of December 31, 2022, we had a portfolio of 1,653 properties (inclusive of 153 properties which secure our investments in mortgage loans receivable) that was diversified by tenant, industry, concept and geography, had annualized base rent of $297.2 million and was 99.9% occupied. Our portfolio is built based on the following core investment attributes: Diversification. As of December 31, 2022, our portfolio was 99.9% occupied by 350 tenants operating 538 different brands, or concepts, in 16 industries across 48 states, with none of our tenants contributing more than 3.4% of our annualized base rent. Our goal is that, over time, no more than 5% of our annualized base rent will be derived from any single tenant or more than 1% from any single property. Long Lease Term. As of December 31, 2022, our leases had a weighted average remaining lease term of 13.9 years (based on annualized base rent), with 6.1% of our annualized base rent attributable to leases expiring prior to January 1, 2028. Our properties generally are subject to long-term net leases that we believe provide us a stable base of revenue from which to grow our portfolio. Significant Use of Sale-Leaseback Investments. We seek to acquire properties owned and operated by middle-market businesses and lease the properties back to the operators pursuant to our standard lease form. For the year ended December 31, 2022, approximately 97.3% of our investments were sale-leaseback transactions. Significant Use of Master Leases. As of December 31, 2022, 65.0% of our annualized base rent was attributable to master leases. Contractual Base Rent Escalation. As of December 31, 2022, 98.2% of our leases (based on annualized base rent) provided for increases in future base rent at a weighted average rate of 1.6% per year. Smaller, Low Basis Single-Tenant Properties. We generally invest in freestanding “small-box” single- tenant properties. As of December 31, 2022, our average investment per property was $2.4 million (which equals 48 our aggregate investment in our properties (including transaction costs, lease incentives and amounts funded for construction in progress) divided by the number of properties owned at such date), and we believe investments of similar size allow us to grow our portfolio without concentrating a large amount of capital in individual properties and limit our exposure to events that may adversely affect a particular property. Additionally, we believe that many of our properties are generally fungible and appropriate for multiple commercial uses, which reduces the risk that a particular property may become obsolete and enhances our ability to sell a property if we choose to do so. Healthy Rent Coverage Ratio and Tenant Financial Reporting. As of December 31, 2022, our portfolio’s weighted average rent coverage ratio was 4.0x, and 98.6% of our leases (based on annualized base rent) obligate the tenant to periodically provide us with specified unit-level financial reporting. Our Competitive Strengths We believe the following competitive strengths distinguish us from our competitors and allow us to compete effectively in the single-tenant, net-lease market: Carefully Constructed Portfolio of Recently Acquired Properties Leased to Service-Oriented or Experience-Based Tenants. We have strategically constructed a portfolio that is diversified by tenant, industry and geography and generally avoids exposure to businesses that we believe are subject to pressure from e-commerce. Our properties are generally subject to long-term net leases that we believe provide us with a stable and predictable base of revenue from which to grow our portfolio. As of December 31, 2022, we had a portfolio of 1,653 properties, with annualized base rent of $297.2 million, which was purposefully selected by our management team in accordance with our focused and disciplined investment strategy. Our portfolio is diversified with 350 tenants operating 538 different concepts across 48 states and in 16 distinct industries. None of our tenants contributed more than 3.4% of our annualized base rent as of December 31, 2022, and our strategy targets a scaled portfolio that, over time, derives no more than 5% of our annualized base rent from any single tenant or more than 1% from any single property. • We focus on investing in properties leased to tenants operating in service-oriented or experience- based businesses such as car washes, restaurants (primarily quick service restaurants), early childhood education, medical and dental services, convenience stores, automotive services, equipment rental, entertainment and health and fitness, which we believe are generally more insulated from e-commerce pressure than many others. As of December 31, 2022, 93.0% of our annualized base rent was attributable to tenants operating service-oriented and experience-based businesses. • We believe that our portfolio’s diversity and our rigorous underwriting decrease the impact on us of an adverse event affecting a specific tenant, industry or region, and our focus on leasing to tenants in industries that we believe are well-positioned to withstand competition from e-commerce businesses increases the stability and predictability of our rental revenue. Differentiated Investment Strategy. We seek to acquire and lease freestanding, single-tenant commercial real estate facilities where a tenant services its customers and conducts activities at the property that are essential to the generation of its sales and profits. We primarily seek to invest in properties leased to unrated middle- market companies that we determine have attractive credit characteristics and stable operating histories. We believe middle-market companies are underserved from a capital perspective and that we can offer them attractive real estate financing solutions while allowing us to enter into lease agreements that provide us with attractive risk-adjusted returns. Furthermore, many net-lease transactions with middle- market companies involve properties that are individually relatively small, which allows us to avoid concentrating a large amount of capital in individual properties. We maintain close relationships with our tenants, which we believe allows us to source additional investments and become the capital provider of choice as our tenants’ businesses grow and their real estate needs increase. Disciplined Underwriting Leading to Strong Portfolio Characteristics. We generally seek to invest in single assets or portfolios of assets through transactions which range in aggregate purchase price from $2 million to $100 million. Our size allows us to focus on investing in a segment of the market that we believe is underserved from a capital perspective and where we can originate or acquire relatively smaller assets on attractive terms that provide meaningful growth to our portfolio. In addition, we seek to invest in commercially desirable properties that are suitable for use by different tenants, offer attractive risk-adjusted returns and possess characteristics that reduce our real estate investment risks. 49 Experienced and Proven Management Team. Our senior management has significant experience in the net-lease industry and a track record of growing net-lease businesses to significant scale. • Our senior management team has been responsible for our focused and disciplined investment strategy and for developing and implementing our investment sourcing, underwriting, closing and asset management infrastructure, which we believe can support significant investment growth without a proportionate increase in our operating expenses. As of December 31, 2022, exclusive of our initial investment in a portfolio of 262 net leased properties, consisting primarily of restaurants, that we acquired on June 16, 2016 as part of the liquidation of General Electric Capital Corporation for an aggregate purchase price of $279.8 million (including transaction costs) (the "Initial Portfolio"), 87.6% of our portfolio’s annualized base rent was attributable to internally originated sale-leaseback transactions and 85.8% was acquired from parties who had previously engaged in one or more transactions that involved a member of our senior management team (including operators and tenants and other participants in the net lease industry, such as brokers, intermediaries and financing sources). The substantial experience, knowledge and relationships of our senior leadership team provide us with an extensive network of contacts that we believe allows us to originate attractive investment opportunities and effectively grow our business. Scalable Platform Allows for Significant Growth. Building on our senior leadership team’s experience in net-lease real estate investing, we have developed leading origination, underwriting, financing and property management capabilities. Our platform is scalable, and we seek to leverage our capabilities to improve our efficiency and processes to continue to seek attractive risk- adjusted growth. While we expect that our general and administrative expenses could increase as our portfolio grows, we expect that such expenses as a percentage of our portfolio and our revenues will decrease over time due to efficiencies and economies of scale. Extensive Tenant Financial Reporting Supports Active Asset Management. We seek to enter into lease agreements that obligate our tenants to periodically provide us with corporate and/or unit-level financial reporting, which we believe enhances our ability to actively monitor our investments, actively evaluate credit risk, negotiate lease renewals and proactively manage our portfolio to protect stockholder value. As of December 31, 2022, leases contributing 98.6% of our annualized base rent required tenants to provide us with specified unit-level financial information, and leases contributing 98.9% of our annualized base rent required tenants to provide us with corporate-level financial reporting. Our Business and Growth Strategies Our primary business objective is to maximize stockholder value by generating attractive risk-adjusted returns through owning, managing and growing a diversified portfolio of commercially desirable properties. We intend to pursue our objective through the following business and growth strategies. Structure and Manage Our Diverse Portfolio with Focused and Disciplined Underwriting and Risk Management. We seek to maintain the stability of our rental revenue and maximize the long-term return on our investments while continuing our growth by using our focused and disciplined underwriting and risk management expertise. When underwriting assets, we emphasize commercially desirable properties, with strong operating performance, healthy rent coverage ratios and tenants with attractive credit characteristics. • Leasing . In general, we seek to enter into leases with (i) relatively long terms (typically with initial terms of 15 years or more and tenant renewal options); (ii) attractive rent escalation provisions; (iii) healthy rent coverage ratios; and (iv) tenant obligations to periodically provide us with financial information, which provides us with information about the operating performance of the leased property and/or tenant and allows us to actively monitor the security of payments under the lease on an ongoing basis. We strongly prefer to use master lease structures, pursuant to which we lease multiple properties to a single tenant on a unitary (i.e., “all or none”) basis. In addition, in the context of our sale-leaseback investments, we generally seek to establish contract rents that are at or below prevailing market rents, which we believe enhances tenant retention and reduces our releasing risk if a lease is rejected in a bankruptcy proceeding or expires. • Diversification . We monitor and manage the diversification of our portfolio in order to reduce the risks associated with adverse developments affecting a particular tenant, property, industry or region. Our strategy targets a portfolio that, over time, will (1) derive no more than 5% of its annualized base rent from any single tenant or more than 1% of its annualized base rent from any single property, (2) be primarily leased to tenants operating in service-oriented or experience- based businesses and (3) avoid significant 50 geographic concentration. While we consider these criteria when making investments, we may be opportunistic in managing our business and make investments that do not meet one or more of these criteria if we believe the opportunity presents an attractive risk-adjusted return. • Asset Management. We are an active asset manager and regularly review each of our properties to evaluate various factors, including, but not limited to, changes in the business performance at the property, credit of the tenant and local real estate market conditions. Among other things, we use Moody’s Analytics RiskCalc, which is a model for predicting private company defaults based on Moody’s Analytics Credit Research Database, to proactively detect credit deterioration. Additionally, we monitor market rents relative to in-place rents and the amount of tenant capital expenditures in order to refine our tenant retention and alternative use assumptions. Our management team utilizes our internal credit diligence to monitor the credit profile of each of our tenants on an ongoing basis. We believe that this proactive approach enables us to identify and address issues in a timely manner and to determine whether there are properties in our portfolio that are appropriate for disposition. • In addition, as part of our active portfolio management, we may selectively dispose of assets that we conclude do not offer a return commensurate with the investment risk, contribute to unwanted geographic, industry or tenant concentrations, or may be sold at a price we determine is attractive. We believe that our underwriting processes and active asset management enhance the stability of our rental revenue by reducing default losses and increasing the likelihood of lease renewals. Focus on Relationship-Based Sourcing to Grow Our Portfolio by Originating Sale-Leaseback Transactions. We plan to continue our disciplined growth by originating sale-leaseback transactions and opportunistically making acquisitions of properties subject to net leases that contribute to our portfolio’s tenant, industry and geographic diversification. As of December 31, 2022, exclusive of the Initial Portfolio, 87.6% of our portfolio’s annualized base rent was attributable to internally originated sale-leaseback transactions and 85.8% was acquired from parties who had previously engaged in transactions that involved a member of our senior management team (including operators and tenants and other participants in the net lease industry, such as brokers, intermediaries and financing sources). In addition, we seek to leverage our relationships with our tenants to facilitate investment opportunities, including selectively agreeing to reimburse certain of our tenants for development costs at our properties in exchange for contractually specified rent that generally increases proportionally with our funding. As of December 31, 2022, exclusive of the Initial Portfolio, approximately 46.6% of our investments were sourced from operators and tenants who had previously consummated a transaction involving a member of our management team. We believe our senior management team’s reputation, in-depth market knowledge and extensive network of longstanding relationships in the net lease industry provide us access to an ongoing pipeline of attractive investment opportunities. Focus on Middle-Market Companies in Service-Oriented or Experience-Based Businesses. We primarily focus on investing in properties that we lease on a long-term, triple-net basis to middle- market companies that we determine have attractive credit characteristics and stable operating histories. Properties leased to middle-market companies may offer us the opportunity to achieve superior risk-adjusted returns as a result of our extensive and disciplined credit and real estate analysis, lease structuring and portfolio composition. We believe our capital solutions are attractive to middle- market companies, as such companies often have limited financing options as compared to larger, credit rated organizations. We also believe that, in many cases, smaller transactions with middle- market companies will allow us to maintain and grow our portfolio’s diversification. Middle-market companies are often willing to enter into leases with structures and terms that we consider attractive (such as master leases and leases that require ongoing tenant financial reporting) and believe contribute to the stability of our rental revenue. • In addition, we emphasize investments in properties leased to tenants engaged in service-oriented or experience-based businesses, such as car washes, restaurants (primarily quick service restaurants), early childhood education, medical and dental services, convenience stores, automotive services, equipment rental, entertainment and health and fitness, as we believe these businesses are generally more insulated from e-commerce pressure than many others. Internal Growth Through Long-Term Triple-Net Leases That Provide for Periodic Rent Escalations. We seek to enter into long-term (typically with initial terms of 15 years or more and tenant renewal options), triple-net leases that provide for periodic contractual rent escalations. As of December 31, 2022, our leases had a weighted average remaining lease term of 13.9 years (based on annualized base rent), with only 6.1% of our 51 annualized base rent attributable to leases expiring prior to January 1, 2028, and 98.2% of our leases (based on annualized base rent) provided for increases in future base rent at a weighted average of 1.6% per year. Actively Manage Our Balance Sheet to Maximize Capital Efficiency. We seek to maintain a prudent balance between debt and equity financing and to maintain funding sources that lock in long-term investment spreads and limit interest rate sensitivity. We target a level of net debt that, over time, is generally less than six times our annualized adjusted EBITDA re (as defined in "Non-GAAP Financial Measures" below). We have access to multiple sources of debt capital, including the investment grade-rated unsecured bond market and bank debt, through our revolving credit facility and our unsecured term loan facilities. Historical Investment and Disposition Activity The following table sets forth select information about our quarterly investment activity for the quarters ended March 31, 2021 through December 31, 2022 (dollars in thousands): Three Months Ended March 31, 2022 June 30, 2022 September 30, 2022 December 31, 2022 Investment Activity $ 237,795 $ 175,738 $ 195,454 $ 328,370 Number of transactions 23 23 27 39 Property count 105 39 40 115 Avg. investment per unit $ 2,187 $ 3,870 $ 3,750 $ 2,782 Cash Cap Rates 1 7.0 % 7.0 % 7.1 % 7.5 % GAAP Cap Rates 2 7.8 % 8.0 % 8.2 % 8.8 % Master Lease Percentage 3,4 83 % 86 % 68 % 90 % Sale-Leaseback Percentage 3,5 100 % 100 % 89 % 99 % Existing Relationship Percentage 83 % 79 % 94 % 95 % Percentage of Financial Reporting 3,6 100 % 100 % 100 % 100 % Rent Coverage Ratio 3.3 x 2.7 x 4.4 x 3.2 x Lease Term Years 15.0 17.2 16.5 18.7 Three Months Ended March 31, 2021 June 30, 2021 September 30, 2021 December 31, 2021 Investment Activity $ 197,816 $ 223,186 $ 230,755 $ 322,203 Number of transactions 22 34 31 55 Property count 74 94 85 96 Avg. investment per unit $ 2,650 $ 2,354 $ 2,676 $ 3,230 Cash Cap Rates 1 7.0 % 7.1 % 7.0 % 6.9 % GAAP Cap Rates 2 7.9 % 7.8 % 7.9 % 7.8 % Master Lease Percentage 3,4 79 % 83 % 80 % 59 % Sale-Leaseback Percentage 3,5 85 % 88 % 84 % 96 % Existing Relationship Percentage 81 % 97 % 81 % 89 % Percentage of Financial Reporting 3,6 100 % 100 % 100 % 98 % Rent Coverage Ratio 3.0 x 2.7 x 2.8 x 3.0 x Lease Term Years 16.1 13.5 16.4 16.3 _____________________________________ (1) Cash annualized base rent for the first full month after the investment divided by the gross investment in the property plus transaction costs. (2) GAAP rent and interest income for the first twelve months after the investment divided by the gross investment in the property plus transaction costs. (3) As a percentage of annualized base rent. (4) Includes investments in mortgage loans receivable collateralized by more than one property. (5) Includes investments in mortgage loans receivable made in support of sale-leaseback transactions. 52 The following table sets forth select information about our quarterly disposition activity for the quarters ended March 31, 2021 through December 31, 2022 (dollars in thousands): Three Months Ended March 31, 2022 June 30, 2022 September 30, 2022 December 31, 2022 Disposition Volume 1 $ 18,443 $ 26,091 $ 35,513 $ 75,522 Cash cap rate on leased assets 2 7.1 % 6.2 % 6.2 % 6.9 % Leased properties sold 3 6 8 12 25 Vacant properties sold 3 — — — 1 Three Months Ended March 31, 2021 June 30, 2021 September 30, 2021 December 31, 2021 Disposition Volume 1 $ 25,197 $ 19,578 $ 10,089 $ 4,466 Cash cap rate on leased assets 2 7.1 % 7.1 % 6.5 % 6.0 % Leased properties sold 3 15 6 11 2 Vacant properties sold 3 1 1 — — _____________________________________ (1) Net of transaction costs. (2) Annualized base rent at time of sale divided by the gross sale price (excluding transaction costs) for the property. (3) Property count excludes dispositions of undeveloped land parcels or dispositions where only a portion of the owned parcel was sold. COVID-19 Pandemic Discussion For much of 2020, the COVID-19 pandemic created significant uncertainty and economic disruption that adversely affected the Company and its tenants. The adverse impact of the pandemic moderated during 2021 and significantly diminished during 2022. However, the continuing impact of the COVID-19 pandemic and its duration are unclear, and various factors could erode the progress that has been made against the virus to date. If conditions similar to those experienced in 2020, at the height of the pandemic, were to reoccur, they would adversely impact the Company and its tenants. The Company continues to closely monitor the impact of COVID-19 on all aspects of its business. Liquidity and Capital Resources As of December 31, 2022, we had $3.8 billion of net investments in our investment portfolio, consisting of investments in 1,653 properties (inclusive of 153 properties which secure our investments in mortgage loans receivable), with annualized base rent of $297.2 million. Substantially all of our cash from operations is generated by our investment portfolio. The liquidity requirements for operating our Company consist primarily of funding our investment activities, servicing our outstanding indebtedness and paying our general and administrative expenses. The occupancy level of our portfolio is high (99.9% as of December 31, 2022) and, because substantially all of our leases are triple-net (with our tenants generally responsible for the maintenance, insurance and property taxes associated with the leased properties), our liquidity requirements are not significantly impacted by property costs. When a property becomes vacant because the tenant has vacated the property due to default or at the expiration of the lease term without a renewal or new lease being executed, we incur the property costs not paid by the tenant, as well as those property costs accruing during the time it takes to locate a new tenant or to sell the property. As of December 31, 2022, two of our properties were vacant, significantly less than 1% of our portfolio, and all remaining properties were subject to a lease. We expect to incur property costs from time to time in periods during which properties that become vacant are being marketed for lease or sale. In addition, we may recognize an expense for certain property costs, such as real estate taxes billed in arrears, if we believe the tenant is likely to vacate the property before making payment on those obligations. The amount of such property costs can vary quarter-to-quarter based on the timing of property vacancies and the level of underperforming properties; however, we do not expect that such costs will be significant to our operations. We intend to continue to grow through additional investments in stand-alone single tenant properties. To accomplish this objective, we seek to invest in real estate with a combination of debt and equity capital and with 53 cash from operations that we do not distribute to our stockholders. When we sell properties, we generally reinvest the cash proceeds from our sales in new property acquisitions. Our short-term liquidity requirements also include the funding needs associated with 40 properties where we have agreed to provide construction financing or reimburse the tenant for certain development, construction and renovation costs in exchange for contractual payments of interest or increased rent that generally increases in proportion with our level of funding. As of December 31, 2022, we agreed to provide construction financing or reimburse the tenant for certain development, construction and renovation costs in an aggregate amount of $107.6 million, and, as of such date, we funded $73.0 million of this commitment. We expect to fund the remainder of this commitment by December 31, 2023. Additionally, as of February 10, 2023, we were under contract to acquire 7 properties with an aggregate purchase price of $16.2 million, subject to completion of our due diligence procedures and satisfaction of customary closing conditions. We expect to meet our short-term liquidity requirements, including our investment in potential future single tenant properties, primarily with our cash and cash equivalents, net cash from operating activities and borrowings under the Revolving Credit Facility, and potentially through proceeds generated from our 2022 ATM Program, which has $403.9 million remaining under the program as of February 10, 2023. Our long-term liquidity requirements consist primarily of funds necessary to acquire additional properties and repay indebtedness. We expect to meet our long-term liquidity requirements through various sources of capital, including net cash from operating activities, borrowings under our Revolving Credit Facility, future debt financings, sales of common stock under our ATM Program, and proceeds from the sale of selected properties in our portfolio. However, at any point in time, there may be a number of factors that could have a material and adverse effect on our ability to access these capital sources, including unfavorable conditions in the overall equity and credit markets, our level of leverage, the portion of our portfolio that is unencumbered, borrowing restrictions imposed by our existing debt agreements, general market conditions for real estate and potentially REITs specifically, our operating performance, our liquidity and general market perceptions about us. The success of our business strategy will depend, to a significant degree, on our ability to access these various capital sources to fund our future investments in single tenant properties and thereby grow our cash flows. An additional liquidity need is funding the required level of distributions, generally 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding any net capital gain), that are among the requirements for us to continue to qualify for taxation as a REIT. During the year ended December 31, 2022, our Board declared total cash distributions of $1.075 per share of common stock. Holders of OP Units are entitled to distributions per unit equivalent to those paid by us per share of common stock. During the year ended December 31, 2022, we paid $141.7 million of distributions to common stockholders and OP Unit holders, and as of December 31, 2022, we recorded $39.4 million of distributions payable to common stockholders and OP Unit holders. To continue to qualify for taxation as a REIT, we must make distributions to our stockholders aggregating annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. As a result of this requirement, we cannot rely on retained earnings to fund our business needs to the same extent as other entities that are not REITs. If we do not have sufficient funds available to us from our operations to fund our business needs, we will need to find alternative ways to fund those needs. Such alternatives may include, among other things, selling properties (whether or not the sales price is optimal or otherwise meets our strategic long-term objectives), incurring additional indebtedness or issuing equity securities in public or private transactions. The availability and attractiveness of the terms of these potential sources of financing cannot be assured. Generally, our short-term debt capital needs are provided through the use of our Revolving Credit Facility. We manage our long-term leverage position through the issuance of long-term fixed-rate debt on a secured or unsecured basis. Generally, we will seek to issue long-term debt on an unsecured basis as we believe this facilitates greater flexibility in the management of our existing portfolio and our ability to retain optionality in our overall financing and growth strategy. By seeking to match the expected cash inflows from our long-term leases with the expected cash outflows for our long-term debt, we seek to "lock in," for as long as is economically feasible, the expected positive spread between our scheduled cash inflows on our leases and the cash outflows on our debt obligations. In this way, we seek to reduce the risk that increases in interest rates would adversely impact our cash flows and results of operations. Our ability to execute leases that contain annual rent escalations also contributes to our ability to manage the risk of a rising interest rate environment. We use various financial instruments designed to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies such as interest rate swaps and caps, depending on our analysis of the interest rate environment and the costs and risks of such strategies. Although we are not required to maintain a particular leverage ratio and may not be able to do so, we generally consider that, over time, a level of net debt (which includes recourse and non-recourse borrowings and 54 any outstanding preferred stock less cash and cash equivalents and restricted cash available for future investment) that is less than six times our annualized adjusted EBITDA re is prudent for a real estate company like ours. As of December 31, 2022, all of our long-term debt was fixed-rate debt or was effectively converted to a fixed-rate for the term of the debt though hedging strategies and our weighted average debt maturity was 5.2 years. As we continue to invest in real estate properties and grow our real estate portfolio, we intend to manage our long-term debt maturities to reduce the risk that a significant amount of our debt will mature in any single year in the future. Future sources of debt capital may include public issuances of senior unsecured notes, term borrowings, mortgage financing of a single-asset or a portfolio of assets and CMBS borrowings. These sources of debt capital may offer us the opportunity to lower our cost of funding and further diversify our sources of debt capital. Over time, we may choose to issue preferred equity as a part of our overall strategy for funding our business. As our outstanding debt matures, we may refinance it as it comes due or choose to repay it using cash and cash equivalents or borrowings under our Revolving Credit Facility. We believe that the cash generated by our operations, together with our cash and cash equivalents at December 31, 2022, our borrowing availability under the Revolving Credit Facility and our potential access to additional sources of capital, will be sufficient to fund our operations for the foreseeable future and allow us to invest in the real estate for which we currently have made commitments. Supplemental Guarantor Information In March 2020, the SEC adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities. The rule became effective January 4, 2021. The Company and the Operating Partnership have filed a registration statement on Form S-3 with the SEC registering, among other securities, debt securities of the Operating Partnership, which, unless otherwise specified, will be fully and unconditionally guaranteed by the Company. At December 31, 2022, the Operating Partnership had issued and outstanding $400.0 million of senior notes. The obligations of the Operating Partnership under the senior notes are guaranteed on a senior basis by the Company. The guarantee is full and unconditional, and the Operating Partnership is a consolidated subsidiary of the Company. As a result of the amendments to Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are not required to provide separate financial statements, provided that the subsidiary obligor is consolidated into the parent company’s consolidated financial statements, the parent guarantee is “full and unconditional” and, subject to certain exceptions as set forth below, the alternative disclosure required by Rule 13-01 is provided, which includes narrative disclosure and summarized financial information. Accordingly, separate consolidated financial statements of the Operating Partnership have not been presented. Furthermore, as permitted under Rule 13-01(a)(4)(vi), the Company has excluded the summarized financial information for the Operating Partnership as the assets, liabilities and results of operations of the Company and the Operating Partnership are not materially different than the corresponding amounts presented in the consolidated financial statements of the Company, and management believes such summarized financial information would be repetitive and not provide incremental value to investors. 55 Description of Certain Debt The following table summarizes our outstanding indebtedness as of December 31, 2022 and 2021: Principal Outstanding Weighted Average Interest Rate (1) (in thousands) Maturity Date December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Unsecured term loans: 2024 Term Loan April 2024 $ 200,000 $ 200,000 2.9% 3.3% 2027 Term Loan February 2027 430,000 430,000 2.4% 3.0% 2028 Term Loan January 2028 400,000 — 4.6% —% Senior unsecured notes July 2031 400,000 400,000 3.1% 3.1% Revolving Credit Facility April 2023 (2) — 144,000 —% 1.3% Total principal outstanding $ 1,430,000 $ 1,174,000 3.3% 2.9% _______________________________________________________________ (1) Interest rates are presented after giving effect to our interest rate swap and lock agreements, where applicable. Unsecured Revolving Credit Facility and 2024/2028 Term Loan Through our Operating Partnership, we are party to an Amended and Restated Credit Agreement with a group of lenders, which was amended on July 25, 2022 (the "Credit Agreement") and provides for revolving loans of up to $600.0 million (the "Revolving Credit Facility") and an additional $600.0 million of term loans, consisting of a $200.0 million initial term loan (the "2024 Term Loan") and a $400.0 million second tranche term loan (the “2028 Term Loan” and, together with the 2024 Term Loan, the “2024/2028 Term Loan”). Concurrently with the closing of the July 25, 2022 amendment, $250.0 million of the 2028 Term Loan was drawn and the remaining $150.0 million of the 2028 Term Loan was drawn in October 2022. Such amendment also amended the applicable margin grid such that the applicable pricing is based on the credit rating of the Company’s long-term senior unsecured non-credit enhanced debt for borrowed money (subject to a single step-down in the applicable pricing if the Company achieves a consolidated leverage ratio that is less than 0.35 to 1:00 while maintaining a credit rating of BBB/Baa2 from S&P, Moody's and/or Fitch). The Revolving Credit Facility matures on February 10, 2026, with two extension options of six months each, exercisable by the Operating Partnership subject to the satisfaction of certain conditions. The 2024 Term Loan matures on April 12, 2024 and the 2028 Term Loan matures on January 25, 2028. The loans under each of the Revolving Credit Facility and the 2024/2028 Term Loan initially bear interest at an annual rate of applicable Adjusted Term SOFR (as defined in the Credit Agreement) plus an applicable margin (which applicable margin varies between the Revolving Credit Facility and the 2024/2028 Term Loan). The Adjusted Term SOFR is a rate with a term equivalent to the interest period applicable to the relevant borrowing. In addition, the Operating Partnership is required to pay a revolving facility fee throughout the term of the Revolving Credit Facility. The applicable margin and the revolving facility fee rate are a spread and rate, as applicable, set according to the credit ratings provided by S&P, Moody's and/or Fitch. Each of the Revolving Credit Facility and the 2024/2028 Term Loan is freely pre-payable at any time. Outstanding credit extensions under the Revolving Credit Facility are mandatorily payable if the amount of such credit extensions exceeds the revolving facility limit. The Operating Partnership may re-borrow amounts paid down on the Revolving Credit Facility prior to its maturity. Loans repaid under the 2024/2028 Term Loan cannot be reborrowed. The Credit Agreement has an accordion feature to increase, subject to certain conditions, the maximum availability of credit (either through increased revolving commitments or additional term loans) by up to $600.0 million. The Operating Partnership is the borrower under the Credit Agreement, and we and certain of the subsidiaries of the Operating Partnership that own a direct or indirect interest in an eligible real property asset are guarantors under the Credit Agreement. Under the terms of the Credit Agreement, we are subject to customary restrictive financial and nonfinancial covenants which, among other things, require us to maintain certain leverage ratios, cash flow and debt service coverage ratios and secured borrowing ratios. As of December 31, 2022, we were in compliance with these covenants. 56 The Credit Agreement also restricts our ability to pay distributions to our stockholders under certain circumstances. However, we may make distributions to the extent necessary to maintain our qualification as a REIT under the Code. In addition to the financial covenants described above, the Credit Agreement contains customary affirmative and negative covenants that, among other things and subject to exceptions, limit or restrict our ability to incur indebtedness and liens, consummate mergers or other fundamental changes, dispose of assets, make certain restricted payments, make certain investments, modify our organizational documents, transact with affiliates, change our fiscal periods, provide negative pledge clauses, make subsidiary distributions, enter into certain new lines of business or engage in certain activities, and fail to meet the requirements for taxation as a REIT. 2027 Term Loan On February 18, 2022, we, through our Operating Partnership, amended our existing $430.0 million term loan credit facility (the "2027 Term Loan") to, among other things, reduce the Applicable Margin, extend the maturity date to February 18, 2027 and make certain other changes consistent with market terms and conditions. In August 2022, the 2027 Term Loan was further amended to revise the applicable margin grid such that the applicable pricing is based on the credit rating of the Company’s long-term senior unsecured non-credit enhanced debt for borrowed money (subject to a single step-down in the applicable pricing if the Company achieves a consolidated leverage ratio that is less than 0.35 to 1:00 while maintaining a credit rating of BBB/Baa2 provided by S&P, Moody's and/or Fitch). The borrowings under the 2027 Term Loan, as amended, bear interest at an annual rate of applicable Adjusted Term SOFR (as defined in the Credit Agreement) plus an applicable margin. The Adjusted Term SOFR is a rate with a term equivalent to the interest period applicable to the relevant borrowing. The applicable margin was initially a spread set according to a leverage-based pricing grid. In May 2022, the Operating Partnership made an irrevocable election to have the applicable margin be a spread set according to the Company’s corporate credit ratings provided by S&P, Moody’s and/or Fitch. The 2027 Term Loan is pre-payable at any time by the Operating Partnership without penalty. The 2027 Term Loan has an accordion feature to increase, subject to certain conditions, the maximum availability of the facility up to an aggregate of $500 million. The Operating Partnership is the borrower under the 2027 Term Loan, and we and certain of the subsidiaries of the Operating Partnership that own a direct or indirect interest in an eligible real property asset are guarantors under the facility. Under the terms of the 2027 Term Loan, we are subject to customary restrictive financial and nonfinancial covenants which, among other things, require us to maintain certain leverage ratios, cash flow and debt service coverage ratios and secured borrowing ratios. As of December 31, 2022, we were in compliance with these covenants. The 2027 Term Loan restricts our ability to pay distributions to our stockholders under certain circumstances. However, we may make distributions to the extent necessary to maintain our qualification as a REIT under the Code. The 2027 Term Loan contains certain additional covenants that, subject to exceptions, limit or restrict our incurrence of indebtedness and liens, disposition of assets, transactions with affiliates, mergers and fundamental changes, modification of organizational documents, changes to fiscal periods, making of investments, negative pledge clauses and lines of business and REIT qualification. Senior Unsecured Notes On June 22, 2021, the Operating Partnership issued $400.0 million aggregate principal amount of 2.950% Senior Notes due 2031 (the "2031 Notes"), resulting in net proceeds of $396.6 million. The 2031 Notes were issued by the Operating Partnership and the obligations of the Operating Partnership under the 2031 Notes are fully and unconditionally guaranteed on a senior basis by the Company. In May 2021, the Company entered into a treasury-lock agreement which was designated as a cash flow hedge associated with the expected public offering of such notes. In June 2021, the agreement was settled in accordance with its terms. The indenture and supplemental indenture creating the 2031 Notes contain customary restrictive covenants, including limitations on our ability to incur additional secured and unsecured indebtedness. As of December 31, 2022, we were in compliance with these covenants. 57 Cash Flows Comparison of the years ended December 31, 2022 and 2021 As of December 31, 2022, we had $62.3 million of cash and cash equivalents and $9.2 million of restricted cash, as compared to $59.8 million and none, respectively, as of December 31, 2021. Cash Flows for the year ended December 31, 2022 During the year ended December 31, 2022, net cash provided by operating activities was $211.0 million, as compared $167.4 million during 2021, an increase of $43.6 million. Our cash flows from operating activities primarily depend on the occupancy of our portfolio, the rental rates specified in our leases and the collectability of such rent, our property operating expenses and other general and administrative costs. Cash inflows during 2022 related to net income adjusted for non-cash items of $210.5 million (net income of $134.7 million adjusted for non-cash items, including the addition of depreciation and amortization of tangible, intangible and right-of-use real estate assets, amortization of deferred financing costs and other non-cash interest expense, loss on debt extinguishment and provision for impairment of real estate, offset by the subtraction of the change in our provision for credit losses, gain on dispositions of real estate, net, straight-line rent receivable, equity-based compensation expense and adjustment to rental revenue for tenant credit, which in aggregate net to an addition of $75.7 million), a decrease in rent receivables, prepaid expenses and other assets of $4.5 million and a decrease in accrued liabilities and other payables of $3.9 million. The increase in net cash provided by operating activities was primarily driven by the increased size of our investment portfolio during 2022. Net cash used in investing activities during the year ended December 31, 2022 was $706.1 million, as compared to $829.7 million during 2021, a decrease of $123.6 million. Our net cash used in investing activities is generally used to fund our investments in real estate, the development of our construction in progress and investments in loans receivable, offset by cash provided from the disposition of real estate and principal collections on our loans and direct financing lease receivables. The cash used in investing activities during 2022 primarily included $728.7 million to fund investments in real estate, $115.0 million of investments in loans receivable, $51.9 million to fund construction in progress and $7.5 million paid to tenants as lease incentives. These cash outflows were partially offset by $126.6 million of proceeds from sales of investments, net of disposition costs, and $70.4 million of principal collections on our loans and direct financing lease receivables. The decrease in net cash used in investing activities was primarily due to our increased level of proceeds from sales of investments during 2022. Net cash provided by financing activities was $506.8 million during the year ended December 31, 2022, as compared to $689.1 million during 2021, a decrease of $182.3 million. Our net cash provided by financing activities in 2022 related to cash inflows of $403.9 million from the issuance of common stock in a follow-on equity offering and through our ATM Program, and $299.0 million of borrowings under the Revolving Credit Facility. These cash inflows were partially offset by $443.0 million of repayments on the Revolving Credit Facility, the payment of $141.7 million in dividends, $1.0 million of offering costs paid related to our follow-on offering and the ATM Program, the payment of deferred financing costs of $5.0 million and $2.5 million of payments for taxes related to the net settlement of equity awards.. Cash Flows for the year ended December 31, 2021 During the year ended December 31, 2021, net cash provided by operating activities was $167.4 million, as compared to $99.4 million during 2020, an increase of $68.0 million. Our cash flows from operating activities primarily depend on the occupancy of our portfolio, the rental rates specified in our leases and the collectability of such rent, our property operating expenses and other general and administrative costs. Cash inflows during 2021 related to net income adjusted for non-cash items of $155.6 million (net income of $96.2 million adjusted for non-cash items, including the addition of depreciation and amortization of tangible, intangible and right-of-use real estate assets, amortization of deferred financing costs and other non-cash interest expense, loss on repayment and repurchase of secured borrowings and provision for impairment of real estate, offset by the subtraction of the change in our provision for credit losses, gain on dispositions of real estate, net, straight-line rent receivable, equity-based compensation expense and adjustment to rental revenue for tenant credit, which in aggregate net to an addition of $59.4 million), a decrease in rent receivables, prepaid expenses and other assets of $2.2 million and an increase in accrued liabilities and other payables of $14.4 million. These net cash inflows were partially offset by payments made in settlement of cash flow hedges of $4.8 million. The increase in net cash provided by operating activities was primarily driven by the increased size of our investment portfolio during 2021. 58 Net cash used in investing activities during the year ended December 31, 2021 was $829.7 million, as compared to $545.5 million in the same period in 2020, an increase of $284.2 million. Our net cash used in investing activities is generally used to fund our investments in real estate, the development of our construction in progress and investments in loans receivable, offset by cash provided from the disposition of real estate and principal collections on our loans and direct financing lease receivables. The cash used in investing activities during 2021 primarily included $840.0 million to fund investments in real estate, $136.4 million of investments in loans receivable, $9.3 million to fund construction in progress and $2.2 million paid to tenants as lease incentives. These cash outflows were partially offset by $100.5 million of principal collections on our loans and direct financing lease receivables and $58.4 million of proceeds from sales of investments, net of disposition costs. The increase in net cash used in investing activities was primarily due to our increased level of investments in real estate and loans receivables during 2021. Net cash provided by financing activities was $689.1 million during the year ended December 31, 2021, as compared to $457.8 million in the same period in 2020, an increase of $231.3 million. Our net cash provided by financing activities in 2021 related to cash inflows of $458.3 million from the issuance of common stock in follow-on equity offerings and through our ATM Program, $396.6 million in net proceeds from the issuance of the 2031 Notes and $393.0 million of borrowings under the Revolving Credit Facility. These cash inflows were partially offset by $267.0 million of repayments on the Revolving Credit Facility, $175.8 million of repayments of secured borrowing principal, the payment of $112.3 million in dividends, $1.2 million of offering costs paid related to our follow-on offerings and the ATM Program, the payment of deferred financing costs of $2.1 million and $0.4 million of payments for taxes related to the net settlement of equity awards. Off-Balance Sheet Arrangements We had no off-balance sheet arrangements as of December 31, 2022. Contractual Obligations The following table provides information with respect to our commitments as of December 31, 2022: Payment due by period (in thousands) Total 2023 2024-2025 2026-2027 Thereafter Unsecured Term Loans $ 1,030,000 $ — $ 200,000 $ 430,000 $ 400,000 Senior unsecured notes 400,000 — — — 400,000 Revolving Credit Facility — — — — — Tenant Construction Financing and Reimbursement Obligations (1) 34,620 34,620 — — — Operating Lease Obligations (2) 20,693 1,433 2,478 1,329 15,453 Total $ 1,485,313 $ 36,053 $ 202,478 $ 431,329 $ 815,453 _____________________________________ (1) Includes obligations to reimburse certain of our tenants for construction costs that they incur in connection with construction at our properties in exchange for contractually-specified rent that generally increases proportionally with our funding. (2) Includes $18.9 million of rental payments due under ground lease arrangements where our tenants are directly responsible for payment. Additionally, we may enter into commitments to purchase goods and services in connection with the operation of our business. These commitments generally have terms of one-year or less and reflect expenditure levels comparable to our historical expenditures, as adjusted for our growth. We have made an election to be taxed as a REIT for federal income tax purposes beginning with our taxable year ended December 31, 2018; accordingly, we generally will not be subject to federal income tax for the year ended December 31, 2022, if we distribute all of our REIT taxable income, determined without regard to the dividends paid deduction, to our stockholders. 59 Critical Accounting Estimates Our accounting policies are determined in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that are subjective in nature and, as a result, our actual results could differ materially from our estimates. Estimates and assumptions include, among other things, subjective judgments regarding the fair values and useful lives of our properties for depreciation and lease classification purposes, the collectability of receivables and asset impairment analysis. Set forth below are the more critical accounting policies that require management judgment and estimates in the preparation of our consolidated financial statements. Real Estate Investments Investments in real estate are carried at cost less accumulated depreciation and impairment losses, if any. The cost of investments in real estate reflects their purchase price or development cost and, in the case of asset acquisitions, transaction costs related to the acquisition. We allocate the purchase price (plus transaction costs) of acquired properties accounted for as asset acquisitions to tangible and identifiable intangible assets or liabilities based on their relative fair values. Tangible assets may include land, site improvements and buildings. Intangible assets may include the value of in-place leases and above- and below-market leases and other identifiable intangible assets or liabilities based on lease or property specific characteristics. The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases based on the specific characteristics of each tenant's lease. We estimate the cost to execute leases with terms similar to the remaining lease terms of the in-place leases, including leasing commissions, legal and other related expenses. Factors we consider in this analysis include an estimate of the carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses, and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from six to 12 months. The fair value of above- or below-market leases is recorded based on the net present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between the contractual amount to be paid pursuant to the in-place lease and our estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining non-cancelable term of the lease including any below-market fixed rate renewal options for below-market leases. In making estimates of fair values for purposes of allocating purchase price, we use a number of sources, including real estate valuations prepared by independent valuation firms. We also consider information and other factors including market conditions, the industry that the tenant operates in, characteristics of the real estate, e.g., location, size, demographics, value and comparative rental rates, tenant credit profile and the importance of the location of the real estate to the operations of the tenant's business. Additionally, we consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. We use the information obtained as a result of our pre-acquisition due diligence as part of our consideration of the accounting standard governing asset retirement obligations and, when necessary, will record an asset retirement obligation as part of the purchase price allocation. Allowance for Credit Losses On January 1, 2020, we adopted ASC Topic 326, Financial Instruments - Credit Losses (“ASC 326”) on a prospective basis. ASC 326 changed how we account for credit losses for all of our loans and direct financing lease receivables. ASC 326 replaced the previous “incurred loss” model with an “expected loss” model that requires consideration of a broader range of information than used under the incurred losses model. Upon adoption of ASC 326, we recorded an initial allowance for credit losses of $0.2 million as of January 1, 2020, netted against loans and direct financing receivables on our consolidated balance sheet. Under ASC 326, we are required to re-evaluate the expected loss of our loans and direct financing lease receivable portfolio at each balance sheet date. As of December 31, 2022 and 2021, we recorded an allowance for credit losses of $0.8 million. Changes in our allowance 60 for credit losses are presented within change in provision for credit losses in our consolidated statements of operations. In connection with our adoption of ASC 326 on January 1, 2020, we implemented a new process including the use of a credit loss forecasting model. We have used this credit loss forecasting model for estimating expected lifetime credit losses, at the individual asset level, for our loans and direct financing lease receivable portfolio. The forecasting model used is the probability weighted expected cash flow method, depending on the type of loan or direct financing lease receivable and global assumptions. We use a real estate loss estimate model (“RELEM”) which estimates losses on our loans and direct financing lease receivable portfolio, for purposes of calculating allowances for credit losses. The RELEM allows us to refine (on an ongoing basis) the expected loss estimate by incorporating loan specific assumptions as necessary, such as anticipated funding, interest payments, estimated extensions and estimated loan repayment/refinancing at maturity, to estimate cash flows over the life of the loan. The model also incorporates assumptions related to underlying collateral values, various loss scenarios, and predicted losses to estimate expected losses. Our specific loan-level inputs include loan-to-stabilized-value (“LTV”), principal balance, property type, location, coupon, origination year, term, subordination, expected repayment date and future funding. We categorize the results by LTV range, which we consider the most significant indicator of credit quality for our loans and direct financing lease receivables. A lower LTV ratio typically indicates a lower credit loss risk. We also evaluate each loan and direct financing lease receivable measured at amortized cost for credit deterioration at least quarterly. Credit deterioration occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan or direct financing lease receivables. Our allowance for credit losses is adjusted to reflect our estimation of the current and future economic conditions that impact the performance of the real estate assets securing our loans. These estimations include various macroeconomic factors impacting the likelihood and magnitude of potential credit losses for our loans and direct financing leases during their anticipated term. Impairment of Long-Lived Assets If circumstances indicate that the carrying value of a property may not be recoverable, we review the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. Impairment assessments have a direct impact on the consolidated statements of operations, because recording an impairment loss results in an immediate negative adjustment to the consolidated statements of operations. Adjustment to Rental Revenue for Tenant Credit We continually review receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. Prior to January 1, 2019, if the collectability of a receivable was in doubt, the accounts receivable and straight-line rent receivable balances were reduced by an allowance for doubtful accounts on the consolidated balance sheets or a direct write-off of the receivable was recorded in the consolidated statements of operations. The provision for doubtful accounts was included in property expenses in our consolidated statements of operations. If the accounts receivable balance or straight-line rent receivable balance was subsequently deemed to be uncollectible, such receivable amounts were written-off to the allowance for doubtful accounts. As of January 1, 2019, if the assessment of the collectability of substantially all payments due under a lease changes from probable to not probable, any difference between the rental revenue recognized to date and the lease payments that have been collected is recognized as a current period adjustment to rental revenue in the consolidated statements of operations. 61 Derivative Instruments In the normal course of business, we use derivative financial instruments, which may include interest rate swaps, caps, options, floors and other interest rate derivative contracts, to protect us against adverse fluctuations in interest rates by reducing our exposure to variability in cash flows on a portion of our floating-rate debt. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. We record all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may also enter into derivative contracts that are intended to economically hedge certain risk, even though hedge accounting does not apply or we elect not to apply hedge accounting. The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designed and qualifies for hedge accounting treatment. If a derivative is designated and qualifies for cash flow hedge accounting treatment, the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) in the consolidated statements of comprehensive income to the extent that it is effective. Any ineffective portion of a change in derivative fair value is immediately recorded in earnings. If we elect not to apply hedge accounting treatment (or for derivatives that do not qualify as hedges), any change in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative instruments in the consolidated statements of operations. We do not intend to use derivative instruments for trading or speculative purposes. Equity-Based Compensation From time to time, we grant shares of restricted common stock and restricted share units ("RSUs") to our directors, executive officers and other employees that vest over multiple periods, subject to the recipient's continued service. Additionally, we also granted performance-based RSUs to our executive officers, the final number of which is determined based on market and subjective performance conditions and which vest over a multi-year period, subject to the recipient's continued service. We account for the restricted common stock and RSUs in accordance with ASC 718, Compensation - Stock Compensation, which requires that such compensation be recognized in the financial statements based on their estimated grant-date fair value. The value of such awards is recognized as compensation expense in general and administrative expenses in the accompanying consolidated statements of operations over the requisite service periods. We recognize compensation expense for equity-based compensation using the straight-line method based on the terms of the individual grant. Forfeitures of equity-based compensation awards, if any, are recognized as they occur. Results of Operations The following discusses our results of operations for the year ended December 31, 2022, as compared to our results of operations for the year ended December 31, 2021. A discussion of the changes in our results of operations for the year ended December 31, 2021, as compared to our results of operations for the year ended December 31, 2020, has been omitted from this Annual Report but may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Comparison of the years ended December 31, 2021 and 2020" in our Annual Report on Form 10-K for the year ended December 31, 2021. 62 Comparison of the years ended December 31, 2022 and 2021 Year ended December 31, (dollar amounts in thousands) 2022 2021 Change % Revenues: Rental revenue $ 269,827 $ 213,327 $ 56,500 26.5 % Interest income on loans and direct financing lease receivables 15,499 15,710 (211) (1.3) % Other revenue, net 1,180 1,197 (17) (1.4) % Total revenues 286,506 230,234 56,272 24.4 % Expenses: General and administrative 29,464 24,329 5,135 21.1 % Property expenses 3,452 5,762 (2,310) (40.1) % Depreciation and amortization 88,562 69,146 19,416 28.1 % Provision for impairment of real estate 20,164 6,120 14,044 229.5 % Change in provision for credit losses 88 (204) 292 143.1 % Total expenses 141,730 105,153 36,577 34.8 % Other operating income: Gain on dispositions of real estate, net 30,647 9,338 21,309 228.2 % Income from operations 175,423 134,419 41,004 30.5 % Other (expense)/income: Loss on debt extinguishment (2,138) (4,461) (2,323) (52.1) % Interest expense (40,370) (33,614) 6,756 (20.1) % Interest income 2,825 94 2,731 2,905.3 % Income before income tax expense 135,740 96,438 48,168 49.9 % Income tax expense 998 227 771 339.6 % Net income 134,742 96,211 47,397 49.3 % Net income attributable to non-controlling interests (612) (486) 126 25.9 % Net income attributable to stockholders $ 134,130 $ 95,725 $ 47,523 49.6 % Revenues: Rental revenue . Rental revenue increased by $56.5 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. The increase in revenues was driven primarily by the growth in the size of our real estate investment portfolio, which generated additional rental revenues. Our real estate investment portfolio grew from 1,451 properties, representing $3.2 billion in net investments in real estate, as of December 31, 2021 to 1,653 properties, representing $3.8 billion in net investments in real estate, as of December 31, 2022. Our real estate investments were acquired throughout the periods presented and were not all owned by us for the entirety of the periods; accordingly, a significant portion of the increase in rental revenue between periods is related to recognizing revenue in 2022 on acquisitions that were made during 2021 and 2022. A smaller component of the increase in revenues between periods is related to rent escalations recognized on our leases. Interest on loans and direct financing lease receivables . Interest on loans and direct financing lease receivables decreased by $0.2 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to the repayment of mortgage loans receivable during the fourth quarter of 2021 and throughout 2022, partially offset by the growth of our mortgage loans receivable portfolio during the second half of 2022. Repayment and lending activity led to a lower average daily balance of loans receivable outstanding during the year ended December 31, 2022 as compared to the year ended December 31, 2021. Other revenue . Other revenue for the year ended December 31, 2022 increased by approximately $17,000, as compared to the year ended December 31, 2021, primarily due to the receipt of mortgage loan prepayment fees during the fourth quarter of 2021. 63 Expenses: General and administrative. General and administrative expense increased by $5.1 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. This increase in general and administrative expense was primarily due to an increase in non-cash share-based compensation of $3.8 million, salary expense and professional fees. Property expenses . Property expenses decreased by $2.3 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. The decrease in property expenses was primarily due to decreased insurance expenses, property taxes and property-related operational costs during the year ended December 31, 2022 related to fewer vacant properties and moving tenants accounted for on a non-accrual basis back to accrual. Depreciation and amortization . Depreciation and amortization expense increased by $19.4 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. Depreciation and amortization expense increased in proportion to the general increase in the size of our real estate investment portfolio. Provision for impairment of real estate . Impairment charges on real estate investments were $20.2 million and $6.1 million for the years ended December 31, 2022 and 2021, respectively, an increase of $14.0 million. During the years ended December 31, 2022 and 2021, we recorded a provision for impairment of real estate on 13 and 18 of our real estate investments, respectively, with the average size of our impairments being smaller in 2021. We strategically seek to identify non-performing properties that we may re-lease or dispose of in an effort to improve our returns and manage risk exposure. An increase in vacancy associated with our disposition or re-leasing strategies may trigger impairment charges when the expected future cash flows from the properties from sale or re-lease are less than their net book value. Change in provision for credit losses. During the year ended December 31, 2022, our provision for credit losses increased by $0.1 million, as compared to a decrease of $0.2 million during the year ended December 31, 2021. Under ASC 326, we are required to re-evaluate the expected loss on our portfolio of loans and direct financing lease receivables at each balance sheet date. Changes in our provision for credit losses are driven by revisions to global and loan-specific assumptions in our credit loss model and by changes in the size of our loan and direct financing lease portfolio. Other operating income: Gain on dispositions of real estate, net. Gain on dispositions of real estate, net, increased by $21.3 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. We disposed of 54 real estate properties during the year ended December 31, 2022, compared to 38 real estate properties during the year ended December 31, 2021. Overall, our 2022 dispositions had a higher sales price in relation to their net book value as compared to our 2021 dispositions. Other (expense)/income: Loss on debt extinguishment. Loss on debt extinguishment of $2.1 million during the year ended December 31, 2022 relates to the write-off of deferred financing costs and the payment of fees in conjunction with amendments to our term loans and revolving credit facility. During the year ended December 31, 2021, we recorded a loss on debt extinguishment of $4.5 million related to the payment of a make-whole premium and the write-off of deferred financing costs upon our repayment of the remaining $171.2 million of principal on our Series 2017-1 Notes in June 2021. Interest expense . Interest expense increased by $6.8 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. This increase in interest expense was primarily due to an increase in our outstanding debt balance and increased interest rates during the year ended December 31, 2022 compared to the year ended December 31, 2021. Interest income . Interest income increased by $2.7 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. The increase in interest income was primarily due to higher interest rates, higher average daily cash balances in our interest-bearing bank accounts and our investments in commercial paper during the year ended December 31, 2022. 64 Income tax expense. Income tax expense increased by $0.8 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. The increase was primarily due to the accrual of income taxes for a transaction consummated in 2022 through our taxable REIT subsidiary. We are organized and operate as a REIT and are generally not subject to U.S. federal taxation. However, the Operating Partnership is subject to taxation in certain state and local jurisdictions that impose income taxes on a partnership. Changes in income tax expense are also due to changes in the proportion of our real estate portfolio located in jurisdictions where the Operating Partnership is subject to taxation. Non-GAAP Financial Measures Our reported results are presented in accordance with GAAP. We also disclose the following non-GAAP financial measures: funds from operations ("FFO"), core funds from operations ("Core FFO"), adjusted funds from operations ("AFFO"), earnings before interest, taxes, depreciation and amortization ("EBITDA"), EBITDA further adjusted to exclude gains (or losses) on sales of depreciable property and real estate impairment losses ("EBITDA re" ), adjusted EBITDA re , annualized adjusted EBITDA re , net debt, net operating income ("NOI") and cash NOI ("Cash NOI"). We believe these non-GAAP financial measures are industry measures used by analysts and investors to compare the operating performance of REITs. We compute FFO in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT"). NAREIT defines FFO as GAAP net income or loss adjusted to exclude extraordinary items (as defined by GAAP), net gain or loss from sales of depreciable real estate assets, impairment write-downs associated with depreciable real estate assets and real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), including the pro rata share of such adjustments of unconsolidated subsidiaries. FFO is used by management, and may be useful to investors and analysts, to facilitate meaningful comparisons of operating performance between periods and among our peers primarily because it excludes the effect of real estate depreciation and amortization and net gains and losses on sales (which are dependent on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions). We compute Core FFO by adjusting FFO, as defined by NAREIT, to exclude certain GAAP income and expense amounts that we believe are infrequent and unusual in nature and/or not related to our core real estate operations. Exclusion of these items from similar FFO-type metrics is common within the equity REIT industry, and management believes that presentation of Core FFO provides investors with a metric to assist in their evaluation of our operating performance across multiple periods and in comparison to the operating performance of our peers, because it removes the effect of unusual items that are not expected to impact our operating performance on an ongoing basis. Core FFO is used by management in evaluating the performance of our core business operations. Items included in calculating FFO that may be excluded in calculating Core FFO include certain transaction related gains, losses, income or expense or other non-core amounts as they occur. To derive AFFO, we modify our computation of Core FFO to include other adjustments to GAAP net income related to certain items that we believe are not indicative of our operating performance, including straight-line rental revenue, non-cash interest expense, non-cash compensation expense, other amortization and non-cash charges, capitalized interest expense and transaction costs. Such items may cause short-term fluctuations in net income but have no impact on operating cash flows or long-term operating performance. We believe that AFFO is an additional useful supplemental measure for investors to consider when assessing our operating performance without the distortions created by non-cash items and certain other revenues and expenses. FFO, Core FFO and AFFO do not include all items of revenue and expense included in net income, they do not represent cash generated from operating activities and they are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures. Additionally, our computation of FFO, Core FFO and AFFO may differ from the methodology for calculating these metrics used by other equity REITs and, therefore, may not be comparable to similarly titled measures reported by other equity REITs. 65 The following table reconciles net income (which is the most comparable GAAP measure) to FFO, Core FFO and AFFO attributable to stockholders and non-controlling interests: Year ended December 31, (in thousands) 2022 2021 2020 Net income $ 134,742 $ 96,211 $ 42,528 Depreciation and amortization of real estate 88,459 69,043 59,309 Provision for impairment of real estate 20,164 6,120 8,399 Gain on dispositions of real estate, net (30,647) (9,338) (5,821) FFO attributable to stockholders and non-controlling interests 212,718 162,036 104,415 Non-core expenses (1)(2)(3) 2,388 4,461 2,273 Core FFO attributable to stockholders and non-controlling interests 215,106 166,497 106,688 Adjustments: Straight-line rental revenue, net (20,615) (19,116) (11,905) Non-cash interest 2,616 2,554 2,040 Non-cash compensation expense 9,489 5,683 5,427 Other amortization expense 2,912 2,675 3,854 Other non-cash charges 74 (212) 829 Capitalized interest expense (757) (81) (228) Transaction costs — — 291 AFFO attributable to stockholders and non-controlling interests $ 208,825 $ 158,000 $ 106,995 _____________________________________ (1) Includes $0.2 million of fees incurred in conjunction with the August 2022 amendment to our 2027 Term Loan and our $2.1 million loss on debt extinguishment during the year ended December 31, 2022. (2) Includes our $4.5 million loss on debt extinguishment during the year ended December 31, 2021. (3) Includes non-recurring expenses of approximately $39,000 related to reimbursement of executive relocation costs, $1.1 million for severance payments and acceleration of non-cash compensation expense in connection with the termination of one of our executive officers, $0.2 million of non-recurring recruiting costs and our $0.9 million loss on debt extinguishment during the year ended December 31, 2020. We compute EBITDA as earnings before interest, income taxes and depreciation and amortization. In 2017, NAREIT issued a white paper recommending that companies that report EBITDA also report EBITDA re . We compute EBITDA re in accordance with the definition adopted by NAREIT. NAREIT defines EBITDA re as EBITDA (as defined above) excluding gains (or losses) from the sales of depreciable property and real estate impairment losses. We present EBITDA and EBITDA re as they are measures commonly used in our industry. We believe that these measures are useful to investors and analysts because they provide supplemental information concerning our operating performance, exclusive of certain non-cash items and other costs. We use EBITDA and EBITDA re as measures of our operating performance and not as measures of liquidity. EBITDA and EBITDA re do not include all items of revenue and expense included in net income, they do not represent cash generated from operating activities and they are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures. Additionally, our computation of EBITDA and EBITDA re may differ from the methodology for calculating these metrics used by other equity REITs and, therefore, may not be comparable to similarly titled measures reported by other equity REITs. 66 The following table reconciles net income (which is the most comparable GAAP measure) to EBITDA and EBITDA re attributable to stockholders and non-controlling interests: Year ended December 31, (in thousands) 2022 2021 2020 Net income $ 134,742 $ 96,211 $ 42,528 Depreciation and amortization 88,562 69,146 59,446 Interest expense 40,370 33,614 29,651 Interest income (2,825) (94) (485) Income tax expense 998 227 212 EBITDA attributable to stockholders and non-controlling interests 261,847 199,104 131,352 Provision for impairment of real estate 20,164 6,120 8,399 Gain on dispositions of real estate, net (30,647) (9,338) (5,821) EBITDA re attributable to stockholders and non-controlling interests $ 251,364 $ 195,886 $ 133,931 We further adjust EBITDA re for the most recently completed quarter i) based on an estimate calculated as if all re-leasing, investment and disposition activity that took place during the quarter had been made on the first day of the quarter, ii) to exclude certain GAAP income and expense amounts that we believe are infrequent and unusual in nature and iii) to eliminate the impact of lease termination fees and contingent rental revenue from certain of our tenants, which is subject to sales thresholds specified in the applicable leases ("Adjusted EBITDA re" ). We then annualize quarterly Adjusted EBITDA re by multiplying it by four ("Annualized Adjusted EBITDA re" ), which we believe provides a meaningful estimate of our current run rate for all of our investments as of the end of the most recently completed quarter. You should not unduly rely on this measure, as it is based on assumptions and estimates that may prove to be inaccurate. Our actual reported EBITDA re for future periods may be significantly less than our current Annualized Adjusted EBITDA re . 67 The following table reconciles net income (which is the most comparable GAAP measure) to Annualized Adjusted EBITDA re attributable to stockholders and non-controlling interests for the three months ended December 31, 2022: (in thousands) Three months ended December 31, 2022 Net income $ 35,521 Depreciation and amortization 24,121 Interest expense 12,128 Interest income (2,025) Income tax expense 229 EBITDA attributable to stockholders and non-controlling interests 69,974 Provision for impairment of real estate 9,623 Gain on dispositions of real estate, net (12,565) EBITDA re attributable to stockholders and non-controlling interests 67,032 Adjustment for current quarter re-leasing, acquisition and disposition activity (1) 6,546 Adjustment to exclude other non-recurring activity (2) 312 Adjustment to exclude termination/prepayment fees and certain percentage rent (3) (181) Adjusted EBITDA re attributable to stockholders and non-controlling interests $ 73,709 Annualized Adjusted EBITDA re attributable to stockholders and non-controlling interests $ 294,836 _____________________________________ (1) Adjustment assumes all re-leasing activity, investments in and dispositions of real estate and loan repayments completed during the three months ended December 31, 2022 had occurred on October 1, 2022. (2) Adjustment is made to exclude non-core expenses added back to compute Core FFO, to exclude changes in our provision for credit losses and to eliminate the impact of seasonal fluctuation in certain non-cash compensation expense recorded in the period. (3) Adjustment excludes lease termination or loan prepayment fees and contingent rent (based on a percentage of the tenant's gross sales at the leased property) where payment is subject to exceeding a sales threshold specified in the lease, if any. We calculate our net debt as our gross debt (defined as total debt plus net deferred financing costs and original issue discount on our borrowings) less cash and cash equivalents and restricted cash deposits available for future investment. We believe excluding cash and cash equivalents and restricted cash available for future investment from gross debt, all of which could be used to repay debt, provides an estimate of the net contractual amount of borrowed capital to be repaid, which we believe is a beneficial disclosure to investors and analysts. The following table reconciles total debt (which is the most comparable GAAP measure) to net debt: December 31, (in thousands) 2022 2021 Unsecured term loan, net of deferred financing costs $ 1,025,492 $ 626,983 Revolving credit facility — 144,000 Senior unsecured notes 395,286 394,723 Total debt 1,420,778 1,165,706 Deferred financing costs and original issue discount, net 9,222 8,294 Gross debt 1,430,000 1,174,000 Cash and cash equivalents (62,345) (59,758) Restricted cash available for future investment (9,155) — Net debt $ 1,358,500 $ 1,114,242 We compute NOI as total revenues less property expenses. NOI excludes all other items of expense and income included in the financial statements in calculating net income or loss in accordance with GAAP. Cash NOI further excludes non-cash items included in total revenues and property expenses, such as straight-line rental revenue and other amortization and non-cash charges. We believe NOI and Cash NOI provide useful and relevant 68 information because they reflect only those revenue and expense items that are incurred at the property level and present such items on an unlevered basis. NOI and Cash NOI are not measures of financial performance under GAAP. You should not consider our NOI and Cash NOI as alternatives to net income or cash flows from operating activities determined in accordance with GAAP. Additionally, our computation of NOI and Cash NOI may differ from the methodology for calculating these metrics used by other equity REITs and, therefore, may not be comparable to similarly titled measures reported by other equity REITs. The following table reconciles net income (which is the most comparable GAAP measure) to NOI and Cash NOI attributable to stockholders and non-controlling interests: Year ended December 31, (in thousands) 2022 2021 2020 Net income $ 134,742 $ 96,211 $ 42,528 General and administrative expense 29,464 24,329 24,444 Depreciation and amortization 88,562 69,146 59,446 Provision for impairment of real estate 20,164 6,120 8,399 Change in provision for credit losses 88 (204) 830 Gain on dispositions of real estate, net (30,647) (9,338) (5,821) Loss on debt extinguishment 2,138 4,461 924 Interest expense 40,370 33,614 29,651 Interest income (2,825) (94) (485) Income tax expense 998 227 212 NOI attributable to stockholders and non-controlling interests 283,054 224,472 160,128 Straight-line rental revenue, net (20,615) (19,116) (11,905) Other amortization and non-cash charges 2,912 2,675 3,854 Cash NOI attributable to stockholders and non-controlling interests $ 265,351 $ 208,031 $ 152,077 69