NETSTREIT Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Special Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements concerning our business and growth strategies, investment, financing and leasing activities and trends in our business, including trends in the market for single-tenant, retail commercial real estate. Words such as “expects,” “anticipates,” “intends,” “plans,” “likely,” “will,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Quarterly Report on Form 10-Q may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. For a further discussion of these and other factors that could impact future results, performance or transactions, see the information under the heading “Risk Factors” in our prospectus dated August 13, 2020, relating to our initial public offering, filed with the Securities and Exchange Commission (the “SEC”) on August 14, 2020 and other reports filed with the Securities and Exchange Commission from time to time. Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report on Form 10-Q. New risks and uncertainties may arise over time and it is not possible for us to predict those events or how they may affect us. Many of the risks identified herein and in our periodic reports have been and will continue to be heightened as a result of the ongoing and numerous adverse effects arising from the novel coronavirus (COVID-19). We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law. Overview We are an internally-managed real estate company that acquires, owns and manages a diversified portfolio of single-tenant, retail commercial real estate subject to long-term net leases with high credit quality tenants across the United States. Our diversified portfolio consists of 189 single-tenant retail net leased properties spanning 37 states, with tenants representing 55 different brands or concepts across 23 retail sectors. Our portfolio generates ABR of $38.9 million and is 100% occupied, with a WALT of 11.1 years and consisting of approximately 68% investment grade tenants by ABR, which we believe provides us with a strong, stable source of recurring cash flow. Our tenants operate in industries where a physical location is critical to the generation of sales and profits, with a focus on necessity goods and essential services in the retail sector, including discount stores, grocers, drug stores and pharmacies, home improvement, automotive service and quick-service restaurants, which we refer to as defensive retail industries. We believe these characteristics make our tenants’ businesses e-commerce resistant and resilient through all economic cycles. We completed our initial public offering on August 17, 2020 and our common stock trades on the New York Stock Exchange under the symbol "NTST." COVID-19 We continue to monitor the global outbreak of COVID-19 and to take steps to mitigate the potential risks to us posed by the pandemic. In addition, we continue to stay in close contact with our tenants and monitor the timeliness of rental payments and any significant changes in our tenants' businesses. See "Note 2 - Summary of Significant Accounting Policies" to our condensed consolidated financial statements included herein. The Company had received payment of approximately 94.9%, 99.3%, 100.0% and 100.0% of contractual base rent, based on lease agreements in place prior to consideration of any rent relief granted as a result of COVID-19, billed for the months of July, August, September and October 2020, respectively (such percentages reflect leases in place for the full applicable month). Outlook We seek to maximize long-term earnings growth and shareholder value primarily through the acquisition of strategically positioned assets throughout the U.S., specifically focusing on properties with tenants which are considered essential businesses. We have deployed $66 million of the $227.3 million from the Company's initial public offering to fund acquisitions through September 30, 2020. In addition, we have repaid $50 million of outstanding borrowings under our Revolver as of September 30, 2020. We intend to use the remainder of the net proceeds for general corporate purposes, including the acquisition of properties in our pipeline. We have identified 30 properties for a combined purchase price, including acquisition costs, of $89 million that we expect to purchase prior to December 31, 2020. Of the $89 million identified, we have acquired five properties, or $8.8 million of property assets subsequent to September 30, 2020. Results of Operations Overall The Company continued to grow its assets held for investment by increasing its asset base from 94 properties as of December 31, 2019 to 189 properties as of the end of September 30, 2020. This growth was facilitated by successfully raising equity capital of $219.0 million and $227.3 million as result of the private offerings and initial public offering, respectively, totaling $446.3 million of net capital raises executed by the Company over the last 12 months. 24 Table of Contents Acquisitions During the three months ended September 30, 2020, the Company acquired 30 retail net lease properties for a total purchase price, inclusive of capitalized acquisition costs, of $102.6 million. The acquisitions were all accounted for as asset acquisitions. These properties are located in 13 states with a weighted average lease term of approximately 10.9 years. The underwritten weighted-average capitalization rate on the Company’s third quarter acquisitions was approximately 6.5%. During the nine months ended September 30, 2020, the Company acquired 98 retail net lease properties for a total purchase price, inclusive of capitalized acquisition costs, of $327.3 million. The acquisitions were all accounted for as asset acquisitions. These properties are located in 21 states with a weighted average lease term of approximately 12.1 years. The underwritten weighted-average capitalization rate on the Company’s year to date acquisitions was approximately 6.8%. Dispositions During the three months ended September 30, 2020, the Company sold one property for a total sales price, net of disposal costs, of $1.9 million. The Company recognized a gain on sale of $0.1 million. During the nine months ended September 30, 2020, Company sold three properties for a total sales price, net of disposal costs, of $11.8 million. The Company recognized a gain on sale of $1.1 million. Three Months Ended September 30, 2020 Compared with Three Months Ended September 30, 2019 The following table sets forth our operating results for the periods indicated (in thousands): Successor Predecessor Three Months Ended September 30, 2020 2019 (Unaudited) Revenues Rental revenue (including reimbursable) $ 9,652 $ 4,786 Operating expenses Property 624 293 General and administrative 4,109 956 Depreciation and amortization 4,692 2,660 Provisions for impairment 363 2,839 Transaction costs 1,241 3 Total operating expenses 11,029 6,751 Other income (expense) Interest expense, net (1,018) (2,449) Gain on sales of real estate 54 1,674 Gain on forfeited earnest money deposit — Total other income (expense) (964) (775) Net loss $ (2,341) $ (2,740) Revenue. Revenue for the three months ended September 30, 2020 increased by $4.9 million to $9.7 million from $4.8 million in the prior period primarily due to the increase in total number of properties which increased from 99 as of the end of September 30, 2019 to 189 as of September 30, 2020. The increase includes an increase in rental income of $3.6 million, straight-line rental revenue of $0.7 million, property expense reimbursement revenue of $0.3 million and an increase of amortization of above and below-market lease related intangible assets of $0.3 million. Total Operating Expenses. Total expenses increased 63.4% to $11.0 million for the three months ended September 30, 2020 as compared to $6.8 million for the three months ended September 30, 2019. The increase in operating expenses is attributed to the increase in the number of operating properties and the completion of the Company's initial public offering in August 2020. Total operating expenses include the following: • Property Expenses. Property expenses increased $0.3 million to $0.6 million for the three months ended September 30, 2020 from $0.3 million for the three months ended September 30, 2019 as a result of the Company's acquisition of new properties in 2020. The increase in property operating expenses is comprised of increased reimbursable expenses of $0.2 million and non-reimbursable expenses of $0.1 million during the three months ended September 30, 2020. • General and Administrative Expenses. General and administrative expenses increased $3.2 million to $4.1 million for the three months ended September 30, 2020 from $1.0 million for the three months ended September 30, 2019. The increase is primarily due to the additional payroll expense associated with the internalization of management to support the Company as a newly public company of $1.6 million, an increase of restricted-share based expense of $1.8 million, offset by the elimination of the management fee paid to affiliates of 25 Table of Contents $0.7 million. The Company also incurred increased administrative related expenses of $0.3 million and professional fees of $0.3 million, which includes board fees of $0.1 million and audit fees of $0.1 million during the three months ended September 30, 2020. • Depreciation and Amortization. Depreciation and amortization expense increased by $2.0 million for the three months ended September 30, 2020 compared to the prior period. The property portfolio consists of 189 and 99 properties as of September 30, 2020 and September 30, 2019, respectively. The majority of our 2020 acquisitions occurred in the second and third quarter of 2020 and as a result depreciation and amortization expense has increased for the three months ended September 30, 2020. • Provision for Impairment. For the three months ended September 30, 2020, we recorded a provision for impairment of $0.4 million on two properties which were classified as held-for-sale assets at September 30, 2020. For the three months ended September 30, 2019, our predecessor recorded a provision for impairment of $2.8 million on four properties which were classified as held for sale at September 30, 2019. • Transaction costs. Transaction costs increased to $1.2 million for the three months ended September 30, 2020. These costs include $0.9 million of costs incurred by the Company to facilitate both the private offering and the initial public offering of common stock. Transaction costs also include $0.3 million of expenses incurred for abandoned acquisitions as well as expenses associated with property acquisitions throughout the year. Interest Expense. Interest expense decreased $1.4 million to $1.0 million for the three months ended September 30, 2020 from $2.4 million for the prior period, primarily due to the decrease in our outstanding credit facilities and related interest rates for the three months ended September 30, 2020 compared to those of our predecessor over the comparable period. Gain on Sales of Real Estate. For the three months ended September 30, 2020, we recorded a gain on sales of real estate $0.1 million. For the three months ended September 30, 2019, our predecessor recorded a gain on sales of real estate of $1.7 million. The table below summarizes the properties sold for the periods indicated (in thousands): Successor Predecessor Three Months Ended September 30, 2020 2019 (Unaudited) Number of properties sold 1 5 Sales price, net of disposal cost $ 1,861 $ 11,370 Gain on sales of real estate $ 54 $ 1,674 Net Loss. Net loss for the three months ended September 30, 2020 remained consistent with the prior comparative period, as a result of the items set forth above. Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019 The following table sets forth our operating results for the periods indicated (in thousands): Successor Predecessor Nine Months Ended September 30, 2020 2019 (Unaudited) Revenues Rental revenue (including reimbursable) $ 22,277 $ 16,203 Operating expenses Property 1,344 853 General and administrative 7,841 2,915 Depreciation and amortization 10,153 8,065 Provisions for impairment 1,773 6,268 Transaction costs 2,969 76 Total operating expenses 24,080 18,177 Other income (expense) Interest expense, net (3,815) (8,349) Gain on sales of real estate 1,070 5,773 Gain on forfeited earnest money deposit 250 — Total other income (expense) (2,495) (2,576) Net loss $ (4,298) $ (4,550) 26 Table of Contents Revenue. Revenue for the nine months ended September 30, 2020 increased by $6.1 million to $22.3 million from $16.2 million in the prior year. This is primarily due to an increase in the real estate portfolio from 99 to 189 properties during the period ended September 30, 2020. The increase includes an increase in rental income of $2.6 million, straight-line rental revenue of $2.1 million, property expense reimbursement revenue of $0.5 million and an increase of amortization of above- and below-market lease related intangibles of $0.9 million. Total Operating Expenses. Total expenses increased by $5.9 million to $24.1 million for the nine months ended September 30, 2020 as compared to $18.2 million for the nine months ended September 30, 2019. The increase in operating expenses is attributed to the increase in the number of operating properties and the completion of the Company's initial public offering in August 2020. Total operating expenses include the following: • Property Expenses. Property expenses increased $0.5 million to $1.3 million for the nine months ended September 30, 2020 from $0.9 million for the nine months ended September 30, 2019. The increase is primarily attributed to the increase in the real estate portfolio from 99 to 189 properties. • General and Administrative Expenses. General and administrative expenses increased $4.9 million to $7.8 million for the nine months ended September 30, 2020 from $2.9 million for the nine months ended September 30, 2019. The increase is primarily due to payroll expense associated with the internalization of management to support the Company as a newly public company of $3.4 million, an increase of restricted-share based expense of $1.8 million, offset by the elimination of management fees of $2.1 million charged to the Company by affiliates. The increase also includes the establishment of office related expenses of $0.6 million and professional and administrative expenses of $1.2 million primarily comprised of audit fees of $0.7 million and board fees of $0.3 million for nine months ended September 30, 2020. • Depreciation and Amortization. Depreciation and amortization expense increased by $2.1 million to $10.2 million for the nine months ended September 30, 2020 from $8.1 million for the nine months ended September 30, 2019. The increase in depreciation and amortization is proportionate to the increase in the size of the portfolio over the comparable period. • Provisions for Impairment. Provisions for impairment decreased by $4.5 million to $1.8 million for the nine months ended September 30, 2020 from $6.3 million for the nine months ended September 30, 2019. For the nine months ended September 30, 2020 and 2019, the provisions for impairment were recorded on four and seven real estate properties, respectively. • Transaction costs. Transaction costs increased to $3.0 million for the nine months ended September 30, 2020. These costs include $2.2 million of costs incurred by the Company to facilitate both the private offering and the initial public offering of common stock. Transaction costs also include $0.8 million of expenses for abandoned acquisitions as well as expenses associated with property acquisitions throughout the year. Interest Expense. Interest expense decreased by $4.5 million to $3.8 million for the nine months ended September 30, 2020 compared to $8.3 million for the nine months ended September 30, 2019. The decrease is primarily attributed to the decrease in the effective interest rate and total borrowings outstanding. Gain on Sales of Real Estate. Gain on sales of real estate decreased $4.7 million to $1.1 million for the nine months ended September 30, 2020 from $5.8 million for the nine months ended September 30, 2019. The table below summarizes the properties sold for the periods indicated (in thousands): Successor Predecessor Nine Months Ended September 30, 2020 2019 (Unaudited) Number of properties sold 3 24 Sales price, net of disposal cost $ 11,778 $ 70,353 Gain on sales of real estate $ 1,070 $ 5,773 Net Loss. Net loss for the nine months ended September 30, 2020 remained consistent with the prior comparative period, as a result of the items set forth above. Liquidity and Capital Resources Our primary capital requirements are to fund required interest payments and property acquisitions, as well as working capital needs, operating expenses, and capital expenditures. Our capital resources primarily consist of cash from operations, sales of equity securities (including the private offering) and borrowings under our Credit Facility. As of September 30, 2020, we had a $175.0 million Term Loan and no borrowings outstanding under our $250.0 million Revolver. We believe that the net proceeds of $227.3 million from our initial public offering plus both our cash flows from operations and available borrowing capacity will be adequate to support our ongoing operations and to fund our debt service requirements, capital expenditures and working capital for at least the next 12 months. 27 Table of Contents Credit Facility In December 2019, we entered into a senior credit facility consisting of (i) a $175.0 million senior secured Term Loan and (ii) a $250.0 million senior secured Revolver. Wells Fargo Securities, LLC is lead arranger and bookrunner and Wells Fargo Bank, National Association is administrative agent under the Credit Facility (the “Administrative Agent”). The Term Loan matures on December 23, 2024 and the Revolver matures on December 23, 2023, subject to extension of up to one year. The Credit Facility is secured by a first priority perfected security interest in and lien on all existing and future equity interests of the Company’s direct and indirect subsidiaries of any Eligible Property (as defined in the Credit Facility) owned by the Company or any of the Company’s subsidiaries. The Credit Facility also provides that the Administrative Agent has the option to release the collateral securing the Credit Facility upon delivery of satisfactory evidence from the Company that Collateral Release Requirements (as defined in the Credit Facility) have been met, which requirements include, among others, conditions related to the unencumbered asset value and asset diversification of the Company. Interest is payable monthly or at the end of the applicable interest period in arrears on any outstanding borrowings. For so long as the Credit Facility is secured, the interest rates under the Credit Facility are based on the Company’s consolidated total leverage ratio, and are determined by (A) in the case of Term Loan either (i) LIBOR, plus a margin ranging from 1.25% to 2.25%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.25% to 1.25%, based on the Company’s consolidated total leverage ratio and (B) in the case of Revolving Loans either (i) LIBOR, plus a margin ranging from 1.35% to 2.30%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.35% to 1.30%, based on the Company’s consolidated total leverage ratio. To the extent the Administrative Agent releases the collateral in connection with the Company’s satisfaction of the Collateral Release Requirements, the interest rates under the Credit Facility will be based on the Company’s consolidated total leverage ratio, and are determined by (A) in the case of Term Loan either (i) LIBOR, plus a margin ranging from 1.15% to 1.60%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.15% to 0.60%, based on the Company’s consolidated total leverage ratio and (B) in the case of Revolving Loans either (i) LIBOR, plus a margin ranging from 1.20% to 1.80%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.20% to 0.80%, based on the Company’s consolidated total leverage ratio. The Company uses interest rate derivative contracts to manage its exposure to changes in interest rates on its variable rate debt. These derivatives are considered cash flow hedges and are recorded on a gross basis at fair value. Effective September 28, 2020, such derivatives were used to hedge the variable cash flows associated with Term Loan above. Historical Cash Flow Information Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019 Successor Predecessor Nine Months Ended September 30, 2020 2019 (in thousands) (Unaudited) Net cash provided by (used in): Operating activities $ 5,699 $ 5,298 Investing activities (316,922) 68,671 Financing activities 278,914 (73,047) Cash Flows Provided By Operating Activities. Net cash provided by operating activities increased by $0.4 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase was attributed to the increase in total number of properties, $4.5 million decrease in the in provision for impairments, offset by the decrease in the realized gain on sale of real estate of $4.7 million and the increase in stock based compensation expense of $1.7 million. Cash Flows Used In Investing Activities. Net cash used in investing activities increased by $385.6 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The Company spent $327.3 million on the acquisition of real estate during the nine months ended September 30, 2020 compared to $1.2 million during the nine months ended September 30, 2019. Additionally, the Company sold three properties during the nine months ended September 30, 2020 for net proceeds of $11.8 million compared to 24 properties sold during the nine months ended September 30, 2019 for net proceeds of $70.4 million. Cash Flows Provided By Financing Activities. Net cash provided by financing activities increased by $352.0 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase is attributed to the private offering of common stock of $54.5 million and the initial public offering of $227.3 million which occurred during the nine months ended September 30, 2020. Additionally, the Company had no net borrowings during the nine months ended September 30, 2020 compared to net borrowings of $68.6 million during the nine months ended September 30, 2019. Contractual Obligations and Commitments As of September 30, 2020, we had one contractual obligation related to the maturity on our $175.0 million Term Loan with the scheduled principal payment due on December 23, 2024. 28 Table of Contents During 2020, the Company borrowed and repaid $50.0 million on our $250.0 million Revolver at an effective interest rate of 1.53% to fund specifically identified property acquisitions. The following table provides information with respect to our commitments as of September 30, 2020 (in thousands): Payment Due by Period Total From October 1, 2020 to December 31, 2020 1 – 3 years 3 – 5 years Contractual Obligations Term Loan – Principal $ 175,000 $ — $ — $ 175,000 Term Loan – Variable interest (1) 10,039 594 7,128 2,317 Unutilized borrowing fees on Revolver (2) 2,031 156 1,875 — Total $ 187,070 $ 750 $ 9,003 $ 177,317 (1) Effective September 28, 2020, the Company entered into an interest rate hedge to fix the total Company interest rate on the Company's Term Loan. Accordingly, the projected interest rate obligations for the variable rate Term Loan is based on the hedged fixed rate (one-month) of 0.21% compared to the variable Term Loan one-month LIBOR rate as of September 30, 2020 of 0.14%, plus a margin of 1.15% based on the $175.0 million Term Loan outstanding through the maturity date of December 23, 2024. (2) We are subject to a variable unutilized borrowing fee on the unused portion of our $250.0 million Revolver. As of September 30, 2020, we have no borrowings on our $250.0 million Revolver and incurred a fee at 0.25%. This reflects our projected unutilized borrowing fee as if the Revolver has no borrowing through the maturity date of December 23, 2023 at 0.25%. Income Taxes We will elect to be treated and to qualify as a REIT for U.S. federal income tax purposes under the Code, commencing with our short taxable year ended December 31, 2019 upon the filing of our U.S. federal income tax return for such taxable year. As a REIT, we generally will not be subject to U.S. federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax on our taxable income at the regular corporate tax rate. We believe that we are organized and have operated in a manner that has enabled us to qualify to be taxed as a REIT commencing with our short taxable year ended December 31, 2019, and we intend to continue to operate so as to satisfy the requirements for qualification as a REIT for U.S. federal income tax purposes. We must declare and pay dividends to maintain our status as a REIT and we were required to declare and pay a dividend of $0.2 million relating to our 2019 fiscal period by December 31, 2020. Accordingly, we declared and paid a $0.10 or $2.8 million dividend on September 25, 2020. We made a joint election with NETSTREIT TRS for it to be treated as a TRS. As a TRS, NETSTREIT TRS will be subject to U.S. federal, state, and local income taxes on its taxable income. In general, NETSTREIT TRS may perform services for our tenants, hold assets that we cannot hold directly and may engage in any real estate or non-real estate-related business. Our predecessor was not a federal taxable entity and no provision for federal income taxes was recognized in its consolidated financial information. Recent Accounting Pronouncements A discussion of new accounting standards and the possible effects of these standards on our condensed consolidated financial statements is included in "Note 2 - Summary of Significant Accounting Policies" of our condensed consolidated financial statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Critical Accounting Policies and Estimates Our accounting policies have been established to conform with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. A summary of the Company’s critical accounting policies is included in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the prospectus dated August 13, 2020, related to our initial public offering, filed with the SEC in accordance with Rule 424(b) under the Securities Act, on August 14, 2020, which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to these policies during the periods covered by this quarterly report. 29 Table of Contents Non-GAAP Financial Measures Our reported results are presented in accordance with GAAP. We also disclose the following non-GAAP financial measures: FFO, Core FFO, AFFO, earnings before interest, taxes, depreciation and amortization (“EBITDA”), EBITDA adjusted to exclude gains (or losses) on sales of depreciable property and real estate impairment losses (“EBITDA re ”), EBITDA re further adjusted to exclude straight-line rent, gains from forfeited earnest money deposits, non-recurring public company costs, representing consulting fees that we have incurred in preparing to become a public company and non-cash compensation expense (“Adjusted EBITDA re ”), NOI and Cash NOI. We believe these non-GAAP financial measures are industry measures used by analysts and investors to compare the operating performance of REITs. FFO, Core FFO and AFFO FFO is a non-GAAP financial measure defined by NAREIT as net income (computed in accordance with GAAP), excluding real estate-related expenses including, but not limited to, gains (losses) from sales, impairment adjustments, and depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of FFO is consistent with FFO as defined by NAREIT. Core FFO is a non-GAAP financial measure defined as FFO adjusted for gains from forfeited earnest money deposits and non-recurring public company costs. We believe the presentation of Core FFO provides investors with a metric to assist in their evaluation of our operating performance across multiple periods because it removes the effect of unusual and non-recurring items that are not expected to impact our operating performance on an ongoing basis. AFFO is a non-GAAP financial measure defined as Core FFO adjusted for GAAP net income related to non-cash revenues and expenses, such as straight-line rent, amortization of above- and below-market lease-related intangibles, non-cash compensation expense, and amortization of deferred financing costs. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. In fact, real estate values historically have risen or fallen with market conditions. FFO is intended to be a standard supplemental measure of operating performance that excludes historical cost depreciation and valuation adjustments from net income. We consider FFO to be useful in evaluating potential property acquisitions and measuring operating performance. We further consider Core FFO and AFFO to be useful in determining funds available for payment of distributions. FFO, Core FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. You should not consider FFO, Core FFO and AFFO to be alternatives to net income as a reliable measure of our operating performance; nor should you consider FFO, Core FFO and AFFO to be alternatives to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity. FFO, Core FFO and AFFO do not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital improvements and distributions to stockholders. FFO, Core FFO and AFFO do not represent cash flows from operating, investing or financing activities as defined by GAAP. Further, FFO, Core FFO and AFFO as disclosed by other REITs might not be comparable to our calculations of FFO, Core FFO and AFFO. The following table sets forth a reconciliation of FFO, Core FFO and AFFO for the periods presented to net income (loss) before allocation to non-controlling interests, as computed in accordance with GAAP (in thousands): Successor Predecessor Successor Predecessor Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (Unaudited) Net loss $ (2,341) $ (2,740) $ (4,298) $ (4,550) Depreciation and amortization of real estate 4,614 2,660 9,926 8,065 Provision for impairment 363 2,839 1,773 6,268 Gain on sale of real estate (54) (1,674) (1,070) (5,773) FFO $ 2,582 $ 1,085 $ 6,331 $ 4,010 Adjustments: Gain on forfeited earnest money deposit — — (250) — 144A and IPO transaction costs (1) 891 — 2,170 — Core FFO $ 3,473 $ 1,085 $ 8,251 $ 4,010 Adjustments: Straight-line rental revenue (387) 296 (1,417) 688 Amortization of deferred financing costs 157 276 464 775 Amortization of above/below market lease intangibles (219) 105 (340) 486 Non-cash compensation expense 1,753 — 1,753 — AFFO $ 4,777 $ 1,762 $ 8,711 $ 5,958 30 Table of Contents (1) These expenses represent a subset of transaction costs as presented on the condensed consolidated statement of operations and comprehensive loss. EBITDA, EBITDAre and Adjusted EBITDAre 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. Adjusted EBITDA re is a non-GAAP financial measure defined as EBITDA re further adjusted to exclude straight-line rent, gains from forfeited earnest money deposits, non-recurring public company costs, representing consulting fees that we have incurred in preparing to become a public company and non-cash compensation expense. We present EBITDA, EBITDA re and Adjusted 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, EBITDA re and Adjusted EBITDA re as measures of our operating performance and not as measures of liquidity. EBITDA, EBITDA re and Adjusted 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, EBITDA re and Adjusted 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. The following table sets forth a reconciliation of EBITDA, EBITDA re and Adjusted EBITDA re for the periods presented to net income (loss) before allocation to non-controlling interests, as computed in accordance with GAAP (in thousands): Successor Predecessor Successor Predecessor Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (Unaudited) Net loss $ (2,341) $ (2,740) $ (4,298) $ (4,550) Depreciation and amortization of real estate 4,614 2,660 9,926 8,065 Amortization of above/below market lease intangibles (219) 105 (340) 486 Non-real estate depreciation and amortization 77 — 228 — Interest expense, net 1,018 2,449 3,815 8,349 EBITDA $ 3,149 $ 2,474 $ 9,331 $ 12,350 Adjustments: Provision for impairments 363 2,839 1,773 6,268 Gain on sale of real estate (54) (1,674) (1,070) (5,773) EBITDA re $ 3,458 $ 3,639 $ 10,034 $ 12,845 Adjustments: Straight-line rental revenue (387) 296 (1,417) 688 Gain on forfeited earnest money deposit — — (250) — 144A and IPO transaction costs (1) 891 — 2,170 — Non-cash compensation expense 1,753 — 1,753 — Adjusted EBITDA re $ 5,715 $ 3,935 $ 12,290 $ 13,533 (1) These expenses represent a subset of transaction costs as presented on the condensed consolidated statement of operations and comprehensive loss. NOI and Cash NOI NOI and Cash NOI are non-GAAP financial measures which we use to assess our operating results. We compute NOI as net income (loss) (computed in accordance with GAAP), excluding general and administrative expenses, interest expense (or income), depreciation and amortization, gains (or losses) on sales of depreciable property, gain from forfeited earnest money deposits and real estate impairment losses. We further adjust NOI for non-cash revenue components of straight-line rent and amortization of lease intangibles to derive Cash NOI. We believe NOI and Cash NOI provide useful and relevant information because they reflect only those income and expense items that are incurred at the property level and present such items on an unlevered basis. 31 Table of Contents NOI and Cash NOI are not measurements of financial performance under GAAP, and our NOI and Cash NOI may not be comparable to similarly titled measures of other companies. 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. The following table sets forth a reconciliation of NOI and Cash NOI for the periods presented (in thousands): Successor Predecessor Successor Predecessor Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (Unaudited) Net loss $ (2,341) $ (2,740) $ (4,298) $ (4,550) General and administrative 4,109 956 7,841 2,915 Depreciation and amortization 4,692 2,660 10,153 8,065 Provisions for impairment 363 2,839 1,773 6,268 Transaction costs 1,241 3 2,969 76 Interest expense, net 1,018 2,449 3,815 8,349 Gain on sales of real estate (54) (1,674) (1,070) (5,773) Gain on forfeited earnest money deposit — — (250) — NOI $ 9,028 $ 4,493 $ 20,933 $ 15,350 Straight-line rental revenue (387) 296 (1,417) 688 Amortization of above/below market lease intangibles (219) 105 (340) 486 Cash NOI $ 8,422 $ 4,894 $ 19,176 $ 16,524