NETSTREIT Corp. 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 the “Business” section as well as the consolidated financial statements and related notes in Part II, Item 8 in this Annual Report on Form 10-K. 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 “Forward-Looking Statements” section of this Annual Report on Form 10-K 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 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 203 single-tenant retail net leased properties spanning 38 states, with tenants representing 56 different brands or concepts across 23 retail sectors. Our portfolio generates ABR of $41.8 million and is 100% occupied, with a WALT of 10.5 years and consisting of approximately 70% and 8.0% of investment grade tenants and investment grade profile tenants, respectively 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 home improvement, auto parts, drug stores and pharmacies, general retail, grocers, convenient stores, discount stores, 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. During 2020, we provided rent deferral and rent abatement to 12 and 15 of our properties, respectively, representing 0.5%, and 1.7% of ABR, as of December 31, 2020, respectively. All tenants with rent relief agreements in place paid in accordance with the terms of their new lease agreements and, as of year end, the Company had collected 100.0% of all 2020 contractual rent payments. The Company has not provided for any abatements or deferrals after August 1, 2020. Accordingly, the Company’s operations and cash flows for the year ended December 31, 2020 were not materially impacted by COVID-19. Outlook We seek to maximize long-term earnings growth and stockholder 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 $147.5 million of the $227.3 million from the Company's initial public offering to fund acquisitions through December 31, 2020. In addition, we have repaid $50 million of outstanding borrowings under our Revolver as of December 31, 2020. We intend to use the remainder of the net proceeds for general corporate purposes, including the acquisition of properties in our pipeline. As of March 4, 2021, we have identified 38 properties in our pipeline of acquisition opportunities for a combined purchase price, including acquisition costs, of approximately $122 million that we expect to purchase in the next 60 days. Additionally, we have acquired eight properties, or $17.4 million of property assets, subsequent to December 31, 2020. 33 Table of Contents 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 203 properties as of the end of December 31, 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 raised by the Company since December 23, 2019. Acquisitions During the year ended December 31, 2020, the Company acquired 124 retail net lease properties for a total purchase price, inclusive of capitalized acquisition costs, of $408.6 million. The acquisitions were all accounted for as asset acquisitions. These properties are located in 30 states with a weighted average lease term of approximately 11.2 years. The underwritten weighted-average capitalization rate on the Company’s year to date acquisitions was approximately 6.7%. Dispositions During the year ended December 31, 2020, the Company sold 15 properties for a total sales price, net of disposal costs, of $48.1 million, recognizing a gain on sale of $6.2 million. Year Ended December 31, 2020 Compared with the Periods from January 1 to December 22, 2019 and from December 23 to December 31, 2019 The following table sets forth our operating results for the periods indicated (in thousands): Successor Predecessor Year Ended December 31, For the Period from December 23 to December 31, For the Period from January 1 to December 22, 2020 2019 Revenues Rental revenue (including reimbursable) $ 33,727 $ 513 $ 19,805 Operating expenses Property 2,569 52 1,113 General and administrative 11,340 49 3,555 Depreciation and amortization 15,459 195 10,422 Provisions for impairment 2,690 — 7,186 Transaction costs 3,169 2 535 Total operating expenses 35,227 298 22,811 Other income (expense) Interest expense, net (4,741) (173) (10,712) Gain on sales of real estate, net 6,213 — 5,646 Gain on forfeited earnest money deposit 250 — — Other income (expense), net (10) — — Total other income (expense), net 1,712 (173) (5,066) Net income (loss) $ 212 $ 42 $ (8,072) Revenue. Revenue for the year ended December 31, 2020 increased by $13.4 million to $33.7 million from $19.8 million for the period from January 1, 2019 to December 22, 2019 and $0.5 million for the period from December 23, 2019 to December 31, 2019. This is primarily due to an increase in the real estate portfolio from 122 properties as of January 1, 2019 to 203 properties as of December 31, 2020. The increase includes an increase in rental income of $8.4 million, straight-line rental revenue of $2.7 million, property expense reimbursement revenue of $1.4 million, amortization of above- and below market lease related intangible assets of $0.6 million, lower bad debt expense of $0.2 million and other net increases of $0.1 million. Total Operating Expenses. Total expenses increased by $12.1 million to $35.2 million for the year ended December 31, 2020 as compared to $22.8 million for the period from January 1, 2019 to December 22, 2019 and $0.3 million for the period from 34 Table of Contents December 23, 2019 to December 31, 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 $1.4 million to $2.6 million for the year ended December 31, 2020. The increase is primarily attributed to the increase in the real estate portfolio from 122 to 203 properties. The largest increases are from property taxes of $0.9 million and maintenance of $0.4 million. • General and Administrative Expenses. General and administrative expenses increased $7.7 million to $11.3 million for the year ended December 31, 2020. The increase is primarily due to payroll expense associated with the internalization of management to support the Company as a newly public company of $3.0 million, an increase of restricted-share based expense of $2.5 million, an increase of employee bonus compensation of $1.6 million, offset by the elimination of management fees of $2.8 million charged to the Company by affiliates. The increase also includes insurance related expenses of $0.6 million, general corporate office related expenses of $0.4 million and professional and administrative expenses of $2.4 million primarily comprised of audit fees of $0.9 million, board fees of $0.5 million, and consulting and other professional services of $0.5 million for the year ended December 31, 2020. • Depreciation and Amortization. Depreciation and amortization expense increased by $4.9 million to $15.5 million for the year ended December 31, 2020. The increase in depreciation and amortization is proportionate to the increase in the size of the portfolio over the comparable period primarily with associated increases in building depreciation expense of $2.5 million and in-place lease depreciation expense of $2.4 million. • Provisions for Impairment. Provisions for impairment decreased by $4.5 million to $2.7 million for the year ended December 31, 2020. Of the properties impaired during 2020, three were disposed of during the year and two were classified as held for sale as of December 31, 2020. Of the properties impaired during 2019, four were disposed of during the prior year and two were classified as held for sale as of December 31, 2019. These impairments and subsequent disposals relate to strategically identifying properties that can be re-leased or disposed of in an effort to improve returns and manage risk exposure. • Transaction costs. Transaction costs increased by $2.7 million to $3.2 million for the year ended December 31, 2020. The increase in transaction costs includes costs incurred by the Company to facilitate the private and public offerings of common stock of $1.8 million and costs associated with abandoned acquisitions as well fees incurred for property acquisitions throughout the period of $0.9 million. Interest Expense. Interest expense decreased by $6.2 million to $4.7 million for the year ended December 31, 2020. The decrease is primarily attributed to the decrease in the effective interest rate and total borrowings outstanding throughout the period as compared to the prior year. Net Gain on Sales of Real Estate. Net gain on sales of real estate increased $0.6 million to $6.2 million for the year ended December 31, 2020. The table below summarizes the properties sold for the periods indicated (in thousands): Successor Predecessor Year Ended December 31, For the Period from December 23 to December 31, For the Period from January 1 to December 22, 2020 2019 Number of properties sold 15 — 30 Sales price, net of disposal cost $ 48,065 $ — $ 77,616 Gain on sales of real estate, net $ 6,213 $ — $ 5,646 Net Income (Loss). Net income increased $7.9 million to $0.1 million for the year ended December 31, 2020 from a net loss of $8.0 million for the prior year. Net income increased primarily due to the growth in the size of our real estate investment portfolio, which generated additional rental revenues, and due to the decreases in impairment and interest expenses, offset by the impact of increases in depreciation and amortization expenses related to our growth, and to increases in general and administrative expenses and transaction costs, primarily the result of becoming a public company, as set forth above. Liquidity and Capital Resources Our primary capital requirements are to fund property acquisitions and required interest payments, as well as working capital needs, operating expenses, and capital expenditures. Our capital resources primarily consist of cash from operations, sales of 35 Table of Contents equity securities (including the private offering and initial public offering) and borrowings under our Credit Facility. As of December 31, 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. Credit Facility In December 2019, we entered into a 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 Administrative Agent released the collateral in connection with the Company’s satisfaction of the Collateral Release Requirements in the fourth quarter of 2020, therefore 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 the 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 the Revolver 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. Prior to the collateral release, the Credit Facility was 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 provided 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. 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 the Term Loan. Historical Cash Flow Information Year Ended December 31, 2020 Compared with the Period from January 1 to December 22, 2019 To assist with the understanding of historical cash flows, we have discussed changes from our Predecessor's statement of cash flows data for the period ended December 22, 2019 to the year ended December 31, 2020. We believe this provides the most meaningful information despite the 2019 period having nine fewer days of cash flow activity than the 2020 period. Successor Predecessor Year Ended December 31, For the Period from January 1 to December 22, (in thousands) 2020 2019 Net cash provided by (used in): Operating activities $ 12,749 $ 5,989 Investing activities (362,133) 75,934 Financing activities 272,708 (82,317) Cash Flows Provided By Operating Activities. Net cash provided by operating activities increased by $6.8 million for the year ended December 31, 2020 compared to the period from January 1, 2019 to December 22, 2019. The increase was largely attributed to the increase in total number of properties as well as increases of $5.1 million in depreciation and amortization expense, $2.5 million in stock based compensation, $3.1 million in accounts payable, accrued expenses and other current liabilities, offset primarily by a decrease of $4.5 million in the provision for impairments. Cash Flows Used In Investing Activities. Net cash used in investing activities increased by $438.1 million for the year ended December 31, 2020 compared to the period ended from January 1, 2019 to December 22, 2019. The Company spent $408.6 36 Table of Contents million on the acquisition of real estate during the year ended December 31, 2020 compared to $1.2 million for the period from January 1, 2019 to December 22, 2019. Additionally, the Company sold 15 properties during the year ended December 31, 2020 for net proceeds of $48.1 million compared to 30 properties sold for the period from January 1, 2019 to December 22, 2019 for net proceeds of $77.6 million. Cash Flows Provided By Financing Activities. Net cash provided by financing activities increased by $355.0 million for the year ended December 31, 2020 compared to the period from January 1, 2019 to December 22, 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 2020. Additionally, the Company had no net borrowings or payments on debt during 2020 compared to net payments of $77.0 million for the period from January 1, 2019 to December 22, 2019. Contractual Obligations and Commitments As of December 31, 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. During 2020, the Company borrowed and repaid $50.0 million on our $250.0 million Revolver at a weighted average interest rate, exclusive of deferred financing costs, of 1.54% to fund specifically identified property acquisitions. The following table provides information with respect to our commitments as of December 31, 2020 (in thousands): Payment Due by Period Total Less than 1 Year 1 – 3 Years 3 – 5 Years Contractual Obligations Term Loan – Principal $ 175,000 $ — $ — $ 175,000 Term Loan – Variable interest (1) 9,452 2,376 4,752 2,324 Unutilized borrowing fees on Revolver (2) 1,861 625 1,236 — Total $ 186,313 $ 3,001 $ 5,988 $ 177,324 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 December 31, 2020 of 0.15%, 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 December 31, 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 elected 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 dividends in the second half of 2020 which were inclusive of the $0.2 million obligation for 2019. See “Note 9 – Stockholders’ Equity, Partners’ Capital and Preferred Equity” of our consolidated financial statements. 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. 37 Table of Contents Recent Accounting Pronouncements A discussion of new accounting standards and the possible effects of these standards on our consolidated financial statements is included in “Note 2 - Summary of Significant Accounting Policies” of our consolidated financial statements. 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. This summary should be read in conjunction with the more complete discussion of our accounting policies and procedures included in “Note 2 - Summary of Significant Accounting Policies” of our consolidated financial statements. Real Estate Held for Investment Real estate is recorded and stated at cost less any provision for impairment. Our Operating Partnership acquired our initial portfolio of 93 properties from our Predecessor and, as a result, was initially recorded at the fair value of the Operating Partnership’s ownership interest issued at the date of the Private Offering. For real property acquired from third parties, assets are recognized at fair value at acquisition date. For properties that we develop, all direct and indirect costs related to planning, development and construction, including interest, real estate taxes and other miscellaneous costs incurred during the construction period, are capitalized for financial reporting purposes and recorded as property under development until construction has been completed. Purchase Price Allocation of Acquired Properties We evaluate each acquisition transaction to determine whether the acquired asset meets the definition of a business and therefore accounted for as a business combination or if the acquisition transaction should be accounted for as an asset acquisition. Under Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”), an acquisition does not qualify as a business when substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets or the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. Transaction costs related to acquisitions that qualify as asset acquisitions are capitalized as part of the cost basis of the acquired assets, while transaction costs for acquisitions that are deemed to be acquisitions of a business are expensed as incurred. We allocate the purchase price 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, buildings, site improvements and tenant improvements. Intangible assets include the value of in-place leases and above-market leases and intangible liabilities include below-market leases. 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. The fair value of above-market 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 utilize 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 38 Table of Contents 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 its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets and liabilities acquired. Impairment of Long-Lived Assets Fair value measurement of an asset occurs when events or changes in circumstances related to an asset indicate that the carrying amount of the asset is no longer recoverable. If indicators are present, we will prepare a projection of the undiscounted future cash flows of the property, excluding interest charges, and determine if the carrying amount of the real estate is recoverable. When a carrying amount is not recoverable, an impairment loss is recognized to the extent that the carrying amount of the asset exceeds its fair market value. We estimate fair value using data such as operating income, estimated capitalization rates or multiples, leasing prospects, local market information, and with regard to assets held for sale, based on the estimated or negotiated selling price, less estimated costs of disposal. 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 noncontrolling interests, as computed in accordance with GAAP (in thousands): 39 Table of Contents Successor Predecessor Year Ended December 31, For the Period from December 23 to December 31, For the Period from January 1 to December 22, 2020 2019 Net income (loss) $ 212 $ 42 $ (8,072) Depreciation and amortization of real estate 15,154 188 10,422 Provision for impairment 2,690 — 7,186 Gain on sale of real estate, net (6,213) — (5,646) FFO 11,843 230 3,890 Adjustments: Gain on forfeited earnest money deposit (250) — — 144A and IPO transaction costs (1) 2,170 — 450 Core FFO 13,763 230 4,340 Adjustments: Straight-line rental revenue (1,688) (15) 1,037 Amortization of deferred financing costs 621 14 1,024 Amortization of above/below market lease intangibles (504) 2 563 Non-cash compensation expense 2,452 — — AFFO $ 14,644 $ 231 $ 6,964 1 These expenses represent a subset of transaction costs as presented on the consolidated statements of operations and comprehensive income (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 noncontrolling interests, as computed in accordance with GAAP (in thousands): 40 Table of Contents Successor Predecessor Year Ended December 31, For the Period from December 23 to December 31, For the Period from January 1 to December 22, 2020 2019 Net income (loss) $ 212 $ 42 $ (8,072) Depreciation and amortization of real estate 15,154 188 10,422 Amortization of above/below market lease intangibles (504) 2 563 Non-real estate depreciation and amortization 305 7 — Interest expense, net 4,741 173 10,712 EBITDA 19,908 412 13,625 Adjustments: Provision for impairments 2,690 — 7,186 Gain on sale of real estate, net (6,213) — (5,646) EBITDAre 16,385 412 15,165 Adjustments: Straight-line rental revenue (1,688) (15) 1,037 Gain on forfeited earnest money deposit (250) — — 144A and IPO transaction costs (1) 2,170 — 450 Non-cash compensation expense 2,452 — — Adjusted EBITDAre $ 19,069 $ 397 $ 16,652 1 These expenses represent a subset of transaction costs as presented on the consolidated statements of operations and comprehensive income (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, transaction costs, 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. 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. 41 Table of Contents The following table sets forth a reconciliation of NOI and Cash NOI for the periods presented (in thousands): Successor Predecessor Year Ended December 31, For the Period from December 23 to December 31, For the Period from January 1 to December 22, 2020 2019 Net income (loss) $ 212 $ 42 $ (8,072) General and administrative 11,340 49 3,555 Depreciation and amortization 15,459 195 10,422 Provisions for impairment 2,690 — 7,186 Transaction costs 3,169 2 535 Interest expense, net 4,741 173 10,712 Gain on sales of real estate, net (6,213) — (5,646) Gain on forfeited earnest money deposit (250) — — Other (income) expense, net 10 — — NOI 31,158 461 18,692 Straight-line rental revenue (1,688) (15) 1,037 Amortization of above/below market lease intangibles (504) 2 563 Cash NOI $ 28,966 $ 448 $ 20,292