What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-29 compared with 2020-10-30 · 125 added, 200 removed, 141 unchanged (70% of the section changed)

7 unchanged sentences

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.

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” Part I, Item 1A.

in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (the “SEC”) on March 4, 2021 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.

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Our diversified portfolio consists of 234 single-tenant retail net leased properties spanning 39 states, with tenants representing 59 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.

Our portfolio generates annualized base rent (“ABR”) of $48.0 million and is 100% occupied, with a WALT of 10.1 years and consisting of approximately 70% and 11% of investment grade tenants and investment grade profile 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 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.”

ABR is calculated by multiplying (i) cash rental payments (a) for the month ended March 31, 2021 (or, if applicable, the next full month's cash rent contractually due in the case of rent abatements, rent deferrals, recently acquired properties and properties with contractual rent increases, other than properties under development) for leases in place as of March 31, 2021, plus (b) for properties under development, the first full month's permanent cash rent contractually due after the development period by (ii) 12.

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.

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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).

The Company’s operations and cash flows for the three months ended March 31, 2021 and 2020 were not materially impacted by COVID-19.

Recent Developments

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.

We have deployed all of the $227.3 million from the Company's initial public offering to fund acquisitions through March 31, 2021 and to repay the $50 million of outstanding borrowings under our Revolver as of September 30, 2020.

On April 12, 2021, the Company completed a public offering of 10,915,688 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 1,423,785 shares of common stock.

Upon closing, the Company issued 10,915,688 shares of common stock and received net proceeds of $194.3 million after deducting the underwriting discount and estimated transaction costs.

We intend to use the net proceeds to repay the $13.0 million of outstanding borrowings under the Revolver and use the remainder of the net proceeds for general corporate purposes, including the acquisition of properties in our pipeline.

Results of Operations

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.

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 Company continued to grow its assets held for investment by increasing its asset base from 203 properties as of December 31, 2020 to 234 properties as of the end of March 31, 2021.

In addition, the Company has committed to one real estate development project with total projected capital spend of $4.4 million of which $1.3 million has been funded as of March 31, 2021.

During the three months ended March 31, 2021, the Company acquired 31 retail net lease properties for a total purchase price, inclusive of capitalized acquisition costs, of $88.2 million.

The acquisitions were all accounted for as asset acquisitions.

These properties are located in 19 states with a weighted average lease term of approximately 8.8 years.

The underwritten weighted-average capitalization rate on the Company’s year to date acquisitions was approximately 6.8%.

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,

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 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

$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,

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 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 underwritten weighted-average capitalization rate on the Company’s first quarter acquisitions was approximately 6.7%.

During the three months ended March 31, 2021, the Company invested $1.3 million in a development project in Yuma, Arizona.

The Company has a non-binding purchase option to acquire the property upon development.

The Company’s total investment is expected to be $4.4 million with the sole tenant in the property commencing lease payments in 2022.

There were no dispositions for the three months ended March 31, 2021.

Three Months Ended March 31, 2021 Compared with Three Months Ended March 31, 2020

The following table sets forth our operating results for the periods indicated (in thousands):

Successor Predecessor

Nine Months Ended September 30,

Three Months Ended

Rental revenue (including reimbursable) $ 11,932 $ 5,508

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Interest expense, net (905) (1,699)

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)

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 other income (expense), net (905) (1,449)

Net income (loss) before income tax expense 791 (1,552)

Income tax expense (50) —

Net income (loss) 741 (1,552)

Revenue for the three months ended March 31, 2021 increased by $6.4 million to $11.9 million from $5.5 million for the three months ended March 31, 2020.

This is primarily due to an increase in the real estate portfolio from 94 properties as of January 1, 2020 to 234 properties as of March 31, 2021.

The increase includes an increase in cash rental receipts of $5.6 million with $0.8 million of combined net increases in straight-line rental revenue, property expense reimbursement, and amortization of above- and below market lease related to intangible assets.

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 expenses increased by $4.6 million to $10.2 million for the three months ended March 31, 2021 as compared to $5.6 million for the three months ended March 31, 2020.

The increase in operating expenses is primarily attributed to the increase in the number of operating properties, increase in stock-based compensation, offset by prior period expenses associated with the consummation 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.

Property expenses increased $0.7 million to $1.0 million for the three months ended March 31, 2021 from $0.3 million for the three months ended March 31, 2020.

The increase is primarily attributed to the increase in the real estate portfolio from 94 to 234 properties.

The largest increases are from reimbursable property taxes of $0.3 million and reimbursable maintenance expense of $0.2 million.

• 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.

General and administrative expenses increased $1.2 million to $3.1 million for the three months ended March 31, 2021 from $1.9 million for the three months ended March 31, 2020.

The increase is primarily due to payroll expense associated with the internalization of management and staff to support the Company as a newly public company of $0.4 million, an increase in stock-based compensation expense of $0.6 million, an increase to insurance related expenses of $0.2 million, net increases to professional and administrative expenses of $0.4 million, offset by a decrease in audit fees of $0.4 million.

• 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.

Depreciation and amortization expense increased $3.6 million to $5.9 million for the three months ended March 31, 2021 from $2.3 million for the three months ended March 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 $1.6 million, in-place lease amortization expense of $1.1 million, and building improvements depreciation expense of $0.8 million.

• Provision for Impairment.

For the three months ended March 31, 2021, we recorded a provision for impairment of $0.1 million on one property which was classified as held-for-sale as of December 31, 2020.

The property was sold subsequent to March 31, 2021.

No provision for impairment was recorded for the three months ended March 31, 2020.

This impairment and subsequent disposal relates to our plan of 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 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.

Transaction costs decreased by $0.9 million to $0.2 million for the three months ended March 31, 2021 from $1.1 million for the three months ended March 31, 2020.

The decrease in transaction costs includes a decrease of $0.7 million of expenses incurred in 2020 to facilitate the private and public offerings of common stock and a decrease of $0.2 million of expenses incurred for abandoned acquisitions and expenses associated with property acquisitions.

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,

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 for the nine months ended September 30, 2020 remained consistent with the prior comparative period, as a result of the items set forth above.

Interest expense decreased by $0.8 million to $0.9 million for the three months ended March 31, 2021 from $1.7 million for the three months ended March 31, 2020.

The decrease is primarily due to the decrease in the effective interest rate of the Term Loan.

Net income (loss).

Net income increased $2.3 million to $0.7 million for the three months ended March 31, 2021 from a net loss of $1.6 million for the three months ended March 31, 2020.

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 a decrease in interest expense and transaction costs, offset by the impact of increases in depreciation and amortization expenses related to our growth, and to increases in general and administrative expenses related to both our growth and the result of becoming a public company, as 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.

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 equity securities (including private and public offerings) and borrowings under our Credit Facility.

As of March 31, 2021, we had a $175.0 million Term Loan and $13.0 of borrowings outstanding under our $250.0 million Revolver.

We believe that the net proceeds of $194.3 million from our April 2021 public offering of our common stock 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.

Contractual Obligations

As of March 31, 2021, our contractual obligation include the maturity on our $175.0 million Term Loan with the scheduled principal payment due on December 23, 2024.

In addition, our contractual obligations include the repayment due on the Revolver.

During the three months ended March 31, 2021, we borrowed $13.0 million on our $250.0 million Revolver at an effective interest rate of 1.29% to fund specifically identified property acquisitions.

A portion of the net proceeds from our April 12, 2021 public offering were used to repay the borrowings in full.

The following table provides information with respect to our commitments as of March 31, 2021 (in thousands):

Payment Due by Period

Total From April 1, 2021 to December 31, 2021 1 – 3 Years 3 – 5 Years

Contractual Obligations

Term Loan – Principal $ 175,000 $ — $ — $ 175,000

Term Loan – Variable interest (1)

8,858 1,782 4,752 2,324

Revolver - Borrowings (2)

13,000 13,000 — —

Unutilized borrowing fees on Revolver (3)

1,704 468 1,236 —

Total $ 198,562 $ 15,250 $ 5,988 $ 177,324

(1) Effective September 28, 2020, we entered into an interest rate hedge to fix the interest rate on our 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 March 31, 2021 of 0.11%, 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 intend to repay the outstanding borrowings under the Revolver in April 2021.

(3) We are subject to a variable unutilized borrowing fee on the unused portion of our $250.0 million Revolver.

As of March 31, 2021, we had $13.0 million of borrowings outstanding on our $250.0 million Revolver, however we continue to incur the unutilized borrowing fee on the unused portion of the Revolver.

This reflects our projected unutilized borrowing fee at 0.25% assuming repayment of the $13.0 million in April 2021 and as if the Revolver has no additional borrowing through the maturity date of December 23, 2023.

Additionally, in the normal course of business, the Company enters into various types of commitments to purchase real estate properties or fund development projects.

These commitments are generally subject to the Company’s customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated or receives an option to purchase the properties.

As of March 31, 2021, the Company had commitments to fund properties under development totaling $4.4 million, of which $1.3 million has been funded to date and the remaining is expected to be funded over the next twelve months.

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.

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 the Administrative Agent.

The Term Loan matures on December 23, 2024 and the Revolver matures on December 23, 2023, subject to extension 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 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.

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 also 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 Term Loan above.

Effective September 28, 2020, such derivatives were used to hedge the variable cash flows associated with the Term Loan.

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,

Three Months Ended March 31, 2021 Compared with Three Months Ended March 31, 2020

Three Months Ended

(in thousands) (Unaudited)

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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.

Net cash provided by operating activities increased by $3.4 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The increase was largely attributed to the increase in the size of the Company’s real estate investment portfolio with an increase in rental income, including reimbursable expenses of $6.2 million, offset primarily by increases in operating and general and administrative expenses paid associated with our larger portfolio of $2.7 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.

Net cash used in investing activities increased by $15.3 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The increase is primarily due to acquisition and development activity.

The Company spent $88.2 million on the acquisition of real estate and $1.3 million was provided to fund real estate development during the three months ended March 31, 2021 compared to $74.2 million during the three months ended March 31, 2020.

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.

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%.

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.

Net cash provided by financing activities decreased by $47.6 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The decrease is primarily attributed to the exercise of the over-allotment option in the Private Offering of common stock of $54.6 million which occurred during the three months ended March 31, 2020.

Additionally, the Company paid $5.7 million of dividends during the three months ended March 31, 2021 and none in the prior period.

Lastly, the net decrease is offset by $13.0 million on borrowings under the Revolver during the three months ended March 31, 2021.

The Company elected to be treated and qualify as a REIT for U.S.

federal income tax purposes beginning with its short taxable year ended December 31, 2019 upon the filing of its 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.

To qualify as a REIT, the Company must meet certain organizational, income, asset and distribution tests.

Accordingly, the Company will generally not be subject to corporate U.S.

federal or state income tax to the extent that it makes qualifying distributions of all of its taxable income to its shareholders and provided it satisfies on a continuing basis, through actual investment and operating results, the REIT requirements, including certain asset, income, distribution and share ownership tests.

The Company intends to make sufficient distributions during 2021 to receive a full dividends paid deduction.

The Company made a joint election with NETSTREIT TRS for it to be treated as a taxable REIT subsidiary which may 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.

In general, NETSTREIT TRS may perform services for tenants of the Company, hold assets that the Company cannot hold directly and may engage in any real estate or non-real estate-related business.

During three months ended March 31, 2021, the Company recognized state and local and franchise tax expense which is included in income tax expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss).

Recent Accounting Pronouncements

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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.

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 our critical accounting policies is included in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 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.

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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.

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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

Net loss $ (2,341) $ (2,740) $ (4,298) $ (4,550)

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):

Three Months Ended March 31,

Net income (loss) $ 741 $ (1,552)

Depreciation and amortization of real estate 5,852 2,272

Provision for impairment 69 —

Gain on sale of real estate (54) (1,674) (1,070) (5,773)

FFO 6,662 720

1 unchanged sentence

144A and IPO transaction costs (1)

891 — 2,170 —

Core FFO 6,662 1,179

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AFFO $ 6,946 $ 1,185

(1) These expenses represent a subset of transaction costs as presented on the condensed consolidated statement of operations and comprehensive loss.

(1) These expenses represent a subset of transaction costs as presented on the condensed consolidated statement of operations and comprehensive income (loss).

EBITDA, EBITDAre and Adjusted EBITDAre

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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

Net loss $ (2,341) $ (2,740) $ (4,298) $ (4,550)

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):

Three Months Ended March 31,

Net income (loss) $ 741 $ (1,552)

Depreciation and amortization of real estate 5,852 2,272

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Interest expense, net 905 1,699

Income tax expense 50 —

EBITDA 7,435 2,501

Provision for impairments 69 —

Gain on sale of real estate (54) (1,674) (1,070) (5,773)

$ 3,458 $ 3,639 $ 10,034 $ 12,845

EBITDAre 7,504 2,501

Straight-line rental revenue (240) (154)

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144A and IPO transaction costs (1)

891 — 2,170 —

Non-cash compensation expense 557 —

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.

Adjusted EBITDAre $ 7,821 $ 2,806

(1) These expenses represent a subset of transaction costs as presented on the condensed consolidated statement 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, gain from forfeited earnest money deposits and real estate impairment losses.

We compute NOI as net income (loss) (computed in accordance with GAAP), excluding general and administrative expenses, interest expense (or income), income tax expense, 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.

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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

Net loss $ (2,341) $ (2,740) $ (4,298) $ (4,550)

Three Months Ended March 31,

Net income (loss) $ 741 $ (1,552)

General and administrative 3,137 1,886

3 unchanged sentences

Interest expense, net 905 1,699

Gain on sales of real estate (54) (1,674) (1,070) (5,773)

Income tax expense 50 —

Gain on forfeited earnest money deposit — (250)

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis