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Item 2. Management’s Discussion and Analysis

2021-07-29 compared with 2021-04-29 · 175 added, 95 removed, 171 unchanged (61% of the section changed)

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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.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, 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.

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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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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 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 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.

Our diversified operating portfolio consists of 264 single-tenant retail net leased properties spanning 39 states, with tenants representing 59 different brands or concepts across 23 retail sectors.

Our portfolio generates annualized base rent (“ABR”) (1) of $55.3 million and is 100% occupied, with a weighted average lease term (“WALT”) of 9.9 years and consisting of approximately 70% and 14% 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, convenience 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.

(1) ABR is calculated by multiplying (i) cash rental payments (a) for the month ended June 30, 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 June 30, 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, including the identification and spread of variants.

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

The Company’s operations and cash flows for the three and six months ended June 30, 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 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.

We seek to maximize long-term earnings growth and shareholder value primarily through the acquisition of strategically positioned assets throughout the United States, specifically focusing on properties with tenants which are considered essential businesses.

We had deployed all $227.3 million of the proceeds from the Company's initial public offering to fund acquisitions through March 31, 2021 and repaid $50 million of outstanding borrowings under our Revolver (as defined in “Note 6 - Debt” to our condensed consolidated financial statements included herein) in August 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.

Upon closing, the Company issued 10,915,688 shares of common stock and received net proceeds of $194.2 million after deducting the underwriting discount and transaction costs of $9.4 million.

We used the net proceeds to repay the $13.0 million of outstanding borrowings under the Revolver and intend to 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 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.

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.

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 Company continued to grow its assets held for investment by increasing its asset base from 203 properties as of December 31, 2020 to 267 properties as of the end of June 30, 2021, inclusive of real estate development projects.

The Company has committed to three real estate development projects with total projected capital spend of $10.4 million of which $5.3 million has been funded as of June 30, 2021.

This growth has been facilitated by successfully raising $640.5 million of net equity capital as a result of private and public offerings since December 23, 2019.

During the three months ended June 30, 2021, the Company acquired 35 retail net lease properties for a total purchase price, inclusive of capitalized acquisition costs, of $116.8 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 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

These properties are located in 15 states with a WALT of approximately 9.7 years.

The underwritten weighted-average capitalization rate on the Company’s second quarter acquisitions was approximately 6.5%.

During the six months ended June 30, 2021, the Company acquired 66 retail net lease properties for a total purchase price, inclusive of capitalized acquisition costs, of $205.2 million.

These properties are located in 27 states with a WALT of approximately 9.3 years.

The underwritten weighted-average capitalization rate on the Company’s year-to-date acquisitions was approximately 6.6%.

The Company commenced development of a real-estate project in Yuma, Arizona in the first quarter of 2021.

The Company has a non-binding purchase option to acquire the property upon completion with the sole tenant commencing lease payments in 2022.

During the three and six months ended June 30, 2021, the Company invested $0.6 million and $1.9 million, respectively, in the project.

The Company also acquired two properties in Fond Du Lac, Wisconsin in the second quarter of 2021.

Upon acquisition, the Company commenced development of two build-to-suit projects, which are expected to be completed in September 2021.

During the three months ended June 30, 2021, the Company invested a total of $3.4 million in the projects.

During the three and six months ended June 30, 2021, the Company sold five properties for a total sales price, net of disposal costs, of $12.3 million, recognizing a gain on sale of $0.5 million.

Three Months Ended June 30, 2021 Compared with Three Months Ended June 30, 2020

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

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Total operating expenses 16,031 7,440

Other income (expense)

Other (expense) income

Interest expense, net (894) (1,098)

Gain on sales of real estate, net 497 1,016

Total other (expense) income, net (397) (82)

Net loss $ (2,630) $ (405)

Revenue for the three months ended June 30, 2021 increased by $6.7 million to $13.8 million from $7.1 million for the three months ended June 30, 2020.

This is primarily due to an increase in the real estate portfolio from 94 properties as of January 1, 2020 to 264 properties as of June 30, 2021.

The increase includes an increase in cash rental receipts of $6.4 million, a decrease in straight-line rental revenue of $0.7 million, and $1.0 million of combined net increases in property expense reimbursement and amortization of above- and below-market lease related intangible assets.

Total Operating Expenses.

Total expenses increased by $8.6 million to $16.0 million for the three months ended June 30, 2021 as compared to $7.4 million for the three months ended June 30, 2020.

The increase in operating expenses is primarily attributed to increases in the number of operating properties, provisions for impairment, and 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 $0.9 million to $1.3 million for the three months ended June 30, 2021 from $0.4 million for the three months ended June 30, 2020.

The increase is primarily attributed to the increase in the real estate portfolio from 94 to 266 properties.

The largest increases resulted from reimbursable property taxes of $0.4 million and reimbursable maintenance expense of $0.2 million.

• General and Administrative Expenses.

General and administrative expenses increased $2.2 million to $4.0 million for the three months ended June 30, 2021 from $1.8 million for the three months ended June 30, 2020.

The increase is primarily due to payroll expense associated with increased management and staff to support the Company as a newly public company of $0.3 million, an increase in stock-based compensation expense of $1.0 million, an increase in insurance related expenses of $0.3 million, increases to professional and administrative expenses of $0.3 million, and a combined net increase of $0.3 million in other general expenses.

• Depreciation and Amortization.

Depreciation and amortization expense increased $4.0 million to $7.1 million for the three months ended June 30, 2021 from $3.1 million for the three months ended June 30, 2020.

The increase in depreciation and amortization is proportionate to the increase in the size of the portfolio over the comparable period with associated increases

in building depreciation expense of $1.6 million, in-place lease amortization expense of $1.2 million, and building improvements depreciation expense of $0.9 million.

• Provision for Impairment.

For the three months ended June 30, 2021, we recorded a provision for impairment of $3.5 million on two properties which were classified as held-for-sale as of June 30, 2021.

For the three months ended June 30, 2020, we recorded a provision for impairment of $1.4 million on two properties which were classified as held-for-sale as of June 30, 2020 and subsequently sold.

These impairments and subsequent disposals relate 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 decreased by $0.4 million to $0.2 million for the three months ended June 30, 2021 from $0.6 million for the three months ended June 30, 2020.

The decrease in transaction costs primarily relates to a decrease of $0.6 million of expenses incurred in 2020 to facilitate our initial public offering, offset by net increases to costs incurred for abandoned acquisitions and expenses associated with property acquisitions.

Interest Expense.

Interest expense decreased by $0.2 million to $0.9 million for the three months ended June 30, 2021 from $1.1 million for the three months ended June 30, 2020.

The decrease is primarily due to the decrease in the effective interest rate of the Term Loan (as defined in “Note 6 - Debt” to our condensed consolidated financial statements included herein).

Gain on sales of real estate, net.

Net gain on sales of real estate decreased by $0.5 million to $0.5 million for the three months ended June 30, 2021 from $1.0 million for the three months ended June 30, 2020.

The table below summarizes the properties sold for the periods indicated (dollars in thousands):

Three Months Ended

Number of properties sold 5 1

Sales price, net of disposal costs $ 12,319 $ 9,369

Gain on sales of real estate, net $ 497 $ 1,016

Net loss increased $2.2 million to $2.6 million for the three months ended June 30, 2021 from a net loss of $0.4 million for the three months ended June 30, 2020.

Net loss increased primarily due to an increase in provisions for impairment, offset by the growth in the size of our real estate investment portfolio, which generated additional rental revenues, offset partially by increases in depreciation and amortization expenses, 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.

Six Months Ended June 30, 2021 Compared with Six Months Ended June 30, 2020

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

Six Months Ended

Rental revenue (including reimbursable) $ 25,730 $ 12,625

Operating expenses

Property 2,265 719

General and administrative 7,127 3,732

Depreciation and amortization 13,004 5,462

Provisions for impairment 3,539 1,410

Transaction costs 332 1,728

Total operating expenses 26,267 13,051

Other (expense) income

Interest expense, net (1,799) (2,797)

Gain on sales of real estate, net 497 1,016

Gain on forfeited earnest money deposit — 250

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

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

Total other (expense) income, net (1,302) (1,531)

Net loss before income tax expense (1,839) (1,957)

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.

Net loss (1,889) (1,957)

Revenue for the six months ended June 30, 2021 increased by $13.1 million to $25.7 million from $12.6 million for the six months ended June 30, 2020.

This is primarily due to an increase in the real estate portfolio from 94 properties as of January 1, 2020 to 264 properties as of June 30, 2021.

The increase includes an increase in cash rental receipts of $12.0 million, combined net increases of property expense reimbursements of $1.4 million, of which $0.7 million was related to tax reimbursements, an increase in amortization of above- and below-market lease related intangible assets of $0.3 million, offset by a decrease in straight-line rental revenue of $0.6 million.

Total Operating Expenses.

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 expenses increased by $13.2 million to $26.3 million for the six months ended June 30, 2021 as compared to $13.1 million for the six months ended June 30, 2020.

Total operating expenses include the following:

• Property Expenses.

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.

Property expenses increased $1.6 million to $2.3 million for the six months ended June 30, 2021 from $0.7 million for the six months ended June 30, 2020.

The increase is primarily attributed to the increase in the real estate portfolio from 94 to 264 properties.

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• General and Administrative Expenses.

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.

General and administrative expenses increased $3.4 million to $7.1 million for the six months ended June 30, 2021 from $3.7 million for the six months ended June 30, 2020.

The increase is primarily due to payroll expense associated with increased management and staff to support the Company as a newly public company of $0.7 million, an increase in stock-based compensation expense of $1.6 million, an increase in insurance related expenses of $0.5 million, and net increases to professional and administrative expenses of $0.3 million.

• Depreciation and Amortization.

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.

Depreciation and amortization expense increased $7.5 million to $13.0 million for the six months ended June 30, 2021 from $5.5 million for the six months ended June 30, 2020.

The increase in depreciation and amortization is proportionate to the increase in the size of the portfolio over the comparable period with associated increases in building depreciation expense of $3.3 million, in-place lease amortization expense of $2.4 million, and building improvements depreciation expense of $1.7 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.

For the six months ended June 30, 2021, we recorded a provision for impairment of $3.5 million on three properties, one of which was classified as held-for-sale as of December 31, 2020 and sold during the period and two of which were classified as held-for-sale during the period.

For the six months ended June 30, 2020, we recorded a provision

for impairment of $1.4 million on two properties, which were classified as held-for-sale as of June 30, 2020 and subsequently sold.

These impairments and subsequent disposals relate 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 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.

Transaction costs decreased by $1.4 million to $0.3 million for the six months ended June 30, 2021 from $1.7 million for the six months ended June 30, 2020.

The decrease in transaction costs includes a decrease of $1.3 million of expenses incurred in 2020 to facilitate our initial public offering and a decrease of $0.1 million of expenses incurred for abandoned acquisitions and expenses associated with property acquisitions.

Interest Expense.

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.

Interest expense decreased by $1.0 million to $1.8 million for the six months ended June 30, 2021 from $2.8 million for the six months ended June 30, 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.

Gain on sales of real estate, net.

Net gain on sales of real estate decreased by $0.5 million to $0.5 million for the six months ended June 30, 2021 from $1.0 million for the six months ended June 30, 2020.

The table below summarizes the properties sold for the periods indicated (in thousands):

Six Months Ended

Number of properties sold 5 2

Sales price, net of disposal costs $ 12,319 $ 9,917

Gain on sales of real estate, net $ 497 $ 1,016

Net loss decreased $0.1 million to $1.9 million for the six months ended June 30, 2021 from a net loss of $2.0 million for the six months ended June 30, 2020.

Net loss decreased primarily due to growth in the size of our real estate investment portfolio, which generated additional rental revenues, offset partially by an increase in depreciation and amortization expenses, decreases in interest expense and transaction costs, an increase in provisions for impairment, and 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

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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.

As of June 30, 2021, 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 $194.2 million from our April 2021 public offering of common stock, coupled with 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):

As of June 30, 2021, our contractual obligations include the maturity of our $175.0 million Term Loan with the scheduled principal payment due on December 23, 2024.

During 2021, the Company borrowed and repaid $13.0 million on our $250.0 million Revolver at a weighted average interest rate, exclusive of deferred financing costs, of 1.24% to fund specifically identified property acquisitions.

The following table provides information with respect to our commitments as of June 30, 2021 (in thousands):

Payment Due by Period

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

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

Contractual Obligations

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8,264 1,188 4,752 2,324

Revolver - Borrowings (2)

13,000 13,000 — —

Unutilized borrowing fees on Revolver (2)

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(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.

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 June 30, 2021 of 0.10%, 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 our $250.0 million Revolver.

This reflects our projected unutilized borrowing fee at 0.25% assuming 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.

As of June 30, 2021, the Company had commitments to fund properties under development totaling $10.4 million, of which $5.3 million has been funded to date and the remaining is expected to be funded over the next eight months.

Credit Facility

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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 Credit Facility is unsecured as 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.

Interest is payable monthly or at the end of the applicable interest period in arrears on any outstanding borrowings.

The stated interest rate as of June 30, 2021 was 1.25%.

The Company uses interest rate derivative contracts to manage its exposure to changes in interest rates on its variable rate debt.

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Historical Cash Flow Information

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

Three Months Ended

Six Months Ended June 30, 2021 Compared with Six Months Ended June 30, 2020

Six Months Ended

(in thousands) (Unaudited)

4 unchanged sentences

Cash Flows Provided By Operating Activities.

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.

Net cash provided by operating activities increased by $12.0 million for the six months ended June 30, 2021 compared to the six months ended June 30, 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 receipts of $12.0 million, offset primarily by increases in operating and general and administrative expenses associated with our larger portfolio.

Cash Flows Used In Investing Activities.

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.

Net cash used in investing activities decreased by $18.0 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The decrease is primarily due to acquisition, development, and disposal activity.

The Company spent $19.5 million less on the acquisition of real estate and received $2.4 million more as a result of disposals, offset by $5.0 million more spent on the development of real estate.

Cash Flows Provided By Financing Activities.

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.

Net cash provided by financing activities increased by $126.8 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The increase is primarily attributed to $141.1 million of additional net proceeds received from the April 2021 public offering as compared to the exercise of the over-allotment option in the Private Offering in February 2020, including deferred offering costs.

Additionally, the Company paid $14.2 million of dividends and distributions during the six months ended June 30, 2021 and none in the prior period.

The Company also borrowed $13.0 million in the first quarter of 2021 which was repaid in the second quarter of 2021.

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

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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).

During the three and six months ended June 30, 2021, the Company recognized franchise and other state and local tax expenses which are included in general and administrative and recognized state and federal income tax expense which is included in income tax expense in the accompanying condensed consolidated statements of operations and comprehensive (loss) income.

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 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.

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 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 ”), net operating income (“NOI”) and cash net operating income (“Cash NOI”).

Funds from operations (“FFO”), Core FFO, Adjusted 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 ”), net operating income (“NOI”) and cash net operating income (“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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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.

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, amortization of lease incentives, capitalized interest expense, 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.

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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)

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

(Unaudited) (Unaudited)

Net loss $ (2,630) $ (405) $ (1,889) $ (1,957)

Depreciation and amortization of real estate 6,997 3,040 12,849 5,311

Provision for impairment 3,469 1,410 3,539 1,410

Gain on sale of real estate, net (497) (1,016) (497) (1,016)

FFO 7,339 3,029 14,002 3,748

1 unchanged sentence

144A and IPO transaction costs (1)

— 570 — 1,279

Core FFO 7,339 3,599 14,002 4,777

2 unchanged sentences

Amortization of above/below market lease intangibles (237) (130) (427) (122)

Amortization of lease incentives 3 — 3 —

Capitalized interest expense (15) — (15) —

Non-cash compensation expense 1,041 — 1,598 —

AFFO $ 8,066 $ 2,747 $ 15,012 $ 3,932

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

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

EBITDA, EBITDAre and Adjusted EBITDAre

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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.

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):

Three Months Ended March 31,

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

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

(Unaudited) (Unaudited)

Net loss $ (2,630) $ (405) $ (1,889) $ (1,957)

Depreciation and amortization of real estate 6,997 3,040 12,849 5,311

Amortization of above/below market lease intangibles (237) (130) (427) (122)

Amortization of lease incentives 3 — 3 —

Non-real estate depreciation and amortization 78 76 155 151

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Provision for impairments 3,469 1,410 3,539 1,410

EBITDAre 7,504 2,501

Gain on sale of real estate, net (497) (1,016) (497) (1,016)

8,077 4,073 15,582 6,574

Straight-line rental revenue (222) (877) (463) (1,030)

1 unchanged sentence

144A and IPO transaction costs (1)

— 570 — 1,279

Non-cash compensation expense 1,041 — 1,598 —

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).

Adjusted EBITDA re

$ 8,896 $ 3,766 $ 16,717 $ 6,573

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

NOI and Cash NOI

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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.

We further adjust NOI for non-cash revenue components of straight-line rent and amortization of lease intangibles and lease incentives 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.

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The following table sets forth a reconciliation of NOI and Cash NOI for the periods presented (in thousands):

Three Months Ended March 31,

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

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

(Unaudited) (Unaudited)

Net loss $ (2,630) $ (405) $ (1,889) $ (1,957)

General and administrative 3,991 1,846 7,127 3,732

3 unchanged sentences

Interest expense, net 894 1,098 1,799 2,797

Gain on sales of real estate, net (497) (1,016) (497) (1,016)

Income tax expense — — 50 —

3 unchanged sentences

Amortization of above/below market lease intangibles (237) (130) (427) (122)

Amortization of lease incentives 3 — 3 —

Cash NOI $ 12,027 $ 5,676 $ 22,578 $ 10,754

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