NETSTREIT Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Special Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of 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. Words such as “expects,” “anticipates,” “intends,” “plans,” “likely,” “will,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Quarterly Report on Form 10-Q may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. For a further discussion of these and other factors that could impact future results, performance or transactions, see the information under the heading “Risk Factors” 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 SEC from time to time. Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report on Form 10-Q. New risks and uncertainties may arise over time and it is not possible for us to predict those events or how they may affect us. Many of the risks identified herein and in our periodic reports have been and will continue to be heightened as a result of the ongoing and numerous adverse effects arising from the novel coronavirus (COVID-19). We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law. Overview We are an internally-managed real estate company that acquires, owns and manages a diversified portfolio of single-tenant, retail commercial real estate subject to long-term net leases with high credit quality tenants across the United States. Our diversified 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.” (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. 28 Table of Contents COVID-19 We continue to monitor the global outbreak of COVID-19 and to take steps to mitigate the potential risks to us posed by the pandemic, 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 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 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 $194.2 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 Overall 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. Acquisitions 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 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%. Development 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. 29 Table of Contents Dispositions 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): Three Months Ended June 30, 2021 2020 Revenues Rental revenue (including reimbursable) $ 13,798 $ 7,117 Operating expenses Property 1,315 434 General and administrative 3,991 1,846 Depreciation and amortization 7,075 3,116 Provisions for impairment 3,469 1,410 Transaction costs 181 634 Total operating expenses 16,031 7,440 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. 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 30 Table of Contents 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 June 30, 2021 2020 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. 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): 31 Table of Contents Six Months Ended June 30, 2021 2020 Revenues 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 (expense) income, net (1,302) (1,531) Net loss before income tax expense (1,839) (1,957) Income tax expense (50) — Net loss (1,889) (1,957) Revenue. 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 $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. 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 $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. The largest increases are from reimbursable property taxes of $0.7 million and reimbursable maintenance expense of $0.6 million. • General and Administrative Expenses. 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 $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 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 32 Table of Contents 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 $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 $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. 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 June 30, 2021 2020 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. 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 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 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 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. 33 Table of Contents The following table provides information with respect to our commitments as of June 30, 2021 (in thousands): Payment Due by Period Total From July 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) 8,264 1,188 4,752 2,324 Unutilized borrowing fees on Revolver (2) 1,549 313 1,236 — Total $ 184,813 $ 1,501 $ 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 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 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 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 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. These derivatives are considered cash flow hedges and are recorded on a gross basis at fair value. Effective September 28, 2020, such derivatives were used to hedge the variable cash flows associated with the Term Loan. 34 Table of Contents Historical Cash Flow Information Six Months Ended June 30, 2021 Compared with Six Months Ended June 30, 2020 Six Months Ended June 30, 2021 2020 (in thousands) (Unaudited) Net cash provided by (used in): Operating activities $ 13,758 $ 1,796 Investing activities (198,156) (216,186) Financing activities 179,895 53,056 Cash Flows Provided By Operating Activities. 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 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 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. Income Taxes 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. 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 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 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 A discussion of new accounting standards and the possible effects of these standards on our condensed consolidated financial statements is included in “Note 2 - Summary of Significant Accounting Policies” of our condensed consolidated financial statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 35 Table of Contents Critical Accounting Policies and Estimates Our accounting policies have been established to conform with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. A summary of 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. Non-GAAP Financial Measures Our reported results are presented in accordance with GAAP. We also disclose the following non-GAAP financial measures: Funds from operations (“FFO”), Core 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. FFO, Core FFO and AFFO FFO is a non-GAAP financial measure defined by NAREIT as net income (computed in accordance with GAAP), excluding real estate-related expenses including, but not limited to, gains (losses) from sales, impairment adjustments, and depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of FFO is consistent with FFO as defined by NAREIT. Core FFO is a non-GAAP financial measure defined as FFO adjusted for gains from forfeited earnest money deposits and non-recurring public company costs. We believe the presentation of Core FFO provides investors with a metric to assist in their evaluation of our operating performance across multiple periods because it removes the effect of unusual and non-recurring items that are not expected to impact our operating performance on an ongoing basis. AFFO is a non-GAAP financial measure defined as Core FFO adjusted for GAAP net income related to non-cash revenues and expenses, such as straight-line rent, amortization of above- and below-market lease-related intangibles, 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. In fact, real estate values historically have risen or fallen with market conditions. FFO is intended to be a standard supplemental measure of operating performance that excludes historical cost depreciation and valuation adjustments from net income. We consider FFO to be useful in evaluating potential property acquisitions and measuring operating performance. We further consider Core FFO and AFFO to be useful in determining funds available for payment of distributions. FFO, Core FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. You should not consider FFO, Core FFO and AFFO to be alternatives to net income as a reliable measure of our operating performance; nor should you consider FFO, Core FFO and AFFO to be alternatives to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity. 36 Table of Contents FFO, Core FFO and AFFO do not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital improvements and distributions to stockholders. FFO, Core FFO and AFFO do not represent cash flows from operating, investing or financing activities as defined by GAAP. Further, FFO, Core FFO and AFFO as disclosed by other REITs might not be comparable to our calculations of FFO, Core FFO and AFFO. The following table sets forth a reconciliation of FFO, Core FFO and AFFO for the periods presented to net income (loss) before allocation to noncontrolling interests, as computed in accordance with GAAP (in thousands): Three Months Ended June 30, Six Months Ended June 30, 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 Adjustments: Gain on forfeited earnest money deposit — — — (250) 144A and IPO transaction costs (1) — 570 — 1,279 Core FFO 7,339 3,599 14,002 4,777 Adjustments: Straight-line rental revenue (222) (877) (463) (1,030) Amortization of deferred financing costs 157 155 314 307 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 statements of operations and comprehensive (loss) income. EBITDA, EBITDAre and Adjusted EBITDAre We compute EBITDA as earnings before interest, income taxes and depreciation and amortization. In 2017, NAREIT issued a white paper recommending that companies that report EBITDA also report EBITDA re . We compute EBITDA re in accordance with the definition adopted by NAREIT. NAREIT defines EBITDA re as EBITDA (as defined above) excluding gains (or losses) from the sales of depreciable property and real estate impairment losses. Adjusted EBITDA re is a non-GAAP financial measure defined as EBITDA re further adjusted to exclude straight-line rent, gains from forfeited earnest money deposits, non-recurring public company costs, representing consulting fees that we have incurred in preparing to become a public company and non-cash compensation expense. We present EBITDA, EBITDA re and Adjusted EBITDA re as they are measures commonly used in our industry. We believe that these measures are useful to investors and analysts because they provide supplemental information concerning our operating performance, exclusive of certain non-cash items and other costs. We use EBITDA, EBITDA re and Adjusted EBITDA re as measures of our operating performance and not as measures of liquidity. EBITDA, EBITDA re and Adjusted EBITDA re do not include all items of revenue and expense included in net income, they do not represent cash generated from operating activities and they are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures. Additionally, our computation of EBITDA, EBITDA re and Adjusted EBITDA re may differ from the methodology for 37 Table of Contents 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 June 30, Six Months Ended June 30, 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 Interest expense, net 894 1,098 1,799 2,797 Income tax expense — — 50 — EBITDA 5,105 3,679 12,540 6,180 Adjustments: Provision for impairments 3,469 1,410 3,539 1,410 Gain on sale of real estate, net (497) (1,016) (497) (1,016) EBITDA re 8,077 4,073 15,582 6,574 Adjustments: Straight-line rental revenue (222) (877) (463) (1,030) Gain on forfeited earnest money deposit — — — (250) 144A and IPO transaction costs (1) — 570 — 1,279 Non-cash compensation expense 1,041 — 1,598 — 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 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), 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 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. NOI and Cash NOI are not measurements of financial performance under GAAP, and our NOI and Cash NOI may not be comparable to similarly titled measures of other companies. You should not consider our NOI and Cash NOI as alternatives to net income or cash flows from operating activities determined in accordance with GAAP. 38 Table of Contents The following table sets forth a reconciliation of NOI and Cash NOI for the periods presented (in thousands): Three Months Ended June 30, Six Months Ended June 30, 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 Depreciation and amortization 7,075 3,116 13,004 5,462 Provisions for impairment 3,469 1,410 3,539 1,410 Transaction costs 181 634 332 1,728 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 — Gain on forfeited earnest money deposit — — — (250) NOI 12,483 6,683 23,465 11,906 Straight-line rental revenue (222) (877) (463) (1,030) 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