NETSTREIT Corp. 10-K

Item 8. Financial Statements and Supplementary Data Page Reports of Independent Registered Public Accounting Firm 44 Consolidated Balance Sheets as of December 31, 2021 and 2020 47 Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2021, 2020 and 2019 48 Consolidated Statements of Changes in Equity for the Years Ended December 31, 2021, 2020 and 2019 49 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019 50 Notes to the Consolidated Financial Statements 51 43 Table of Contents Report of Independent Registered Public Accounting Firm To the the Stockholders and Board of Directors NETSTREIT Corp.: Opinion on Internal Control Over Financial Reporting We have audited NETSTREIT Corp. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income (loss), changes in equity, and cash flows for each of the years in the two-year period ended December 31, 2021 (successor), for the period from December 23, 2019 to December 31, 2019 (successor), and the period from January 1, 2019 to December 22, 2019 (predecessor) and the related notes and financial statement Schedule III (collectively, the consolidated financial statements), and our report dated February 24, 2022 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP Dallas, Texas February 24, 2022 44 Table of Contents Report of Independent Registered Public Accounting Firm To the the Stockholders and the Board of Directors NETSTREIT Corp.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of NETSTREIT Corp. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income (loss), changes in equity, and cash flows for each of the years in the two-year period ended December 31, 2021 (successor), for the period from December 23, 2019 to December 31, 2019 (successor), and the period from January 1, 2019 to December 22, 2019 (predecessor) and the related notes and financial statement Schedule III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021 (successor), for the period from December 23, 2019 to December 31, 2019 (successor), and the period from January 1, 2019 to December 22, 2019 (predecessor), in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 24, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Evaluation of indicators for potential impairment of long-lived asset groups As discussed in Note 2 to the consolidated financial statements, the Company evaluates its long-lived asset groups for potential impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group is no longer recoverable. As of December 31, 2021 the Company has $913.6 million of real estate held for investment, net. The evaluation of the indicators of potential impairment relies upon certain management assumptions, including the anticipated holding period for a real estate investment property. 45 Table of Contents We identified the evaluation of indicators for potential impairment of long-lived asset groups as a critical audit matter. Subjective and challenging auditor judgment was required to evaluate the reasonableness of Company’s intent and ability to hold long-lived asset groups for particular periods of time. A shortening of the anticipated holding period could indicate a potential impairment. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s long-lived asset impairment process, including a control related to the identification of indicators of potential impairment. We inquired of and obtained representations from Company officials and inspected documents, such as meeting minutes of the board of trustees and its sub-committees and asset management meeting summaries to evaluate the Company’s intent and ability to hold long-lived asset groups for particular periods of time. We read external communications with investors to identify information regarding potential sales of the Company’s long-lived asset groups. Evaluation of the fair value of land and building in certain real estate asset acquisitions As discussed in Notes 2 and 4 to the consolidated financial statements, the Company acquired real estate properties in asset acquisitions during 2021 for a total purchase price of $441.3 million, of which $116.1 million and $241.9 million were allocated to land and buildings, respectively. The purchase price of an asset acquisition is allocated to tangible and identifiable intangible assets or liabilities based on their relative fair values. In estimating fair values, the Company utilizes a number of sources, including real estate valuations prepared by an independent valuation firm. We identified the evaluation of the fair value of land and building in certain real estate asset acquisitions as a critical audit matter. Subjective auditor judgment was required to evaluate the assumptions used in the Company’s estimates of fair value of land and building, including comparable land sales and estimated replacement cost of the building for certain real estate asset acquisitions. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s asset acquisition valuation process, including controls related to the assumptions noted above. We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the relevance of the comparable land sales and replacement cost of the building used by the Company to estimate fair values, by comparing them to our independently developed ranges of comparable land sales and estimated replacement cost of the building for a selection of real estate asset acquisitions. /s/ KPMG LLP We have served as the Company’s auditor since 2019. Dallas, Texas February 24, 2022 46 Table of Contents NETSTREIT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) December 31, 2021 2020 Assets Real estate, at cost: Land $ 299,935 $ 189,373 Buildings and improvements 626,457 358,360 Total real estate, at cost 926,392 547,733 Less accumulated depreciation ( 30,669 ) ( 10,111 ) Property under development 17,896 — Real estate held for investment, net 913,619 537,622 Assets held for sale 2,096 14,802 Cash, cash equivalents and restricted cash 7,603 92,643 Lease intangible assets, net 124,772 75,024 Other assets, net 20,351 5,724 Total assets $ 1,068,441 $ 725,815 Liabilities and equity Liabilities: Term loan, net $ 174,330 $ 174,105 Revolving credit facility 64,000 — Lease intangible liabilities, net 23,316 16,930 Liabilities related to assets held for sale — 399 Accounts payable, accrued expenses and other liabilities 16,980 6,308 Total liabilities 278,626 197,742 Commitments and contingencies Equity: Stockholders’ equity Common stock, $ 0.01 par value, 400,000,000 shares authorized; 44,223,050 and 28,203,545 shares issued and outstanding as of December 31, 2021 and 2020, respectively 442 282 Additional paid-in capital 809,724 501,045 Distributions in excess of retained earnings ( 35,119 ) ( 7,464 ) Accumulated other comprehensive income 4,123 235 Total stockholders’ equity 779,170 494,098 Noncontrolling interests 10,645 33,975 Total equity 789,815 528,073 Total liabilities and equity $ 1,068,441 $ 725,815 The accompanying notes are an integral part of these consolidated financial statements. 47 Table of Contents NETSTREIT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (in thousands, except share and per share data) Successor Predecessor Year Ended December 31, For the Period from December 23 to December 31, For the Period from January 1 to December 22, 2021 2020 2019 Revenues Rental revenue (including reimbursable) $ 59,140 $ 33,727 $ 513 $ 19,805 Operating expenses Property 5,803 2,569 52 1,113 General and administrative 14,810 11,340 49 3,555 Depreciation and amortization 30,807 15,459 195 10,422 Provisions for impairment 3,539 2,690 — 7,186 Transaction costs 700 3,169 2 535 Total operating expenses 55,659 35,227 298 22,811 Other income (expense) Interest expense, net ( 3,700 ) ( 4,741 ) ( 173 ) ( 10,712 ) Gain on sales of real estate, net 2,997 6,213 — 5,646 Gain on forfeited earnest money deposit — 250 — — Other income (expense), net 431 ( 10 ) — — Total other income (expense), net ( 272 ) 1,712 ( 173 ) ( 5,066 ) Net income (loss) before income tax expense 3,209 212 42 ( 8,072 ) Income tax expense ( 59 ) — — — Net income (loss) 3,150 212 42 ( 8,072 ) Net income (loss) attributable to noncontrolling interests 104 ( 518 ) 14 — Preferred stock dividends — 42 — — Net income (loss) attributable to common stockholders $ 3,046 $ 688 $ 28 $ ( 8,072 ) Amounts available to common stockholders per common share: Basic $ 0.08 $ 0.04 $ — N/A Diluted $ 0.08 $ 0.01 $ — N/A Weighted average common shares: Basic 36,999,459 17,322,182 8,860,760 N/A Diluted 38,672,565 21,157,996 8,860,760 N/A Other comprehensive income (loss): Net income (loss) $ 3,150 $ 212 $ 42 $ ( 8,072 ) Change in value on derivatives, net 4,057 253 — 55 Total comprehensive income (loss) $ 7,207 $ 465 $ 42 $ ( 8,017 ) Comprehensive income (loss) attributable to noncontrolling interests 273 ( 500 ) 14 — Comprehensive income (loss) attributable to common stockholders $ 6,934 $ 965 $ 28 $ ( 8,017 ) The accompanying notes are an integral part of these consolidated financial statements. 48 Table of Contents NETSTREIT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in thousands, except share data) Preferred stock Common stock Shares Par Value Shares Par Value Additional Paid-in Capital Distributions in Excess of Retained Earnings Accumulated Other Comprehensive Income Total Stockholders’ Equity Partners’ Capital Noncontrolling Interests Total Equity Balance at December 31, 2018 — $ — — $ — $ — $ — $ — $ — $ 82,748 $ — $ 82,748 Partners’ contribution — — — — — — — — 537 — 537 Partners’ distribution — — — — — — — — ( 5,711 ) — ( 5,711 ) Net loss — — — — — — — — ( 8,072 ) — ( 8,072 ) Other comprehensive income — — — — — — — — 55 — 55 Balance at December 22, 2019 — $ — — $ — $ — $ — $ — $ — $ 69,557 $ — $ 69,557 Proceeds received from Successor for assets of the Predecessor — — — — — — — — ( 69,557 ) — ( 69,557 ) Issuance of OP Units — — — — — — — — — 87,885 87,885 Issuance of common stock, net of issuance costs — — 8,860,760 89 164,416 — — 164,505 — — 164,505 Net income — — — — — 28 — 28 — 14 42 Balance at December 31, 2019 — $ — 8,860,760 $ 89 $ 164,416 $ 28 $ — $ 164,533 $ — $ 87,899 $ 252,432 Issuance of preferred stock, net of issuance costs 125 104 — — — — — 104 — — 104 Issuance of common stock in private offering, net of issuance costs — — 2,936,885 29 54,530 — — 54,559 — — 54,559 Dividends declared and paid on preferred stock — — — — — ( 8 ) — ( 8 ) — — ( 8 ) Issuance of common stock in initial public offering, net of issuance costs — — 13,681,561 136 227,165 — — 227,301 — — 227,301 Redemption of preferred stock upon initial public offering ( 125 ) ( 104 ) — — — ( 34 ) — ( 138 ) — — ( 138 ) Redemption of OP Units and issuance of common stock in initial public offering — — 255,268 3 5,027 — — 5,030 — ( 5,030 ) — Dividends and distributions declared on common stock and OP units — — — — — ( 8,057 ) — ( 8,057 ) — ( 777 ) ( 8,834 ) Dividends declared on restricted stock — — — — — ( 123 ) — ( 123 ) — — ( 123 ) OP Units converted to common stock — — 2,441,869 24 47,593 — — 47,617 — ( 47,617 ) — Vesting of restricted stock units — — 34,600 1 ( 1 ) — — — — — — Repurchase of common stock for tax withholding obligations — — ( 7,398 ) — ( 137 ) — — ( 137 ) — — ( 137 ) Stock-based compensation — — — — 2,452 — — 2,452 — — 2,452 Other comprehensive income — — — — — — 235 235 — 18 253 Net income (loss) — — — — — 730 — 730 — ( 518 ) 212 Balance at December 31, 2020 — $ — 28,203,545 $ 282 $ 501,045 $ ( 7,464 ) $ 235 $ 494,098 $ — $ 33,975 $ 528,073 Issuance of common stock in public offering, net of issuance costs — — 14,768,124 148 282,997 — — 283,145 — — 283,145 OP Units converted to common stock — — 1,189,098 12 22,482 — — 22,494 — ( 22,494 ) — Dividends and distributions declared on common stock and OP Units — — — — — ( 30,195 ) — ( 30,195 ) — ( 1,109 ) ( 31,304 ) Dividends declared on restricted stock — — — — — ( 513 ) — ( 513 ) — — ( 513 ) Vesting of restricted stock units — — 84,790 — — — — — — — — Repurchase of common stock for tax withholding obligations — — ( 22,507 ) — ( 504 ) — — ( 504 ) — — ( 504 ) Stock-based compensation, net — — — — 3,704 7 — 3,711 — — 3,711 Other comprehensive income — — — — — — 3,888 3,888 — 169 4,057 Net income — — — — — 3,046 — 3,046 — 104 3,150 Balance at December 31, 2021 — $ — 44,223,050 $ 442 $ 809,724 $ ( 35,119 ) $ 4,123 $ 779,170 $ — $ 10,645 $ 789,815 The accompanying notes are an integral part of these consolidated financial statements. 49 Table of Contents NETSTREIT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Successor Predecessor Year Ended December 31, For the Period from December 23 to December 31, For the Period from January 1 to December 22, 2021 2020 2019 Cash flows from operating activities Net income (loss) $ 3,150 $ 212 $ 42 $ ( 8,072 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 30,807 15,459 195 10,422 Amortization of deferred financing costs 627 621 14 1,024 Amortization of above/below-market assumed debt — — — ( 13 ) Noncash revenue adjustments ( 1,769 ) ( 2,192 ) ( 13 ) 1,601 Stock-based compensation expense 3,704 2,452 — — Gain on sales of real estate, net ( 2,997 ) ( 6,213 ) — ( 5,646 ) Gain on forfeited earnest money deposit — ( 250 ) — — Provisions for impairment 3,539 2,690 — 7,186 Gain on involuntary conversion of building and improvements ( 438 ) — — — Changes in assets and liabilities, net of assets acquired and liabilities assumed: Other assets, net ( 1,061 ) ( 1,511 ) ( 681 ) 67 Accounts payable, accrued expenses and other liabilities 1,738 3,374 532 ( 580 ) Lessee improvement obligations ( 1 ) ( 1,893 ) — — Lease incentive payments ( 5,821 ) — — — Net cash provided by operating activities 31,478 12,749 89 5,989 Cash flows from investing activities Acquisitions of assets of the Predecessor, net of cash acquired — — ( 166,732 ) — Acquisitions of real estate ( 441,328 ) ( 408,584 ) ( 1,112 ) ( 1,232 ) Real estate development and improvements ( 19,896 ) ( 2,033 ) — ( 450 ) Earnest money deposits ( 219 ) 466 — — Purchase of computer equipment and other corporate assets ( 732 ) ( 51 ) — — Proceeds from sale of real estate 31,119 48,069 — 77,616 Proceeds from the settlement of property-related insurance claims 928 — — — Net cash (used in) provided by investing activities ( 430,128 ) ( 362,133 ) ( 167,844 ) 75,934 Cash flows from financing activities Issuance of common stock in public offerings, net 283,145 227,301 — — Issuance of common stock in private offering, net — 54,559 164,727 — Issuance of preferred stock, net — 104 — — Payment of common and preferred stock dividends ( 30,195 ) ( 8,065 ) — — Payment of OP unit distributions ( 1,109 ) ( 777 ) — — Payment of restricted stock dividends ( 34 ) ( 10 ) — — Redemption of preferred stock, net — ( 138 ) — — Proceeds from term loans — — 175,000 708 Principal payments on term loans — — — ( 62,983 ) Principal payments on mortgages payable — — — ( 14,756 ) Proceeds under revolving credit facility 150,000 50,000 — — Repayments under revolving credit facility ( 86,000 ) ( 50,000 ) — — Repurchase of common stock for tax withholding obligations ( 504 ) ( 137 ) — — Deferred offering costs ( 1,693 ) — — — Deferred financing costs — ( 129 ) ( 2,653 ) ( 199 ) Partners’ contributions — — — 537 Partners’ distributions — — — ( 5,624 ) Net cash provided by (used in) financing activities 313,610 272,708 337,074 ( 82,317 ) Net change in cash and cash equivalents ( 85,040 ) ( 76,676 ) 169,319 ( 394 ) Cash, cash equivalents and restricted cash at beginning of the period 92,643 169,319 — 1,950 Cash, cash equivalents and restricted cash at end of the period $ 7,603 $ 92,643 $ 169,319 $ 1,556 Supplemental disclosures of cash flow information: Cash paid for interest $ 2,993 $ 4,212 $ — $ 9,460 Supplemental disclosures of non-cash investing and financing activities: Dividends declared and unpaid on restricted stock $ 506 $ 113 $ — $ — Cash flow hedge change in fair value $ 4,057 $ 253 $ — $ — Accrued capital expenditures and real estate development and improvements costs $ 2,962 $ 375 $ — $ — Involuntary conversion of building and improvements and change in related insurance proceeds receivable $ 490 $ — $ — $ — Operating lease right-of-use asset and liability added for corporate office, excluding $0.9 million non-cash lease incentive received $ 4,493 $ — $ — $ — The accompanying notes are an integral part of these consolidated financial statements. 50 Table of Contents NETSTREIT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Organization and Description of Business NETSTREIT Corp. (“Successor” or the “Company”) was incorporated on October 11, 2019 as a Maryland corporation and commenced operations on December 23, 2019. The Company conducts its operations through NETSTREIT, L.P., a Delaware limited partnership (the “Operating Partnership”). Concurrently with a series of transactions completed on December 23, 2019 (collectively the “Private Offering”), EverSTAR Income and Value Fund V, LP, a Delaware limited partnership (the “Predecessor”), was merged with and into the Operating Partnership, with the Operating Partnership surviving. NETSTREIT GP, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company, is the sole general partner of the Operating Partnership. The Company elected to be treated and to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with its short taxable year ended December 31, 2019. Additionally, the Operating Partnership formed NETSTREIT Management TRS, LLC (“NETSTREIT TRS”), which together with the Company jointly elected to be treated as a taxable REIT subsidiary under Section 856(a) of the Internal Revenue Code of 1986, as amended, (the “Code”) for U.S. federal income tax purposes. On August 17, 2020, the Company completed the initial public offering of its common stock. The Company's common stock began trading on the New York Stock Exchange under the symbol “NTST” on August 13, 2020. The Company is structured as an umbrella partnership real estate investment trust (commonly referred to as an “UPREIT”) and is an internally-managed real estate company that acquires, owns and manages a diversified portfolio of single-tenant, retail commercial real estate leased on a long-term basis to high credit quality tenants across the United States. As of December 31, 2021, the Company owned or had investments in 328 properties, located in 41 states, including eight properties under development, with a non-binding option to purchase one additional property under development. Note 2 – Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and the rules and regulations of the U.S. Securities and Exchange Commission (SEC). The accompanying consolidated financial statements include the accounts of the Company and subsidiaries in which the Company has a controlling financial interest. All intercompany accounts and transactions have been eliminated in consolidation and the Company’s net income (loss) is reduced by the portion of net income (loss) attributable to noncontrolling interests. For the periods prior to December 23, 2019, the accompanying consolidated financial statements represent the historical financial information of EverSTAR Income and Value Fund V, LP, the Predecessor. For the periods after December 23, 2019, the accompanying consolidated financial statements represent the historical financial information of the Successor. As a result of the Company’s formation transactions, the consolidated financial statements after December 23, 2019 are presented on a new basis of accounting pursuant to Accounting Standards Codification 805, Business Combinations. Noncontrolling Interests The Company presents noncontrolling interests, which represent limited partnership units in the operating partnership (the “OP Units”) not owned by the Company, as a component of permanent equity, separate from the Company's stockholders’ equity. Noncontrolling interests were created as part of an asset acquisition and recognized at fair value as of the date of the transaction. Effective with the Company’s initial public offering, each limited partner of the Operating Partnership has the right to require the Operating Partnership to redeem part or all of its OP Units for cash, based upon the value of an equivalent number of shares of the Company’s common stock at the time of the redemption, or, at the Company’s election, shares of the Company’s common stock on a one-for-one basis, subject to certain adjustments and the restrictions on ownership and transfer of the Company’s common stock. The election to pay cash or issue common stock is solely within the control of the Company to satisfy a noncontrolling interest holder's redemption request. 51 Table of Contents Net income or loss of the Operating Partnership is allocated to its noncontrolling interests based on the noncontrolling interests’ ownership percentages in the Operating Partnership throughout the period. Ownership percentage is calculated by dividing the number of OP Units held by the noncontrolling interests by the total OP Units outstanding. Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s most significant assumptions and estimates relate to the useful lives of real estate assets, lease accounting, real estate impairment assessments, and allocation of fair value of purchase consideration. These estimates are based on historical experience and other assumptions which management believes are reasonable under the circumstances. The Company evaluates its estimates on an ongoing basis and makes revisions to these estimates and related disclosures as experience develops or new information becomes known. Further, the uncertainty over the ultimate impact COVID-19 will have on the global economy and the Company’s business makes any estimates and assumptions as of December 31, 2021 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made to conform with current period presentation. Transaction costs within the consolidated financial statements were previously included within the caption “general and administrative” and real estate improvements within the consolidated statements of cash flows were previously included within the caption “acquisitions of real estate.” Risk and Uncertainties COVID-19 The ongoing COVID-19 pandemic and the measures taken to limit its spread have negatively impacted the economy across many industries, including industries in which our tenants operate. The impacts may continue and/or increase in severity as the duration of the pandemic lengthens. However, the Company’s operations and cash flows during the years presented in the consolidated financial statements were not materially impacted by COVID-19. Specifically, during 2020, a number of our tenants across various industries announced temporary closures of their locations and requested rent deferral or rent abatement. During 2020, we granted rent deferral and rent abatement to 12 and 15 of our properties, respectively, representing 0.5 %, and 1.7 % of ABR as of December 31, 2020, respectively. The Company has not granted any abatements or deferrals since August 1, 2020. The Company also adopted an optional remote-work policy and other physical distancing policies for its corporate office during the pandemic. These policies have not had any adverse effect on its ability to continue to operate its business or on the Company's general ledger system, internal controls or processes related to financial reporting. Real Estate Held for Investment Real estate is recorded and stated at cost less any provision for impairment. At acquisition date, the purchase price of an acquired property is allocated to tangible and identifiable intangible assets or liabilities based on their relative fair values. For properties developed by the Company, all direct and indirect costs related to planning, development and construction, including interest, real estate taxes and other miscellaneous costs incurred during the construction period, are capitalized for financial reporting purposes and recorded as property under development until construction has been completed. The Company evaluates each acquisition transaction to determine whether the acquired asset meets the definition of a business and therefore accounted for as a business combination or if the acquisition transaction should be accounted for as an asset acquisition. Under Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”), an acquisition does not qualify as a business when substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets or the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. Transaction costs related to acquisitions that qualify as asset acquisitions are capitalized as part of the cost basis of the acquired assets, while transaction costs for acquisitions that are deemed to be acquisitions of a business are expensed as incurred. 52 Table of Contents The Company allocates the purchase price of acquired properties accounted for as asset acquisitions to tangible and identifiable intangible assets or liabilities based on their relative fair values. Tangible assets may include land, buildings, site improvements and tenant improvements. Intangible assets include the value of in-place leases and above-market leases and intangible liabilities include below-market leases. The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases based on the specific characteristics of each tenant’s lease. The Company estimates the cost to execute leases with terms similar to the remaining lease terms of the in-place leases, including leasing commissions, legal and other related expenses. The fair value of above-market or below-market leases is recorded based on the net present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between the contractual amount to be paid pursuant to the in-place lease and the Company’s estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining non-cancelable term of the lease including any below-market fixed rate renewal options for below-market leases. In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including real estate valuations prepared by an independent valuation firm. The Company also considers information and other factors including market conditions, the industry that the tenant operates in, characteristics of the real estate; e.g., location, size, demographics, value and comparative rental rates; tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business. Additionally, the Company considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets and liabilities acquired. Based on these inputs for measuring and allocating the fair value of real estate acquisitions, the Company utilizes both observable market data (categorized as level 2 on the three-level valuation hierarchy of Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement), and unobservable inputs that reflect the Company’s own internal assumptions (categorized as level 3 under ASC Topic 820). Depreciation and Amortization Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets: Buildings 13 – 35 years Building improvements 15 years Tenant improvements Shorter of the term of the related lease or useful life Acquired in-place leases or leasing commissions Remaining terms of the respective leases Assembled workforce 3 years Computer equipment and other corporate assets 3 – 5 years Total depreciation and amortization expense was $ 30.8 million, $ 15.5 million, $ 0.2 million, and $ 10.4 million for the years ended December 31, 2021 and 2020, and for the periods from December 23, 2019 to December 31, 2019, and from January 1, 2019 to December 22, 2019, respectively. Depreciation expense on real estate held for investment and computer equipment and other corporate assets was $ 21.1 million, $ 10.7 million, $ 0.1 million, and $ 8.4 million for the years ended December 31, 2021 and 2020, and for the periods from December 23, 2019 to December 31, 2019, and from January 1, 2019 to December 22, 2019, respectively. Amortization expense on acquired in-place lease and assembled workforce intangible assets and leasing commissions was $ 9.7 million, $ 4.8 million, $ 0.1 million, and $ 2.0 million for the years ended December 31, 2021 and 2020, and for the periods from December 23, 2019 to December 31, 2019, and from January 1, 2019 to December 22, 2019, respectively. Repairs and maintenance are charged to operations as incurred; major renewals and betterments that extend the useful life or improve the operating capacity of the asset are capitalized. Upon the sale or disposition of a property, the asset and the related accumulated depreciation are removed from the consolidated balance sheets with the difference between the proceeds received, net of sales costs, and the carrying value of the asset group recorded as a gain or loss on sale, subject to impairment considerations. 53 Table of Contents Assets Held for Sale Properties classified as held for sale, including the related intangibles, on the consolidated balance sheets include only those properties available for immediate sale in their present condition, which are actively being marketed, and for which management believes that it is probable that a sale of the property will be completed within one year. Properties held for sale are carried at the lower of cost or fair value, less estimated selling costs. No depreciation expense or amortization expense is recognized on properties held for sale and the related intangible assets or liabilities once they have been classified as such. Only disposals representing a strategic shift in operations are presented as discontinued operations. Accordingly, we have not reclassified results of operations for properties disposed during the year or held for sale as discontinued operations, as these events are a normal part of the Company’s operations and do not represent strategic shifts in the Company’s operations. As of December 31, 2021 and 2020, there were one and three properties, respectively, classified as held for sale. Impairment of Long-Lived Assets Fair value measurement of an asset group occurs when events or changes in circumstances related to an asset indicate that the carrying amount of the asset is no longer recoverable. An example of an event or changed circumstance is a reduction in the expected holding period of a property. If indicators are present, the Company will prepare a projection of the undiscounted future cash flows of the property, excluding interest charges, and determine if the carrying amount of the asset group is recoverable. When a carrying amount is not recoverable, an impairment loss is recognized to the extent that the carrying amount of the asset group exceeds its fair market value. The Company estimates fair value using data such as operating income, estimated capitalization rates or multiples, leasing prospects, local market information, and with regard to assets held for sale, based on the estimated or negotiated selling price, less estimated costs of disposal. Based on these unobservable inputs, the Company determined that its valuations of impaired real estate and intangible assets fall within Level 3 of the fair value hierarchy under ASC Topic 820. The following table summarizes the provision for impairment during the periods indicated below (in thousands): Successor Predecessor Year Ended December 31, For the Period from December 23 to December 31, For the Period from January 1 to December 22, 2021 2020 2019 Total provision for impairment $ 3,539 $ 2,690 $ — $ 7,186 Number of properties: (1) Classified as held for sale — 2 — 2 Disposed within the period 3 3 — 4 (1) Includes the number of properties that were impaired and classified as held for sale as of year-end or impaired and disposed of during the respective periods. Excludes properties that did not have impairment recorded during the year. Cash, Cash Equivalents and Restricted Cash The Company considers all cash balances, money market accounts and highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Restricted cash includes cash restricted for property tenant improvements and cash proceeds from the sale of assets held by qualified intermediaries in anticipation of the acquisition of replacement properties in tax-free exchanges under Section 1031 of the Code. Restricted cash is included in cash, cash equivalents, and restricted cash on the consolidated balance sheets. The Company had no restricted cash as of December 31, 2021 and had $ 14.8 million of restricted cash as of December 31, 2020. The Company’s bank balances as of December 31, 2021 and 2020 included certain amounts over the Federal Deposit Insurance Corporation limits. Revenue Recognition and Related Matters The Company’s rental revenue is primarily related to rent received from tenants under leases accounted for as operating leases. Rent from leases that have fixed and determinable rent increases is recognized on a straight-line basis over the non-cancellable initial term of the lease and reasonably certain renewal periods, from the later of the date of the commencement of the lease or the date of acquisition of the property subject to the lease. The difference between rental revenue recognized and the cash rent due under the provisions of the lease is recorded as deferred rent receivable and included as a component of other assets in the consolidated balance sheets. 54 Table of Contents Variable lease revenues include tenant reimbursements, lease termination fees, changes in the index or market-based indices after the inception of the lease or percentage rents. Variable lease revenues are not recognized until the specific events that trigger the variable payments have occurred. The Company and its Predecessor recognized variable lease revenue related to tenant reimbursements and lease termination fees for the periods presented. Capitalized above-market and below-market lease values are amortized on a straight-line basis as a reduction or increase of rental revenue as appropriate over the remaining non-cancellable terms of the respective leases. Reserves for uncollectible amounts are provided against the portion of accounts receivable, net including straight-line rents, which are estimated to be uncollectible, which include a portfolio-based reserve and reserves for specific disputed amounts. Such reserves are reviewed each period based upon recovery experience and the specific facts of each outstanding amount. As of December 31, 2021, the Company had an immaterial reserve for uncollectible amounts specific to uncharged reimbursable expenses and as of December 31, 2020, there were no reserves for uncollectible amounts. Stock-Based Compensation The Company has a share-based compensation award program for its employees and directors. Stock-based compensation expense associated with these awards is recognized in general and administrative expenses in the consolidated statements of operations and comprehensive income (loss). The Company classifies stock-based payment awards either as equity awards or liability awards based upon an analysis of ASC 718 and ASC 480. Equity classified awards are measured based on the fair value on the date of grant. Liability classified awards are remeasured to fair value each reporting period. Stock-based compensation expense is recognized over the requisite service or performance period. The Company recognizes forfeitures as they occur. Transaction Costs Transaction costs represent costs incurred by the Company to facilitate the Private Offering, formation transactions and initial public offering. In addition, transaction costs include the costs associated with abandoned acquisitions and other acquisition related activity. There were no offering costs expensed for the year ended December 31, 2021 or for the period from December 23, 2019 to December 31, 2019, however, there were $ 2.2 million and $ 0.5 million of offering costs expensed for the year ended December 31, 2020 and for the period from January 1, 2019 to December 22, 2019, respectively. Acquisition related expenses were $ 0.7 million and $ 1.0 million for the years ended December 31, 2021 and 2020 and $ 0.1 million, for the periods from December 23, 2019 to December 31, 2019, and from January 1, 2019 to December 22, 2019, respectively. 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. 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 stockholders 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. NETSTREIT TRS is 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 years ended December 31, 2021 and 2020 and for the periods from December 23, 2019 to December 31, 2019, and from January 1, 2019 to December 22, 2019, respectively, the Company recognized franchise and other state and local tax expenses in general and administrative and recognized state and federal income tax expense in income tax expense in the accompanying consolidated statements of operations and comprehensive income (loss). All provisions for federal income taxes in the accompanying consolidated financial statements are attributable to NETSTREIT TRS. Deferred income tax expense and its ending balance in deferred tax assets and liabilities were immaterial for the years and periods presented. The Company has elected to record related interest and penalties, if any, as general and administrative expense or as income tax expense based on the nature of the tax on the consolidated statements of operations and comprehensive income (loss). The 55 Table of Contents Company had no material interest or penalties relating to income, franchise, and other state and local taxes for the years and periods presented. Additionally, there were no material accruals for interest or penalties as of December 31, 2021 and 2020. The Company files federal, state and local income tax returns. The Company regularly analyzes its various federal and state filing positions and only recognizes the income tax effect in its financial statements when certain criteria regarding uncertain income tax positions have been met. The Company believes that its income tax positions would more likely than not be sustained upon examination by all relevant taxing authorities. Therefore, no provisions for uncertain income tax positions have been recorded in the consolidated financial statements. All federal tax returns for years prior to 2018 are no longer subject to examination. Additionally, state tax returns for years prior to 2016 are generally no longer subject to examination. Earnings Per Share Earnings per common share has been computed pursuant to the guidance in FASB ASC Topic 260, Earnings per Share. Basic earnings per share (“EPS”) is computed by dividing net income (loss) allocated to common stockholders by the weighted-average number of common shares outstanding for the reporting period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. No effect is shown for any securities that are anti-dilutive. Net income (loss) allocated to common stockholders represents net income (loss) less income allocated to participating securities and noncontrolling interests. None of the Company’s equity awards are participating securities. Fair Value Measurement Fair value measurements are utilized in the accounting of the Company’s assets acquired and liabilities assumed in an asset acquisition and also affect the Company’s accounting for certain of its financial assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The hierarchy described below prioritizes inputs to the valuation techniques used in measuring the fair value of assets and liabilities. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs to be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows: Level 1 inputs, such as quoted prices in an active market; Level 2 inputs, which are observable inputs for similar assets; or Level 3 inputs, which are unobservable inputs. The Company uses the following inputs in its fair value measurements: – Level 2 inputs for its debt and derivative financial instrument fair value disclosures. See “Note 6 - Debt” and “Note 7 - Derivative Financial Instruments,” respectively; and – Level 2 and Level 3 inputs when assessing the fair value of assets and liabilities in connection with real estate acquisitions and impairment. See “Note 4 - Real Estate Investments.” The fair value of the Company’s cash, cash equivalents and restricted cash (including money market accounts), other assets and accounts payable, accrued expenses and other liabilities approximate their carrying value because of the short-term nature of these instruments. Provisions for impairments recognized in the years ended December 31, 2021, 2020, and 2019 related to assets held for sale and the impairment was determined based on the estimated or negotiated selling price, less costs of disposal, compared to the carrying value of the property. Concentrations of Credit Risk Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company is exposed to credit risk with respect to cash held at various financial institutions, access to its Credit Facility, and amounts due or payable under derivative contracts. The credit risk exposure with regard to the Company’s cash, credit facilities, and derivative instruments is spread among a diversified group of investment grade financial institutions. During 2021, the Company’s rental revenues were derived from 70 separate tenants leasing 328 total properties and there was no tenant with rental revenue that exceeded 10% of total rental revenue. 56 Table of Contents During 2020, the Company’s rental revenues were derived from 63 separate tenants leasing 219 total properties and there was no tenant with rental revenue that exceeded 10% of total rental revenue. During 2019, the Company and the Predecessor’s rental revenues were derived from 48 separate tenants leasing 123 total properties. During this period, one tenant, CVS, accounted for 12.6 % of total rental revenue. Segment Reporting The Company considers each one of its properties to be an operating segment, none of which meets the threshold for a reportable segment. The Company allocates resources and assesses operating performance based on individual property needs. All of the Company’s operating segments meet the aggregation criteria, and thus, the Company reports one segment, rental operations. There were no intersegment sales during the periods presented. Recent Accounting Pronouncements Adopted In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which replaces the existing guidance in Topic 840, “Leases” (“ASC 842”). ASC 842 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Predecessor adopted ASC 842 on January 1, 2019 utilizing the modified retrospective transition method. The Predecessor elected to recast prior-period comparative information to aggregate prior period tenant reimbursement revenue within rental revenue to conform with the current period presentation within the consolidated statements of operations and comprehensive income (loss). The Predecessor elected the package of practical expedients available under ASC 842, but did not elect the hindsight practical expedient, thereby not requiring the Predecessor to reassess the lease classification for existing contracts. Accordingly, the Predecessor's leases continue to be classified as operating leases as of January 1, 2019. The Predecessor did not make any adjustments to the opening balance of retained earnings upon adoption of the new standard given the nature of the impacts and other transition practical expedients elected by the Predecessor. In April 2020, the FASB issued a question and answer document, “Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic” focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 global pandemic. Under existing lease guidance, the entity would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant, which would be accounted for under the lease modification framework, or if a lease concession was under the enforceable rights and obligations that existed in the original lease, which would be accounted for outside the lease modification framework. Entities can elect to not evaluate whether certain concessions provided by lessors to mitigate the effects of COVID-19 on lessees are lease modifications. Entities that make this election can then elect to apply the lease modification guidance in ASC 842 or account for the concession as if it were contemplated as part of the existing contract. On April 1, 2020, the Company adopted this guidance and determined that it has not materially impacted the Company's consolidated financial statements. For all leases when the Company is a lessor, the Company elected to not evaluate whether certain concessions that do not result in a substantial increase in the Company’s rights as the lessor or the obligations of the lessee provided to mitigate the effects of COVID-19 on tenants are lease modifications, further electing to account for the concession as if it were contemplated as part of the existing contract. In March 2020, the FASB issued ASU 2020-04 “Topic 848: Reference Rate Reform.” ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives, and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. On July 1, 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company determined these elections have not materially impacted the Company's consolidated financial statements. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur. Recent Accounting Pronouncements Issued But Not Yet Adopted In August 2020, the FASB issued ASU 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models currently required. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. ASU 2020-06 also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within 57 Table of Contents those fiscal years. Early adoption will be permitted. The adoption of this standard will not materially impact the Company's consolidated financial statements. Note 3 – Leases Tenant Leases The Company acquires, owns and manages single-tenant, retail commercial real estate lease properties, with the majority being long-term triple-net leases where the tenant is generally responsible for all improvements and contractually obligated to pay all operating costs (such as real estate taxes, utilities and repairs and maintenance costs). As of December 31, 2021, the Company had investments in 327 single-tenant retail net leased properties spanning 41 states, with 67 different tenants represented across 23 retail sectors. As of December 31, 2021, the remaining terms of leases range from 1 - 32 years. The Company’s property leases have been classified as operating leases and some have scheduled rent increases throughout the lease term. The Company’s leases typically provide the tenant one or more multi-year renewal options to extend their leases, subject to generally the same terms and conditions, including rent increases, consistent with the initial lease term. On January 1, 2019, the Predecessor adopted the new accounting guidance in Accounting Standards Codification (“ASC”) Topic 842, Leases, including all related ASUs. The Predecessor elected to use the alternative modified retrospective transition method provided in ASU 2018-11 (the “effective date method”). Under this method, the effective date of January 1, 2019 is the date of initial application. In connection with the adoption of Topic 842, the Predecessor elected a package of practical expedients, transition options, and accounting policy elections as follows: • Package of practical expedients is applied to all leases, allowing the Predecessor not to reassess (i) whether expired or existing contracts contain leases under the new definition of a lease, (ii) lease classification for expired or existing leases, and (iii) whether previously capitalized initial direct costs would qualify for capitalization under Topic 842; • For land easements, the Predecessor elected not to assess at transition whether any expired or existing land easements are, or contain, leases if they were not previously accounted for as leases under the previous lease accounting standard (Topic 840); • Lessor separation and allocation practical expedient — The Predecessor as lessor, to aggregate non-lease components with the related lease component if certain conditions are met, and account for the combined component based on its predominant characteristic, which generally results in combining lease and non-lease components of its tenant lease contracts to a single line shown as rental revenue in the accompanying consolidated statements of operations and comprehensive income (loss); and • The Predecessor made an accounting policy election to continue to exclude, from contract consideration, sales tax (and similar taxes) collected from lessees. All lease-related income is reported as a single line item, rental revenue (including reimbursable), in the consolidated statements of operations and comprehensive income (loss). Effective January 1, 2019, with the adoption of ASC 842, rental revenues are presented net of reserves for uncollectible amounts. Fixed lease income includes stated amounts per the lease contract, which are primarily related to base rent and straight-line lease adjustments. Variable lease income includes the following main items in the lease contracts: • Recoveries from tenants represents amounts which tenants are contractually obligated to reimburse the Company for the tenants' portion of actual recoverable costs incurred. • Percentage rent represents amounts billable to tenants based on the tenants' actual sales volume in excess of levels specified in the lease contract. The following table provides a disaggregation of lease income recognized under ASC 842 (in thousands): 58 Table of Contents Successor Predecessor Year Ended December 31, For the Period from December 23 to December 31, For the Period from January 1 to December 22, 2021 2020 2019 Rental revenue Fixed lease income (1) $ 53,734 $ 31,097 $ 446 $ 19,350 Variable lease income (2) 4,743 2,126 69 1,241 Other rental revenue: Above/below market lease amortization, net 808 504 ( 2 ) ( 564 ) Lease incentives ( 122 ) — — — Uncollectible amounts in lease income ( 23 ) — — ( 222 ) Rental revenue (including reimbursable) $ 59,140 $ 33,727 $ 513 $ 19,805 (1) Fixed lease income includes contractual rents under lease agreements with tenants recognized on a straight-line basis over the lease term. (2) Variable lease income primarily includes tenant reimbursements for real estate taxes, insurance, common area maintenance, lease termination fees, and the write-off of uncollectible amounts. There were immaterial write-offs of uncollectible amounts during 2021 with no write-offs during 2020. During 2019, there were $ 0.2 million of write-offs of uncollectible amounts. Scheduled future minimum base rental payments (excluding base rental payments from properties classified as held for sale and straight line rent adjustments for all properties) due to be received under the remaining non-cancelable term of the operating leases in place as of December 31, 2021 are as follows (in thousands): Future Minimum Base Rental Receipts 2022 $ 69,581 2023 70,238 2024 70,759 2025 70,493 2026 68,185 Thereafter 383,276 $ 732,532 Future minimum rentals exclude amounts that may be received from tenants for reimbursements of operating costs and property taxes. In addition, the future minimum rents do not include any contingent rents based on a percentage of the lessees' gross sales or lease escalations based on future changes in the Consumer Price Index (“CPI”) or other stipulated reference rate. Corporate Office Lease In August 2021, the Company entered into a lease agreement on a new corporate office space, which is classified as an operating lease. The Company began operating out of the new office in February 2022. The Company expects to incur approximately $ 2.2 million of total costs, including costs related to improvements, furniture and fixtures, and computer and computer related equipment. The Company capitalized $ 1.6 million as of December 31, 2021. Tenant allowances in the amount of $ 0.9 million were utilized in accordance with the lease agreement. The lease has an initial noncancellable term of 10.5 years that expires on July 31, 2032, with a one-time option to terminate in 2029 exercisable by the Company. The lease is also renewable at the Company’s option for two additional periods of five years . Annual rent expense, excluding variable costs, is expected to be approximately $ 0.5 million during the initial term. The corporate office lease contains variable lease costs related to the lease of parking spaces and non-lease components related to the reimbursement of property operating expenses and certain common area maintenance expenses, all of which are recognized as incurred. The Company elected to use the component practical expedient, which permits the Company to not separate non-lease components from lease components if timing and pattern of transfer is the same. Rent expense, including variable costs, will be recorded beginning January 2022. The Company recorded a right-of-use asset and operating lease liability of approximately $ 4.5 million at lease commencement. As of December 31, 2021, the right-of-use asset and operating lease liability was $ 4.6 million and $ 5.4 million, respectively. 59 Table of Contents The right-of-use asset is included in other assets, net and the operating lease liability is included in accounts payable, accrued expenses and other liabilities in the accompanying consolidated balance sheets. Scheduled future minimum base rental payments as of December 31, 2021 are as follows (in thousands): Future Minimum Base Rental Payments 2022 $ 156 2023 533 2024 617 2025 636 2026 653 Thereafter 3,982 Total lease payments 6,576 Less: amount representing interest (1) ( 1,135 ) Present value of operating lease liabilities $ 5,442 (1) Imputed interest was calculated using a discount rate of 3.25 %. The discount rate is based on the estimated incremental borrowing rate, calculated as the treasury rate for the same period as the underlying lease term, plus a spread determined using factors including the Company’s credit rating and REIT industry performance. Note 4 – Real Estate Investments As of December 31, 2021, the Company owned or had investments in 328 properties, including nine properties under development. The gross real estate investment portfolio, including properties under development, totaled approximately $ 1.05 billion and consisted of the gross acquisition cost of land, buildings, improvements, and lease intangible assets and liabilities. The investment portfolio is geographically dispersed throughout 41 states with gross real estate investments in Illinois and Texas representing 11.3 % and 11.2 %, respectively, of the total gross real estate investment of the Company’s entire portfolio. Acquisitions During the year ended December 31, 2021, the Company acquired 124 properties, for a total purchase price of $ 441.3 million, including $ 4.2 million of capitalized acquisition costs. During the year ended December 31, 2020, the Company acquired 124 properties, for a total purchase price of $ 408.6 million, including $ 4.7 million of capitalized acquisition costs. The acquisitions were all accounted for as asset acquisitions. An allocation of the purchase price and acquisition costs paid for the completed acquisitions is as follows (in thousands): Successor Year Ended December 31, 2021 2020 Land $ 116,056 $ 124,998 Buildings 241,930 205,157 Site improvements 29,137 27,571 Tenant improvements 5,965 7,066 In-place lease intangible assets 48,484 53,743 Above-market lease intangible assets 7,904 5,673 Assumed receivables 44 Construction-in-progress assets 52 270 Fuel equipment — 156 449,572 424,634 Liabilities assumed Below-market lease intangible liabilities ( 8,244 ) ( 14,157 ) Accounts payable, accrued expense and other liabilities — ( 1,893 ) Purchase price (including acquisition costs) $ 441,328 $ 408,584 60 Table of Contents On December 23, 2019, the Company contributed the proceeds of the Private Offering to the Operating Partnership, and the Operating Partnership acquired the Predecessor for a combination of OP Units and $ 256.3 million in cash. The Operating Partnership issued 8,860,760 Class A OP Units to the Company for its contribution and 4,449,019 OP Units ( 3,652,149 Class A OP Units and 796,870 Class B OP Units) to the Predecessor's owners for the acquisition. The acquisition was accounted for as an asset acquisition and included $ 0.5 million of acquisition fees incurred in connection with the acquisition. An allocation of the purchase price and acquisition costs paid for the completed acquisition is as follows (in thousands): December 23, 2019 Land $ 83,744 Buildings 125,140 Site improvements 8,152 Tenant improvements 5,969 In-place lease intangible assets 20,665 Above-market lease intangible assets 7,286 Properties held for sale 8,343 Other assets 3,486 262,785 Liabilities assumed Below-market lease intangible liabilities ( 4,649 ) Other liabilities ( 1,851 ) Purchase price (including acquisition costs) $ 256,285 Development During the year ended December 31, 2021, the Company invested a total of $ 20.8 million, including total purchase price of $ 12.0 million, in ten properties, including one that contains a non-binding purchase option to acquire the property upon completion. Upon acquisition or investment in these properties, the Company commenced or assumed development of build-to-suit projects. As of December 31, 2021, the Company completed development on one of the projects and reclassified approximately $ 2.9 million from property under development to land, building, and improvements in the accompanying consolidated balance sheets. The remaining developments are expected to be substantially completed with rent commencing at various points throughout 2022. The purchase price, including acquisitions costs, and subsequent development are included in property under development in the accompanying consolidated balance sheets as of December 31, 2021. During the year ended December 31, 2020, the Company invested a total of $ 5.4 million, including the purchase price of $ 3.5 million, in two properties. Upon acquisition in these properties, the Company commenced development of build-to-suit projects which were completed in July and December 2020, respectively. Rent commenced in July 2020 and January 2021, respectively. These amounts were included in buildings and improvements in the accompanying consolidated balance sheets as of December 31, 2020. Dispositions During the year ended December 31, 2021, the Company sold nine properties for a total sales price, net of disposal costs of $ 31.1 million, recognizing a net gain of $ 3.0 million on the sales. During the year ended December 31, 2020, the Company sold 15 properties for a total sales price, net of disposal costs of $ 48.1 million, recognizing a net gain of $ 6.2 million on the sales. For the period from December 23, 2019 to December 31, 2019, the Company had no dispositions. For the period from January 1, 2019 to December 22, 2019, the Company sold 30 properties for a total sales price, net of disposal costs of $ 77.6 million, recognizing a net gain of $ 5.6 million on the sales. 61 Table of Contents Loss on Damages and Other Items The Company incurred significant damages to a property in Houma, Louisiana as a result of Hurricane Ida making landfall in August 2021. As of December 31, 2021, the Company recorded a loss based on estimated damages of $ 0.5 million in the accompanying consolidated statements of operations and comprehensive income (loss), which has been fully offset by insurance proceeds specific to capitalized building and improvement costs of $ 0.9 million. Total repair and replacement costs are expected to be approximately $ 1.1 million which is covered by insurance, less the Company’s $ 0.1 million deductible. The Company expects construction to be completed in the first quarter of 2022. During the construction period, customer rental payments will continue to be abated, with the lost rent covered by the Company’s insurance policy. During 2019, the Company entered into an agreement to sell one property to a third-party and received a nonrefundable $ 0.3 million earnest money deposit which, upon the third-party’s failure to perform under the purchase and sale agreement in the first quarter of 2020, was recognized as a gain. Note 5 – Intangible Assets and Liabilities Intangible assets and liabilities consisted of the following (in thousands): December 31, 2021 December 31, 2020 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Assets: In-place leases $ 116,368 $ ( 13,408 ) $ 102,960 $ 69,470 $ ( 4,146 ) $ 65,324 Above-market leases 17,348 ( 1,516 ) 15,832 9,607 ( 481 ) 9,126 Assembled workforce 873 ( 592 ) 281 873 ( 299 ) 574 Lease incentives 5,821 ( 122 ) 5,699 — — — Total Intangible assets $ 140,410 $ ( 15,638 ) $ 124,772 $ 79,950 $ ( 4,926 ) $ 75,024 Liabilities: Below-market leases $ 26,185 $ ( 2,869 ) $ 23,316 $ 17,951 $ ( 1,021 ) $ 16,930 The remaining weighted average amortization period for the Company’s intangible assets and liabilities as of December 31, 2021 and 2020 by category were as follows: Years Remaining December 31, 2021 2020 In-place leases 9.7 11.1 Above-market leases 12.8 12.6 Below-market leases 12.3 13.4 Assembled workforce 1.0 2.0 Lease incentives 12.7 — The Company records amortization of in-place lease assets and assembled workforce intangible assets to amortization expense, and records net amortization of above-market and below-market lease intangibles as well as amortization of lease incentives to rental revenue. The following amounts in the accompanying consolidated statements of operations and comprehensive income (loss) related to the amortization of intangibles assets and liabilities for all property and ground leases (in thousands): 62 Table of Contents Successor Predecessor Year Ended December 31, For the Period from December 23 to December 31, For the Period from January 1 to December 22, 2021 2020 2019 Amortization: Amortization of in-place leases $ 9,411 $ 4,437 $ 56 $ 2,032 Amortization of assembled workforce 293 292 7 — $ 9,704 $ 4,729 $ 63 $ 2,032 Net adjustment to rental revenue: Above-market lease assets ( 1,050 ) ( 560 ) ( 13 ) ( 966 ) Below-market lease liabilities 1,858 1,064 11 403 Lease incentives ( 122 ) — — — $ 686 $ 504 $ ( 2 ) $ ( 563 ) The following table provides the projected amortization of in-place lease assets and assembled workforce intangible assets to amortization expense, and the net amortization of above-market, below-market, and lease incentive lease intangibles to rental revenue as of December 31, 2021, for the next five years and thereafter (in thousands): 2022 2023 2024 2025 2026 Thereafter Total In-place leases $ 13,421 $ 12,542 $ 11,831 $ 11,552 $ 10,459 $ 43,155 $ 102,960 Assembled workforce 281 — — — — — 281 Amortization expense $ 13,702 $ 12,542 $ 11,831 $ 11,552 $ 10,459 $ 43,155 $ 103,241 Above-market lease assets $ ( 1,316 ) $ ( 1,316 ) $ ( 1,312 ) $ ( 1,311 ) $ ( 1,310 ) $ ( 9,267 ) $ ( 15,832 ) Below-market lease liabilities 2,220 2,213 2,193 2,169 2,049 12,472 23,316 Lease incentives ( 473 ) ( 473 ) ( 473 ) ( 473 ) ( 473 ) ( 3,334 ) ( 5,699 ) Net adjustment to rental revenue $ 431 $ 424 $ 408 $ 385 $ 266 $ ( 129 ) $ 1,785 Note 6 – Debt Debt consists of the following (in thousands): December 31, Maturity Date Interest Rate 2021 2020 Term Loan (1) December 23, 2024 1.36 % $ 175,000 $ 175,000 Revolver (2) December 23, 2023 1.31 % 64,000 — Total debt 239,000 175,000 Unamortized discount and debt issuance costs ( 670 ) ( 895 ) Unamortized deferred financing costs, net (3) ( 796 ) ( 1,198 ) Total debt, net $ 237,534 $ 172,907 (1) Interest rate includes the effect of a variable interest rate that has been swapped to a fixed interest rate. (2) The annual interest rate of the Revolver assumes one-month LIBOR as of December 31, 2021 of 0.10 %. Additionally, the Revolver may be extended up to one year. (3) The Company records deferred financing costs for the Revolver in other assets, net on its consolidated balance sheets. Credit Facility In December 2019, the Company entered into a senior credit facility consisting of (i) a $ 175.0 million senior secured term loan (“Term Loan”) and (ii) a $ 250.0 million senior secured revolving credit facility (“Revolver”, and collectively with the Term Loan, the “Credit Facility”). Wells Fargo Securities, LLC is lead arranger and bookrunner and Wells Fargo Bank, National Association is administrative agent under the Credit Facility (the “Administrative Agent”). 63 Table of Contents 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, effective during the fourth quarter of 2020, is unsecured as the Administrative Agent released the collateral in connection with the Company’s satisfaction of the collateral release requirements. Therefore interest rates under the Credit Facility are based on the Company’s consolidated total leverage ratio, and are determined by (A) in the case of the Term Loan either (i) LIBOR, plus a margin ranging from 1.15 % to 1.60 %, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.15 % to 0.60 %, based on the Company’s consolidated total leverage ratio and (B) in the case of the Revolver either (i) LIBOR, plus a margin ranging from 1.20 % to 1.80 %, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.20 % to 0.80 %, based on the Company’s consolidated total leverage ratio. Interest is payable monthly or at the end of the applicable interest period in arrears on any outstanding borrowings. The Company is required to pay a Revolver facility fee at an annual rate of 0.15 % of the unused capacity if usage exceeds 50% of the total available facility, or 0.25 % of the unused facility if usage does not exceed 50%. Loans from the Revolver are generally restricted if, among other things, the proposed usage of the proceeds from the loan do not meet certain criteria as outlined in the Credit Facility Agreement, if an event of default exists, or if the requested loan will create an event of default. Loans from the Revolver may not exceed the total revolving commitments. During the second quarter of 2020, the Company entered into an amendment to the Credit Facility to amend and redefine its debt covenant calculations. The Company incurred and capitalized less than $ 0.1 million of financing costs relating to this amendment, which has been pro-rated to the Term Loan and Revolver based on their respective borrowing capacities. The Company further amended and redefined its debt covenant calculation during the third quarter of 2021 through the execution of two separate amendments. Effective September 28, 2020, the Company entered into an interest rate derivative contract to fix the interest rate on the Term Loan. The interest rate is effectively fixed to 1.36 % which includes the fixed rate (one-month LIBOR) of 0.21 % plus a margin of 1.15 %. The interest rate hedge is further described in “Note 7 - Derivative Financial Instruments.” On December 23, 2019, in connection with the acquisition of the Predecessor, the Company fully drew down on its Term Loan and used the proceeds to acquire the Predecessor who then concurrently settled its outstanding debt facilities of $ 168.3 million, including incremental legal and tax costs of $ 0.4 million, excluding unamortized deferred financing costs of $ 0.5 million. As part of the acquisition, the Company did not assume any obligation under the Predecessor's then outstanding debt facilities. Settlement of the Predecessor's debt was contingent upon the consummation of the Private Offering. In the Successor's consolidated statement of cash flows the consideration paid to settle the Predecessor's debt is included in acquisitions of assets of the Predecessor. The residual amount of $ 4.3 million was held in cash, cash equivalents and restricted cash on December 31, 2019 on the Successor's consolidated balance sheet. Deferred financing, discount and debt issuance costs are being amortized over the remaining terms of each respective loan. Total costs amortized on the Term Loan and Revolver were $ 0.6 million for both years ended December 31, 2021 and 2020 and less than $ 0.1 million for the period from December 23, 2019 to December 31, 2019. This is included in interest expense on the Company’s consolidated statements of operations and comprehensive income (loss). As of December 31, 2021, and 2020, the Term Loan had a weighted average interest rate, exclusive of amortization of discount and deferred financing costs and the effects of the interest rate hedge, of 1.27 % and 1.97 %, respectively, and 3.28 % for the period from December 23, 2019 to December 31, 2019. The Company incurred interest expense in connection with the Term Loan for the year ended December 31, 2021, 2020, and for the period from December 23, 2019 to December 31, 2019 of $ 2.2 million, $ 3.5 million, and $ 0.2 million, respectively. The estimated fair value of the Company’s Term Loan has been derived based on market observable inputs such as interest rates and discounted cash flow analysis using estimates of the amount and timing of future cash flows. These measurements are classified as Level 2 within the fair value hierarchy. The Company determined that the carrying value materially approximated the estimated fair value of the Term Loan as of December 31, 2021 and 2020. During 2021 and 2020, the Company incurred interest expense, exclusive of facility fees for unused capacity, on borrowings under the Revolver of $ 0.2 million and $ 0.1 million, respectively, with a weighted average interest rate, exclusive of amortization of deferred financing costs, of 1.31 % and 1.54 %, respectively. As of December 31, 2021, the Company had $ 64.0 million of borrowings under the Revolver and as of December 31, 2020, had no borrowings outstanding. The Company also incurred approximately $ 0.6 million of interest expense in connection with unused capacity during both 2021 and 2020. Additionally, for the period from December 23, 2019 to December 31, 2019, the Company incurred interest expense in connection with unused capacity of less than $ 0.1 million. 64 Table of Contents During 2021, the Company capitalized less than $ 0.1 million of interest expense associated with properties under development. No interest expense was capitalized in 2020. The Company was in compliance with all of its debt covenants as of December 31, 2021 and expects to be in compliance for the following twelve-month period. Debt Maturity Payments on the Term Loan are interest only through maturity. All outstanding amounts on the Term Loan are due on December 23, 2024. Predecessor Credit Facility and Mortgages Payable The Predecessor had a syndicated credit facility (the “Predecessor Credit Facility”) with Bank of America, N.A., acting as the administrative agent, wherein the Predecessor borrowed funds to acquire its properties. The Predecessor Credit Facility was secured by a first lien on the Predecessor's portfolio of properties. As amended, the Predecessor Credit Facility consisted of legacy term loans and a $ 30 million accordion available on or before November 22, 2019. The Predecessor Credit Facility provided for total borrowings of up to $ 289.8 million subject to the approval of the lenders. The Predecessor Credit Facility provided for interest only payments through June 4, 2019 and amortized over 30 -years thereafter (with interest rates based on LIBOR plus 2.4 % to 2.5 %). The Predecessor Credit Facility was repaid in full on December 23, 2019. The Predecessor refinanced three properties in 2017 with a $ 3.3 million term loan with LegacyTexas Bank, secured by a first lien on the properties. The loan was interest only and interest was based on LIBOR plus 3.75 %. The loan was repaid in full on December 23, 2019. The Predecessor assumed five term loans in an acquisition of five properties during 2018 with a principal amount of $ 14.1 million with Wells Fargo. The loans were fully amortized, and interest was fixed at 5.773 %. The loans were repaid in full on December 23, 2019. In accordance with the terms of the Predecessor's credit facilities, the Predecessor was required to meet certain restrictive financial covenants which, among other things, required the Predecessor to maintain certain (i) leverage, (ii) debt service coverage and (iii) liquidity ratios. Total deferred financing costs amortized on the Predecessor’s credit facilities was $ 1.0 million for the period from January 1, 2019 to December 22, 2019. This is included in interest expense on the consolidated statement of operations and comprehensive income (loss). The Predecessor incurred interest expense of $ 9.3 million in connection with its borrowings for the period from January 1, 2019 to December 22, 2019. Note 7 – Derivative Financial Instruments 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. Assessments of hedge effectiveness are performed quarterly using either a qualitative or quantitative approach. The Company recognizes the entire change in the fair value in Accumulated Other Comprehensive Income (“AOCI”) and the change is reflected as cash flow hedge changes in fair value in the supplemental disclosures of non-cash investing and financing activities in the consolidated statement of cash flows. Effective September 28, 2020, such derivatives were initiated to hedge the variable cash flows associated with Term Loan. Accordingly, the interest rate for the variable rate Term Loan is based on the hedged fixed rate (one-month) of 0.21 % compared to the variable Term Loan one-month LIBOR rate as of December 31, 2021 of 0.10 %, plus a margin of 1.15 %. The maturity date of the interest rate swaps coincide with the maturity date of the Term Loan. Amounts will subsequently be reclassified to earnings when the hedged item affects earnings. The Company does not enter into derivative contracts for speculative or trading purposes and does not have derivative netting arrangements. 65 Table of Contents The Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company evaluates counterparty credit risk through monitoring the creditworthiness of counterparties, which includes review of debt ratings and financial performance. To mitigate credit risk, the Company enters into agreements with counterparties it considers credit-worthy, such as large financial institutions with favorable credit ratings. The Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (in thousands, except number of instruments): Number of Instruments Notional Interest Rate Derivatives December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 Interest rate swaps 4 4 $ 175,000 $ 175,000 The following table presents the fair value of the Company's derivative financial instruments as well as their classification on the consolidated balance sheets as of December 31, 2021 and December 31, 2020 (in thousands): Derivative Assets Fair Value as of December 31, Derivatives Designated as Hedging Instruments: Balance Sheet Location 2021 2020 Interest rate swaps Other assets, net $ 4,310 $ 253 The following table presents the effect of the Company's interest rate swaps on the consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2021, 2020, and 2019 (in thousands): Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Derivatives in Cash Flow Hedging Relationships 2021 2020 2019 2021 2020 2019 Interest Rate Products $ 3,873 $ 227 $ 55 Interest expense, net $ ( 184 ) $ ( 26 ) $ 55 The Company did not exclude any amounts from the assessment of hedge effectiveness for the year ended December 31, 2021, 2020, and 2019. During the next twelve months, the Company estimates that an additional $ 0.5 million will be reclassified as a decrease to interest expense. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2021, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. 66 Table of Contents The table below presents the Company’s derivative assets measured at fair value on a recurring basis as of December 31, 2021 and 2020, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands): Fair Value Hierarchy Level Description Level 1 Level 2 Level 3 Total Fair Value December 31, 2021 Derivative assets $ — $ 4,310 $ — $ 4,310 December 31, 2020 Derivative assets $ — $ 253 $ — $ 253 Note 8 – Supplemental Detail for Certain Components of the Consolidated Balance Sheets Other assets, net consist of the following (in thousands): December 31, 2021 2020 Accounts receivable, net $ 2,801 $ 1,489 Deferred rent receivable 2,263 1,407 Prepaid assets 1,473 356 Earnest money deposits 853 634 Fair value of interest rate swaps 4,309 253 Deferred offering costs 615 — Deferred financing costs, net 796 1,198 Right-of-use asset 4,581 — Leasehold improvements and other corporate assets 1,657 38 Other assets, net 1,003 349 $ 20,351 $ 5,724 Accounts payable, accrued expenses and other liabilities consists of the following (in thousands): December 31, 2021 2020 Accrued expenses $ 6,254 $ 2,035 Accrued bonus 1,742 1,561 Prepaid rent 1,918 1,551 Operating lease liability 5,442 — Accounts payable 419 916 Other liabilities 1,205 245 $ 16,980 $ 6,308 Note 9 – Stockholders’ Equity, Partners’ Capital and Preferred Equity Common Stock The Private Offering resulted in net proceeds to the Company of $ 219.0 million, net of initial purchaser’s discount and placement fees of $ 13.9 million. The Private Offering resulted in the issuance of 11,797,645 shares of common stock. The Company contributed the net proceeds of $ 219.0 million from the Private Offering to the Operating Partnership in exchange for 11,797,645 Class A OP Units. 67 Table of Contents On August 17, 2020, the Company completed the initial public offering of its common stock. The Company sold 12,244,732 shares of common stock and selling stockholders sold 255,268 shares of common stock at a price of $ 18.00 per share. On September 16, 2020, the Company issued an additional 1,436,829 shares of its common stock pursuant to the underwriters' over-allotment option. The net proceeds to the Company from the initial public offering were $ 227.3 million, net of underwriting discounts and transaction costs of $ 18.9 million. The Company contributed the net proceeds to the Operating Partnership in exchange for 13,681,561 Class A OP Units. In addition, an equivalent number of Class A OP Units were issued to the Company for the 255,268 shares sold by selling stockholders. 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. The Company received net proceeds of $ 194.2 million, net of underwriting discounts and transaction costs of $ 9.4 million. The Company contributed the net proceeds to the Operating Partnership in exchange for 10,915,688 Class A OP Units. On September 1, 2021, the Company entered into a new $ 250.0 million at-the-market equity program (the “ATM Program”) through which, from time to time, it may sell shares of its common stock in registered transactions. From October 1, 2021 through November 12, 2021, the Company issued 3,852,436 shares of common stock at a weighted average price of $ 23.36 per share in connection with the ATM Program for net proceeds of approximately $ 89.0 million, net of underwriting discounts and transaction costs of $ 1.0 million. The Company contributed the net proceeds to the Operating Partnership in exchange for 3,852,436 Class A OP Units. In September 2021, the Board of Directors of the Company (the “Board”) authorized a repurchase program for up to $ 150.0 million of common stock. Repurchases of common stock may be made at management’s discretion from time to time in open market transactions, privately negotiated transactions or by other means (including through Rule 10b5-1 trading plans or one or more accelerated stock repurchase programs). The timing of share repurchases and the number of shares of common stock to be repurchased will depend upon prevailing market conditions and other factors and there can be no assurances that the Company will make any purchases under the common stock repurchase program. During the year ended December 31, 2021, portions of restricted stock unit awards granted to certain of the Company’s officers, directors and employees vested. The vesting of these awards, granted pursuant to the Omnibus Incentive Plan (as defined in “Note 10 - Stock-Based Compensation”), resulted in federal and state income tax liabilities for the recipients. As permitted by the terms of the Omnibus Incentive Plan and the award grants, certain executive officers and employees elected to surrender a total of 23 thousand shares of common stock valued at $ 0.5 million, solely to pay the associated statutory tax withholding during the year ended December 31, 2021. The surrendered shares are included in repurchase of shares of common stock on the consolidated statements of cash flows. Preferred Equity To maintain the Company’s status as a REIT, on January 27, 2020, the Company issued and sold 125 shares of 12.0 % Series A Cumulative Non-Voting Preferred Stock, par value $ 0.01 per share, for $ 1,000 per share to accredited investors pursuant to Regulation D under the Securities Act. The shares of Series A Preferred Stock may be redeemed solely at the Company’s option for consideration equal to $ 1,000 per share, plus accrued and unpaid dividends thereon to and including the date fixed for redemption, plus a redemption premium as follows (i) until December 31, 2021, $ 100 and (ii) thereafter, no redemption premium. In May 2020, the Company declared a preferred dividend of $ 51.33 per share of Series A Preferred Stock to holders of record as of June 15, 2020. The preferred dividend was settled in cash on June 30, 2020. The Company redeemed all 125 outstanding shares of Series A Preferred Stock upon the completion of the initial public offering for approximately $ 0.1 million, which included the payment of accrued dividends for the period from July 1, 2020 to August 18, 2020 and a redemption premium of $ 100 per share. As of December 31, 2020, there were no shares of preferred stock outstanding. 68 Table of Contents Dividends During the years ended December 31, 2021 and 2020, the Company declared and paid the following common stock dividends (in thousands, except per share data): Year Ended December 31, 2021 Declaration Date Dividend Per Share Record Date Total Amount Payment Date March 3, 2021 $ 0.20 March 15, 2021 $ 5,687 March 30, 2021 April 27, 2021 0.20 June 1, 2021 7,890 June 15, 2021 July 27, 2021 0.20 September 1, 2021 7,916 September 15, 2021 October 26, 2021 0.20 December 1, 2021 8,702 December 15, 2021 $ 0.80 $ 30,195 Year Ended December 31, 2020 Declaration Date Dividend Per Share Record Date Total Amount Payment Date August 18, 2020 $ 0.10 September 15, 2020 $ 2,430 September 25, 2020 October 27, 2020 0.20 December 1, 2020 5,627 December 15, 2020 $ 0.30 $ 8,057 The holders of OP Units are entitled to an equal distribution per each Class A OP Unit and Class B OP Unit held as of each record date. Accordingly, during the years ended December 31, 2021 and 2020, the Operating Partnership paid distributions of $ 1.1 million and $ 0.8 million, respectively, to holders of OP Units. For federal income tax purposes, distributions to stockholders are characterized as ordinary dividends, capital gain distributions, or nondividend distributions. Nondividend distributions will reduce U.S. stockholders’ basis (but not below zero) in their shares. The following table shows the character of the Company’s common stock distributions paid on a percentage basis for the years ended December 31, 2021 and 2020. Year Ended December 31, 2021 2020 Ordinary dividends 38.7 % 2.6 % Nondividend distributions 61.3 % 97.4 % Total 100.0 % 100.0 % Inclusive of the $ 2.4 million common stock dividend paid on September 25, 2020, was $ 0.2 million of dividends paid relating to the Company’s 2019 fiscal period. Noncontrolling Interests Noncontrolling interests represent third party holders of OP Units. OP Units are convertible into common stock as the OP Units may be redeemed for cash or, at the Company’s election, exchanged for shares of the Company’s common stock on a one-for-one basis. As of December 31, 2021 and 2020, noncontrolling interests represented 1.3 % and 5.9 %, respectively of OP Units. During the years ended December 31, 2021 and 2020, OP Unit holders redeemed 1,189,098 and 2,441,869 OP units, respectively, into shares of common stock on a one-for-one basis. Effective with the Company’s Private Offering, the Operating Partnership issued 11,797,645 Class A OP Units to the Company for its contribution and 4,449,019 OP Units ( 3,652,149 Class A and 796,870 Class B) to the Predecessor's owners for the acquisition. Class A OP Units and Class B OP Units have identical rights and preferences, except that the Class A OP Units will, and the Class B OP Units will not, be entitled to receive the special stock dividend, if applicable. Effective with the Company's initial public offering, 13,681,561 OP Units were issued to the Company in exchange for $ 227.3 million and 255,268 of OP Unit holders converted their units into common stock of the Company. 69 Table of Contents Note 10 – Stock-Based Compensation Under the NETSTREIT Corp. 2019 Omnibus Incentive Compensation Plan (the “Omnibus Incentive Plan”), 2,094,976 shares of common stock are reserved for issuance. The Omnibus Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted shares, restricted stock units, long-term incentive plan units, dividend equivalent rights, and other share-based, share-related or cash-based awards, including performance-based awards, to employees, directors and consultants, with each grant evidenced by an award agreement providing the terms of the award. The Omnibus Incentive Plan is administered by the Compensation Committee of the Board of Directors. As of December 31, 2021, the only stock-based compensation granted by the Company were restricted stock units. The total amount of stock-based compensation costs recognized in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income (loss) was $ 3.7 million and $ 2.5 million for the years ended 2021 and 2020. No stock-based compensation expense was recognized in 2019. All awards of unvested restricted stock units are expected to fully vest over the next one to five years . Performance-Based Restricted Stock Units (effectiveness of shelf registration) Pursuant to the Omnibus Incentive Plan, the Company granted performance-based restricted stock units to certain employees and non-employee directors. The performance condition required the Company to effectively file a shelf registration statement. Up until the point of filing the registration statement, performance was not deemed probable and accordingly, no restricted stock units had the capability of vesting and no stock-based compensation expense was recorded. As a result of the Company's initial public offering in August 2020, the performance condition was satisfied and the Company recorded a stock-based compensation expense catch-up adjustment of $ 1.4 million. The vesting terms of these grants are specific to the individual grant and vest in equal annual installments over the next three to four years . The following table summarizes performance-based restricted stock unit activity for the period ended December 31, 2021, 2020, and 2019: 2021 2020 2019 Shares Weighted Average Grant Date Fair Value per Share Shares Weighted Average Grant Date Fair Value per Share Shares Weighted Average Grant Date Fair Value per Share Unvested restricted stock grants outstanding, beginning of year 207,803 $ 19.75 168,353 $ 19.75 — $ — Granted during the period — — 85,441 19.75 168,353 19.75 Forfeited during the period — — ( 11,391 ) 19.75 — — Vested during the period ( 50,423 ) 19.75 ( 34,600 ) 19.75 — — Unvested restricted stock grants outstanding, end of year 157,380 $ 19.75 207,803 $ 19.75 168,353 $ 19.75 For the years ended 2021 and 2020, the Company recognized $ 1.2 million and $ 2.2 million, respectively, in stock-based compensation expense associated with performance-based restricted stock units. No stock-based compensation expense was recognized in 2019. As of December 31, 2021, the remaining unamortized stock-based compensation expense totaled $ 1.3 million which is expected to be recognized over a weighted average period of 2.1 years. These units are subject to graded vesting and amortization is recognized ratably over the requisite service period for each vesting tranche in the award. The weighted average grant date fair value of unvested restricted units is calculated as the per share price determined in the Private Offering. Service-Based Restricted Stock Units Pursuant to the Omnibus Incentive Plan, the Company has granted service-based restricted stock units to certain employees and non-employee directors. The vesting terms of these grants are specific to the individual grant and vest in equal annual installments over the next two to five years . 70 Table of Contents The following table summarizes service-based restricted stock unit activity for the period ended December 31, 2021 and 2020: 2021 2020 Shares Weighted Average Grant Date Fair Value per Share Shares Weighted Average Grant Date Fair Value per Share Unvested restricted stock grants outstanding, beginning of year 169,793 $ 18.00 — $ — Granted during the period 167,454 17.71 169,793 18.00 Forfeited during the period ( 7,673 ) 17.93 — — Vested during the period ( 34,367 ) 18.00 — — Unvested restricted stock grants outstanding, end of year 295,207 $ 17.84 169,793 $ 18.00 For the years ended 2021 and 2020, the Company recognized $ 1.6 million and $ 0.2 million, respectively, in stock-based compensation expense associated with service-based restricted stock units. No stock-based compensation expense was recognized in 2019. As of December 31, 2021, the remaining unamortized stock-based compensation expense totaled $ 4.1 million which is expected to be recognized over a weighted average period of 3.0 years. Amortization is recognized on a straight-line basis over the total requisite service period for the entire award. The grant date fair value of service based unvested restricted units was calculated as the per share price determined in the initial public offering for awards granted in 2020 and as the per share price of the Company’s stock on the date of grant for those granted in 2021. Performance-Based Restricted Stock Units (total shareholder return) Pursuant to the Omnibus Incentive Plan, the Company granted performance-based restricted stock units to certain employees. These grants are subject to the participant’s continued service over a three year period with 40 % of the award based on the Company’s total shareholder return (“TSR”) as compared to the TSR of 33 peer companies and 60 % of the award based on total absolute TSR over the cumulative three year period. The performance period of these grants runs through March 8, 2024. Grant date fair value of the performance-based share awards was calculated using the Monte Carlo simulation model, which incorporated stock price volatility of the Company and each of the Company’s peers and other variables over the performance period. Significant inputs for the calculation were expected volatility of the Company of 42.8 % and expected volatility of the Company's peers, ranging from 28.7 % to 90.7 %, with an average volatility of 46.3 % and a risk-free interest rate of 0.34 %. The fair value per share on the grant date specific to the target TSR relative to the Company’s peers was $ 20.18 and the target absolute TSR was $ 16.46 for a weighted average grant date fair value of $ 17.77 per share. Stock-based compensation expense associated with unvested performance-based share awards is recognized on a straight-line basis over the minimum required service period, which is three years . The following table summarizes performance-based restricted stock unit activity for the period ended December 31, 2021 and 2020: 2021 2020 Shares Weighted Average Grant Date Fair Value per Share Shares Weighted Average Grant Date Fair Value per Share Unvested restricted stock grants outstanding, beginning of year — $ — — $ — Granted during the period 135,766 17.77 — — Forfeited during the period ( 1,299 ) 17.77 — — Vested during the period — — — — Unvested restricted stock grants outstanding, end of year 134,467 $ 17.77 — $ — For the year ended 2021, the Company recognized $ 0.6 million in stock-based compensation expense associated with performance-based restricted stock units. No stock-based compensation expense was recognized in 2020 or 2019. As of December 31, 2021, the remaining unamortized stock-based compensation expense totaled $ 1.8 million and as of December 31, 2021, these awards are expected to be recognized over a remaining weighted average period of 2.2 years. 71 Table of Contents Alignment of Interest Program During March 2021, the Company adopted the Alignment of Interest Program (the “Program”), which allows employees to elect to receive a portion of their 2021 bonus in unvested restricted stock units in the first quarter of 2022 that would vest over a four-year service period beginning April 1, 2021. The Program is deemed to be a liability-classified award (accounted for as an equity-classified award as the service date precedes the grant date and the award would otherwise by classified as equity on grant date), which will be fair-valued and accrued over the applicable service period beginning April 1, 2021. The total estimated fair value of the Program as of December 31, 2021 was approximately $ 1.0 million. The award will be remeasured to fair value each reporting period. For the year ended December 31, 2021, the Company recognized approximately $ 0.2 million in stock-based compensation expense associated with this award. Note 11 – Earnings Per Share Net income (loss) per common share has been computed pursuant to the guidance in the FASB ASC Topic 260, Earnings per Share. Basic earnings per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is similarly calculated except that the denominator is increased by using the treasury stock method to determine the potential dilutive effect of the Company’s outstanding unvested restricted stock units and using the if-converted method to determine the potential dilutive effect of the OP Units. The Company has noncontrolling interests in the form of OP Units which are convertible into common stock and represent potentially dilutive securities, as the OP Units may be redeemed for cash or, at the Company’s election, exchanged for shares of the Company’s common stock on a one-for-one basis. The following table is a reconciliation of the numerator and denominator used in the computation of basic and diluted net income (loss) per common share for the years ended December 31, 2021 and 2020 and for the period from December 23, 2019 to December 31, 2019. Net income per share information is not applicable for the reporting periods prior to December 23, 2019. Successor Year Ended December 31, For the Period from December 23 to December 31, (in thousands, except share and per share data) 2021 2020 2019 Numerator: Net income (loss) $ 3,150 $ 212 $ 42 Net (income) loss attributable to noncontrolling interests ( 104 ) 518 ( 14 ) Preferred stock dividends — ( 42 ) — Net income (loss) attributable to common shares, basic 3,046 688 28 Net income (loss) attributable to noncontrolling interest ( 104 ) 518 ( 14 ) Net income (loss) attributable to common shares, diluted $ 3,150 $ 170 $ 42 Denominator: Weighted average common shares outstanding, basic 36,999,459 17,322,182 8,860,760 Effect of dilutive shares for diluted net income per common share: OP Units 1,377,335 3,807,022 — Unvested RSUs 295,771 28,792 — Weighted average common shares outstanding, diluted 38,672,565 21,157,996 8,860,760 Net income (loss) available to common stockholders per common share, basic $ 0.08 $ 0.04 $ — Net income (loss) loss available to common stockholders per common share, diluted $ 0.08 $ 0.01 $ — As of December 31, 2021 and 2020, there were 562,784 and 1,751,882 of OP Units outstanding, respectively. 72 Table of Contents Note 12 – Commitments and Contingencies Litigation and Regulatory Matters In the ordinary course of business, from time to time, the Company may be subject to litigation, claims and regulatory matters, none of which are currently outstanding, which the Company believes could have, individually or in the aggregate, a material adverse effect on its business, financial condition or results of operations, liquidity or cash flows. Environmental Matters The Company is subject to environmental regulations related to the ownership of real estate. The cost of complying with the environmental regulations was not material to the Company’s results of operations for any of the periods presented. The Company is not aware of any environmental condition on any of its properties that is likely to have a material adverse effect on the consolidated financial statements when the fair value of such liability can be reasonably estimated and is required to be recognized. Commitments 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. Additionally, as of December 31, 2021, the Company had commitments to fund nine properties under development totaling $ 21.6 million, all of which is expected to be funded over the next 12 months. In August 2021, the Company entered into a lease agreement on a new corporate office space, which is classified as an operating lease. The Company began operating out of the new office in February 2022. The Company expects to incur approximately $ 0.5 million of additional improvement, furniture and fixtures, and computer and computer related equipment costs in the first quarter of 2022. The lease has an initial noncancellable term of 10.5 years that expires on July 31, 2032 and is renewable at the Company’s option for two additional periods of five years . Future minimum base rental payments under the lease are outlined in “Note - 3 - Leases.” Annual rent expense, excluding operating expenses, is expected to be approximately $ 0.5 million during the initial term. The Company incurred significant damages to a property in Houma, Louisiana as a result of Hurricane Ida making landfall in August 2021. Repair and replacement costs are expected to be approximately $ 1.1 million which is covered by insurance, less the Company’s $ 0.1 million deductible. The Company has incurred approximately $ 0.9 million of costs as of December 31, 2021. As of December 31, 2021, the Company did not have any other material commitments for re-leasing costs, recurring capital expenditures, non-recurring building improvements, or similar types of costs. Note 13 – Related-Party Transactions Successor Transactions Effective with the Private Offering and commencement of the Company’s operations on December 23, 2019, the Company executed a facilities agreement with a subsidiary of EB Arrow Holdings, LLC, which was subsequently amended in April 2021 and ultimately terminated in July 2021. Under the facilities agreement, the Company shared in office rent by paying a fixed monthly rate and office related expenses based on employee headcount. For the years ended 2021, 2020, and 2019, the Company incurred approximately $ 0.1 million, $ 0.2 million, and less than $ 0.1 million, respectively, in related expenses. Predecessor Transactions The Predecessor’s fees paid and accrued to the benefit of related parties for the for the period from January 1, 2019 to December 22, 2019 are as follows (amounts in thousands): Entity Transaction Type For the Period from January 1 to December 22, EverSTAR IVF V GP, LLC Asset management fees $ 2,767 EBA EverSTAR, LLC Disposition fees 909 EBA EverSTAR, LLC Acquisition fees 18 73 Table of Contents Note 14 – Subsequent Events The Company has evaluated all events that occurred subsequent to December 31, 2021 through the date on which these consolidated financial statements were issued to determine whether any of these events required disclosure in the financial statements. Common Stock Dividend On February 22, 2022, the Company's Board of Directors declared a cash dividend of $ 0.20 per share for the first quarter of 2022. The dividend will be paid on March 30, 2022 to stockholders of record on March 15, 2022. Real Estate Investment Activity Since December 31, 2021, the Company acquired or provided funding to seven properties for $ 60.6 million, which includes capitalized transaction costs. Public Offering and Forward Sale of the Company’s Common Stock On January 13, 2022, the Company completed a public offering of 10,350,000 shares of common stock at a public offering price of $ 22.25 per share. In connection with the offering, the Company entered into forward sale agreements for 10,350,000 shares of its common stock. The Company did not initially receive any proceeds from the sale of shares of common stock by the forward purchasers. The Company expects to physically settle the forward sale agreements (by delivery of shares of common stock) and receive proceeds from the sale of those shares upon one or more forward settlement dates, which shall occur no later than January 10, 2023. The Company may also elect to cash settle or net share settle all or a portion of its obligations under a forward sale agreement if it concludes it is in its best interest to do so. If the Company elects to cash settle a forward sale agreement, it may not receive any proceeds and it may owe cash to the relevant counterparty in certain circumstances. No physical settlement has occurred through the date on which these consolidated financial statements were issued. Revolver Borrowing In January 2022, the Company borrowed $ 53.0 million on the Revolver which will be used for general corporate purposes, including the acquisition of properties in the Company’s pipeline. OP Unit Conversions to Common Stock There were 11,391 OP Units redeemed for shares of common stock on a one-for-one basis subsequent to December 31, 2021. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.