What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-27 compared with 2022-07-28 · 148 added, 126 removed, 245 unchanged (53% of the section changed)

21 unchanged sentences

See “Note 2 – Summary of Significant Accounting Policies” to our condensed consolidated financial statements included herein.

The Company’s operations and cash flows for the three and six months ended June 30, 2022 and 2021 were not materially impacted by COVID-19.

(1) Annualized base rent, or ABR, is calculated by multiplying (i) cash rental payments (a) for the month ended June 30, 2022 (or, if applicable, the next full month's cash rent contractually due in the case of rent abatements, rent deferrals, recently acquired properties and properties with contractual rent increases, other than properties under development) for leases in place as of June 30, 2022, plus (b) for properties under development, the first full month's permanent cash rent contractually due after the development period by (ii) 12.

Financing Activities

The Company’s operations and cash flows for the three and nine months ended September 30, 2022 and 2021 were not materially impacted by COVID-19.

(1) Annualized base rent, or ABR, is calculated by multiplying (i) cash rental payments (a) for the month ended September 30, 2022 (or, if applicable, the next full month's cash rent contractually due in the case of rent abatements, rent deferrals, recently acquired properties and properties with contractual rent increases, other than properties under development) for leases in place as of September 30, 2022, plus (b) for properties under development, the first full month's permanent cash rent contractually due after the development period by (ii) 12.

2022 Debt Refinancing Transaction

On August 11, 2022, we entered into a credit agreement (the “New Credit Agreement”) related to the sustainability-linked senior unsecured credit facility consisting of (i) a $200.0 million senior unsecured term loan (the “2028 Term Loan”) and (ii) a $400.0 million senior unsecured revolving credit facility (the “New Revolver”, and together with the 2028 Term Loan, the “New Credit Facility”).

The New Credit Facility may be increased by $400.0 million in the aggregate.

The New Revolver refinanced and upsized our existing $250.0 million senior unsecured revolving credit facility (“Prior Revolver”) pursuant to the credit agreement, dated as of December 23, 2019, governing such facility (the “Prior Credit Agreement”).

The proceeds of the loans under the New Credit Facility will be used by us and our subsidiaries for general corporate purposes, including acquisitions in our pipeline.

We used the proceeds from the borrowings made on the closing date to repay in full our Prior Revolver.

Our $175.0 million senior unsecured term loan (“2024 Term Loan”) under the Prior Credit Agreement, which matures in December 2024, remained outstanding upon the closing of the New Credit Facility.

The 2028 Term Loan matures on February 11, 2028 and the New Revolver matures on August 11, 2026, subject to extension of up to one year.

Borrowings under the New Credit Facility are repayable at our option in whole or in part without premium or penalty.

Borrowings under the New Revolver may be repaid and reborrowed from time to time prior to the maturity date.

January 2022 Follow-On Offering

On January 13, 2022, we completed a registered 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, we entered into forward sale agreements for 10,350,000 shares of our common stock.

We did not initially receive any proceeds from the sale of shares of common stock by the forward purchasers.

We expect to physically settle the forward sale agreements (by the 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.

We may also elect to cash settle or net share settle all or a portion of our obligations under a forward sale agreement if we conclude it is in our best interest to do so.

If we elect to cash settle a forward sale agreement, we may not receive any proceeds and may owe cash to the relevant forward counterparty in certain circumstances.

In connection with the offering, we entered into forward sale agreements for 10,350,000 shares of common stock.

As of September 30, 2022, we fully physically settled the forward sale agreements (by the delivery of shares of common stock) as follows:

• On September 29, 2022 we settled 4,512,003 shares of common stock at a price of $22.25 per share in accordance with the forward sale agreements.

We received net proceeds from the offering of $93.5 million, net of underwriting discounts and offering costs of $6.9 million.

• On June 23, 2022, we settled 2,397,035 shares of common stock at a price of $22.25 per share in accordance with the forward sale agreements.

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We received net proceeds from the offering of $72.0 million, net of underwriting discounts and offering costs of $4.6 million.

August 2022 Follow-On Offering

On August 8, 2022, we completed a registered public offering of 9,000,000 shares of common stock at a public offering price of $20.20 per share which excluded an over-allotment option to the underwriters to purchase an additional 1,350,000 shares, which was exercised on August 10, 2022.

In connection with the offering, we entered into forward sale agreements for 10,350,000 shares of common stock.

We did not initially receive any proceeds from the sales of shares of common stock by the forward purchasers upon registration of the offering.

We may also elect to cash settle or net share settle all or a portion of our obligations under a forward sale agreement if we conclude it is in our best interest to do so over the prescribed offering period.

If we elect to cash settle a forward sale agreement, we may not receive any proceeds and may owe cash to the relevant forward counterparty in certain circumstances.

As of September 30, 2022, 10,350,000 shares remained unsettled under the August 8, 2022 forward sale agreements.

On September 1, 2021, we entered into a $250.0 million at-the-market equity program (the “ATM Program”) through which, from time to time, we may sell shares of our common stock in registered transactions.

During the first two quarters of 2022, we issued 163,774 shares of common stock at a weighted average price of $22.08 per share in connection with the ATM Program for net proceeds of approximately $3.5 million, net of sales commissions and offering costs of less than $0.1 million.

During the nine months ended September 30, 2022, we issued 163,774 shares of common stock at a weighted average price of $22.08 per share in connection with the ATM Program for net proceeds of approximately $3.5 million, net of sales commissions and offering costs of less than $0.1 million.

Results of Operations

The Company continued to grow its assets held for investment during the first half of 2022 by increasing its property portfolio from 328 properties as of December 31, 2021 to 384 properties as of the end of June 30, 2022.

This includes six real estate development projects owned by the Company and two properties fully collateralized by an investment in mortgage loan receivables.

This growth was financed through the settlement of shares of common stock through our forward sale agreements in an amount of $122.0 million, the issuance of common stock under the ATM Program in an amount of $3.5 million, and net borrowings of $173.0 million on our Revolver during the six months ended June, 30, 2022.

During the three months ended June 30, 2022, we acquired 22 properties for a total purchase price of $117.3 million, including $0.7 million of capitalized acquisition costs.

The Company continued to grow its assets held for investment during the nine months ended September 30, 2022 by increasing its property portfolio from 328 properties as of December 31, 2021 to 409 properties as of the end of September 30, 2022.

This includes six real estate development projects owned by the Company and two properties fully collateralized by investments in mortgage loans receivable.

This growth was financed through the settlement of shares of common stock through our forward sale agreements in an amount of $215.5 million, the issuance of common stock under the ATM Program in an amount of $3.5 million, and net borrowings of $149.0 million on our revolving credit facilities during the nine months ended September 30, 2022.

During the three months ended September 30, 2022, we acquired 26 properties for a total purchase price of $121.7 million, including $1.3 million of capitalized acquisition costs.

The acquisitions were all accounted for as asset acquisitions.

These properties are located in 14 states with a WALT of approximately 11.8 years.

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

During the six months ended June, 30, 2022, we acquired 56 properties for a total purchase price of $207.3 million million, including $1.9 million of capitalized acquisition costs.

The underwritten weighted-average capitalization rate on the Company’s third quarter acquisitions was approximately 6.6%.

During the nine months ended September 30, 2022, we acquired 82 properties for a total purchase price of $329.0 million, including $3.2 million of capitalized acquisition costs.

The acquisitions were all accounted for as asset acquisitions.

1 unchanged sentence

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

During the three months ended June 30, 2022, we invested $4.6 million in our property developments and completed three developments projects, reclassifying approximately $9.8 million from property under development to land, building, and improvements in the accompanying condensed consolidated balance sheets.

During the six months ended June, 30, 2022, we invested $9.6 million in our property developments, including the acquisition of one new build-to-suit project with an initial purchase price of $1.0 million.

During the six months ended June, 30, 2022, we

completed development on four projects and reclassified approximately $14.7 million from property under development to land, building, and improvements in the accompanying condensed consolidated balance sheets.

The remaining six 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 condensed consolidated balance sheets of June 30, 2022.

During the three months ended June 30, 2022, we sold two properties for a total sales price, net of disposal costs, of $9.9 million, recognizing a gain of $1.9 million on the sales.

During the six months ended June, 30, 2022, we sold three properties for a total sales price, net of disposal costs, of $12.2 million, recognizing a gain of $2.0 million on the sales.

Investment in Mortgage Loan Receivables

During the three months ended September 30, 2022, we invested $4.7 million in our property developments.

During the nine months ended September 30, 2022, we invested $14.3 million in our property developments, including the acquisition of one new build-to-suit project with an initial purchase price of $1.0 million.

In addition, we completed development on four projects and reclassified approximately $14.7 million from property under development to land, building, and improvements in the accompanying condensed consolidated balance sheets.

The remaining six developments are expected to be substantially completed with rent commencing at various points through the first quarter of 2023.

The purchase price, including acquisitions costs, and subsequent development are included in property under development in the accompanying condensed consolidated balance sheets as of September 30, 2022.

During the three months ended September 30, 2022, we sold one property for a total sales price, net of disposal costs, of $1.7 million, recognizing a gain of $0.1 million.

During the nine months ended September 30, 2022, we sold four properties for a total sales price, net of disposal costs, of $13.8 million, recognizing a gain of $2.2 million.

Investment in Mortgage Loans Receivable

On January 26, 2022, we executed a fully collateralized $40.3 million loan receivable with a stated interest rate of 6.0%.

1 unchanged sentence

The loan receivable is collateralized by real estate that is leased by three separate investment-grade tenants.

The funds provided under the loan, in addition to loan origination costs of $0.1 million, are included in loan receivables, net in the accompanying condensed consolidated balance sheets as of June 30, 2022.

The funds provided under the loan, in addition to loan origination costs of $0.1 million, are included in loans receivable, net in the accompanying condensed consolidated balance sheets as of September 30, 2022.

On June 30, 2022, we executed a fully collateralized $6.0 million loan receivable with a stated interest rate of 6.5%.

1 unchanged sentence

The loan receivable is collateralized by real estate that is leased by two separate tenants, one of which is an investment grade profile tenant.

The funds provided under the loan, in addition to loan origination costs of less than $0.1 million, are included in loan receivables, net in the accompanying condensed consolidated balance sheets as of June 30, 2022.

Three Months Ended June 30, 2022 Compared with Three Months Ended June 30, 2021

The funds provided under the loan, in addition to loan origination costs of less than $0.1 million, are included in loans receivable, net in the accompanying condensed consolidated balance sheets as of September 30, 2022.

Three Months Ended September 30, 2022 Compared with Three Months Ended September 30, 2021

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

Three Months Ended

September 30,

Rental revenue (including reimbursable) $ 24,339 $ 15,603

Interest income on mortgage loan receivables 586 —

Interest income on mortgage loans receivable 674 —

Total revenues 25,013 15,603

3 unchanged sentences

Depreciation and amortization 13,407 8,074

Provisions for impairment 1,114 3,469

Transaction costs 51 132

3 unchanged sentences

Gain on sales of real estate, net 143 1,955

Other income 36 —

Total other income (expense), net (2,874) 1,060

Net income (loss) before income taxes 2,103 (2,630)

Net income before income taxes 1,590 2,944

Income tax expense (171) —

Net income (loss) $ 2,010 $ (2,630)

Revenue for the three months ended June 30, 2022 increased by $8.8 million to $22.6 million from $13.8 million for the three months ended June 30, 2021.

This is primarily due to an increase in the real estate portfolio from 203 operating properties as of January 1, 2021 to 376 operating properties as of June 30, 2022.

The increase includes an increase in cash rental receipts of $6.9 million, combined with net increases of property expense reimbursements of $1.2 million, of which $0.6 million was related to tax reimbursements and $0.5 million was related to reimbursable maintenance expenses, and an increase of $0.6 million related to interest income on mortgage loan receivables.

Net income $ 1,419 $ 2,944

Revenue for the three months ended September 30, 2022 increased by $9.4 million to $25.0 million from $15.6 million for the three months ended September 30, 2021.

This is primarily due to an increase in the real estate portfolio from 264 operating properties as of July 1, 2021 to 401 operating properties as of September 30, 2022.

The increase includes an increase in cash rental receipts of $7.8 million, combined with net increases of property expense reimbursements of $0.7 million, of which $0.5 million was related to tax reimbursements, an increase of $0.7 million related to interest income on mortgage loans receivable, an increase of $0.1 million related to straight-line rental revenue, and an increase of $0.3 million related to amortization of above- and below-market lease related intangible assets, offset by a decrease of $0.1 million related to amortization of lease incentives.

Total Operating Expenses.

Total expenses increased by $4.9 million to $20.9 million for the three months ended June 30, 2022 as compared to $16.0 million for the three months ended June 30, 2021.

The increase in operating expenses is primarily attributed to the increase in the number of operating properties with the most significant increases being depreciation and amortization expense, property-specific reimbursable expenses, stock-based compensation, and other general and administrative expenses associated with our growth, offset by fewer provisions for impairment.

Total expenses increased by $6.8 million to $20.5 million for the three months ended September 30, 2022 as compared to $13.7 million for the three months ended September 30, 2021.

Total operating expenses include the following:

• Property Expenses.

Property expenses increased $1.4 million to $2.7 million for the three months ended June 30, 2022 from $1.3 million for the three months ended June 30, 2021.

Property expenses increased $0.8 million to $2.5 million for the three months ended September 30, 2022 from $1.7 million for the three months ended September 30, 2021.

The increase is primarily attributed to the increase in the real estate portfolio from 264 to 401 operating properties.

The largest increases are from reimbursable property taxes of $0.6 million, reimbursable maintenance expense of $0.3 million, and non-reimbursable expenses of $0.3 million.

The largest increases are from reimbursable property taxes of $0.5 million, reimbursable insurance expense of $0.2 million, and non-reimbursable insurance expense of $0.1 million, offset by a $0.2 million decrease in reimbursable maintenance expense.

• General and Administrative Expenses.

General and administrative expenses increased $0.9 million to $4.9 million for the three months ended June 30, 2022 from $4.0 million for the three months ended June 30, 2021.

The increase is primarily due to an increase in stock-based compensation expense of $0.3 million, an increase of in payroll expenses of $0.2 million, and increases in professional and consulting expenses of $0.4 million.

General and administrative expenses increased $0.8 million to $4.6 million for the three months ended September 30, 2022 from $3.8 million for the three months ended September 30, 2021.

The increase is primarily due to an increase in stock-based compensation expense of $0.3 million and an increase in payroll expenses of $0.3 million.

• Depreciation and Amortization.

Depreciation and amortization expense increased $4.7 million to $11.8 million for the three months ended June 30, 2022 from $7.1 million for the three months ended June 30, 2021.

The increase in depreciation and amortization is proportionate to the increase in the size of the portfolio over the comparable period primarily with associated increases in building depreciation expense of $2.0 million, in-place lease amortization expense of $1.6 million, building improvements depreciation expense of $0.8 million, and leasehold improvement depreciation expense of $0.2 million.

• Provision for Impairment.

For the three months ended June 30, 2022, we recorded a provision for impairment of $1.1 million on one property which was also sold during the period.

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

These impairments and subsequent disposals relate to our plan of strategically identifying properties that can be re-leased or disposed of in an effort to improve returns and manage risk exposure.

Depreciation and amortization expense increased $5.3 million to $13.4 million for the three months ended September 30, 2022 from $8.1 million for the three months ended September 30, 2021.

The increase in depreciation and amortization is proportionate to the increase in the size of the portfolio over the comparable period primarily with associated increases in building depreciation expense of $2.4 million, in-place lease amortization expense of $1.8 million, and building improvements depreciation expense of $1.0 million.

• Transaction costs.

Transaction costs increased by $0.3 million to $0.5 million for the three months ended June 30, 2022 from $0.2 million for the three months ended June 30, 2021 which primarily relate to costs incurred for abandoned acquisitions.

Transaction costs decreased by less than $0.1 million for the three months ended September 30, 2022 from $0.1 million for the three months ended September 30, 2021 which primarily relates to decreases in costs incurred for abandoned acquisitions.

Interest Expense.

Interest expense increased by $0.6 million to $1.5 million for the three months ended June 30, 2022 from $0.9 million for the three months ended June 30, 2021.

An increase of $0.8 million is primarily due to the increase in the average balances outstanding under the Revolver (as defined in “Note 6 – Debt” to our condensed consolidated financial statements), offset by a $0.1 million decrease in facilities fees incurred for unused capacity, further offset by an increase in capitalized interest on our property developments.

Interest expense increased by $2.1 million to $3.0 million for the three months ended September 30, 2022 from $0.9 million for the three months ended September 30, 2021.

An increase of $0.8 million is attributed to the increase in the average balances outstanding under the Prior Revolver, an increase of $1.1 million and $0.4 million is attributed to interest incurred under the New Revolver and 2028 Term Loan, respectively, as a result of the New Credit Agreement, and an increase of $0.1 million is attributed to deferred financing cost amortization as a result of the New Credit Facility.

This is offset by $0.2 million less of facility fees incurred for unused capacity and $0.1 million of increased capitalized interest on our property developments.

Gain on sales of real estate, net.

Net gain on sales of real estate increased by $1.4 million to $1.9 million for the three months ended June 30, 2022 from $0.5 million for the three months ended June 30, 2021.

Net gain on sales of real estate decreased by $1.9 million to $0.1 million for the three months ended September 30, 2022 from $2.0 million for the three months ended September 30, 2021.

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

Three Months Ended

September 30,

Number of properties sold 1 4

1 unchanged sentence

Gain on sales of real estate, net $ 143 $ 1,955

Net income (loss).

Net income (loss) increased $4.6 million to $2.0 million for the three months ended June 30, 2022 from a net loss of $2.6 million for the three months ended June 30, 2021.

Net income (loss) increased primarily due to the growth in the size of our real estate investment portfolio, which generated additional rental revenues, including interest income associated with our mortgage loan receivables, in addition to decreases in provisions for impairment, and an increase associated with net gains on the sale of real estate, offset by the impact of increases in depreciation and amortization expenses, increases in interest expense, and to increases in general and administrative expenses, as set forth above.

Six Months Ended June 30, 2022 Compared with Six Months Ended June 30, 2021

Income tax expense.

Income tax expense increased by $0.2 million for the three months ended September 30, 2022.

The increase relates to provisions for federal and state income taxes on the financial results of NETSTREIT Management TRS, LLC (“NETSTREIT TRS”).

Net income decreased $1.5 million to $1.4 million for the three months ended September 30, 2022 from a net income of $2.9 million for the three months ended September 30, 2021.

Net income decreased primarily due to a decrease associated with net gains on the sale of real estate, the impact of increases in depreciation and amortization expenses, increases in interest expense, and increases in general and administrative expenses, as set forth above, offset by increases attributed to the growth in the size of our real estate investment portfolio, which generated additional rental revenues, including interest income associated with our mortgage loans receivable.

Nine Months Ended September 30, 2022 Compared with Nine Months Ended September 30, 2021

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

Six Months Ended

Nine Months Ended

September 30,

Rental revenue (including reimbursable) $ 67,309 $ 41,333

Interest income on mortgage loan receivables 997 —

Interest income on mortgage loans receivable 1,671 —

Total revenues 68,980 41,333

10 unchanged sentences

Other income 36 —

Total other income (expense), net (636) (1,302)

Net income (loss) before income taxes 4,160 (1,839)

Total other expense, net (3,510) (241)

Net income before income taxes 5,751 1,105

Income tax expense (356) (50)

Net income (loss) 3,976 (1,889)

Revenue for the six months ended June 30, 2022 increased by $18.3 million to $44.0 million from $25.7 million for the six months ended June 30, 2021.

This is primarily due to an increase in the real estate portfolio from 203 operating properties as of January 1, 2021 to 376 operating properties as of June 30, 2022.

The increase includes an increase in cash rental receipts of $13.6 million, combined net increases of property expense reimbursements of $3.0 million, of which $1.4 million was related to tax reimbursements and $1.4 million was related to reimbursable maintenance expenses, an increase of $1.0 million related to interest income on mortgage loan receivables, and an increase of $0.7 million was related to straight-line rental revenue.

Net income $ 5,395 $ 1,055

Revenue for the nine months ended September 30, 2022 increased by $27.7 million to $69.0 million from $41.3 million for the nine months ended September 30, 2021.

This is primarily due to an increase in the real estate portfolio from 203 operating properties as of January 1, 2021 to 401 operating properties as of September 30, 2022.

The increase includes an increase in cash rental receipts of $21.4 million, combined net increases of property expense reimbursements of $3.7 million, of which $1.9 million was related to tax reimbursements, $1.4 million was related to reimbursable maintenance expenses, and $0.4 million was related to reimbursable insurance expenses, an increase of $1.7 million related to interest income on mortgage loans receivable, an increase of $0.8 million related to straight-line rental revenue, and an increase of $0.4 million related to amortization of above- and below-market lease related intangible assets, offset by a decrease of $0.4 million related to amortization of lease incentives.

Total Operating Expenses.

Total expenses increased by $12.9 million to $39.2 million for the six months ended June 30, 2022 as compared to $26.3 million for the six months ended June 30, 2021.

Total expenses increased by $19.7 million to $59.7 million for the nine months ended September 30, 2022 as compared to $40.0 million for the nine months ended September 30, 2021.

1 unchanged sentence

• Property Expenses.

Property expenses increased $3.3 million to $5.6 million for the six months ended June 30, 2022 from $2.3 million for the six months ended June 30, 2021.

Property expenses increased $4.2 million to $8.2 million for the nine months ended September 30, 2022 from $4.0 million for the nine months ended September 30, 2021.

The increase is primarily attributed to the increase in the real estate portfolio from 203 to 401 operating properties.

The largest increases are from reimbursable property taxes of $1.4 million and reimbursable maintenance expense of $1.0 million.

The largest increases are from reimbursable property taxes of $1.9 million, reimbursable maintenance expense of $1.2 million, reimbursable insurance expense of $0.4 million, and a combined net increase in non-reimbursable expenses of $0.7 million.

• General and Administrative Expenses.

General and administrative expenses increased $2.0 million to $9.1 million for the six months ended June 30, 2022 from $7.1 million for the six months ended June 30, 2021.

The increase is primarily due to an increase in stock-based compensation expense of $0.7 million, an increase of in payroll expenses of $0.2 million, increases in professional and consulting expenses of $0.5 million, and additional combined net increases in other general expenses of $0.6 million.

General and administrative expenses increased $2.7 million to $13.6 million for the nine months ended September 30, 2022 from $10.9 million for the nine months ended September 30, 2021.

The increase is primarily due to an increase in stock-based compensation expense of $1.0 million, an increase of in payroll expenses of $0.5 million, increases in professional and consulting expenses of $0.5 million, an increase of $0.2 million in corporate office rent, and additional combined net increases in other general expenses of $0.5 million.

• Depreciation and Amortization.

Depreciation and amortization expense increased $9.7 million to $22.7 million for the six months ended June 30, 2022 from $13.0 million for the six months ended June 30, 2021.

The increase in depreciation and amortization is proportionate to the increase in the size of the portfolio over the comparable period primarily with associated increases in building depreciation expense of $4.1 million, in-place lease amortization expense of $3.4 million, building improvements depreciation expense of $1.7 million, and leasehold improvement depreciation expense of $0.3 million.

Depreciation and amortization expense increased $15.0 million to $36.1 million for the nine months ended September 30, 2022 from $21.1 million for the nine months ended September 30, 2021.

The increase in

depreciation and amortization is proportionate to the increase in the size of the portfolio over the comparable period primarily with associated increases in building depreciation expense of $6.5 million, in-place lease amortization expense of $5.2 million, building improvements depreciation expense of $2.7 million, and leasehold improvement depreciation expense of $0.5 million.

• Provision for Impairment.

For the six months ended June 30, 2022, we recorded a provision for impairment of $1.1 million on one property which was also sold during the period.

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

For the nine months ended September 30, 2022, we recorded a provision for impairment of $1.1 million on one property which was also sold during the period.

For the nine months ended September 30, 2021, we recorded a provision for impairment of $3.5 million on three properties, all of which were previously classified as held-for-sale and sold before September 30, 2021.

These impairments and subsequent disposals relate to our plan of strategically identifying properties that can be re-leased or disposed of in an effort to improve returns and manage risk exposure.

• Transaction costs.

Transaction costs increased by $0.4 million to $0.7 million for the six months ended June 30, 2022 from $0.3 million for the six months ended June 30, 2021 which primarily relate to costs incurred for abandoned acquisitions.

Transaction costs increased by $0.2 million to $0.7 million for the nine months ended September 30, 2022 from $0.5 million for the nine months ended September 30, 2021 which primarily relate to costs incurred for abandoned acquisitions.

Interest Expense.

Interest expense increased by $0.9 million to $2.7 million for the six months ended June 30, 2022 from $1.8 million for the six months ended June 30, 2021.

An increase of $1.2 million is primarily due to the increase in the average balances outstanding under the Revolver (as defined in “Note 6 – Debt” to our condensed consolidated financial statements), offset by a $0.2 million decrease in facilities fees incurred for unused capacity, further offset by an increase of $0.1 million in capitalized interest on our property developments.

Interest expense increased by $3.0 million to $5.7 million for the nine months ended September 30, 2022 from $2.7 million for the nine months ended September 30, 2021.

An increase of $2.0 million is attributed to the increase in the average balances outstanding under the Prior Revolver, an increase of $1.1 million and $0.4 million is attributed to interest incurred under the New Revolver and 2028 Term Loan, respectively, as a result of the New Credit Agreement, and an increase of $0.1 million is attributed to deferred financing cost amortization as a result of the New Credit Facility.

This is offset by $0.4 million less of facility fees incurred for unused capacity and $0.2 million of increased capitalized interest on our property developments.

Gain on sales of real estate, net.

Net gain on sales of real estate increased by $1.5 million to $2.0 million for the six months ended June 30, 2022 from $0.5 million for the six months ended June 30, 2021.

Net gain on sales of real estate decreased by $0.3 million to $2.2 million for the nine months ended September 30, 2022 from $2.5 million for the nine months ended September 30, 2021.

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

Six Months Ended

Nine Months Ended

September 30,

Number of properties sold 4 9

1 unchanged sentence

Gain on sales of real estate, net $ 2,162 $ 2,452

Net income (loss).

Net income (loss) increased $5.9 million to $4.0 million for the six months ended June 30, 2022 from a net loss of $1.9 million for the six months ended June 30, 2021.

Income tax expense.

Income tax expense increased by $0.3 million to $0.4 million for the nine months ended September 30, 2022 from $0.1 million for the nine months ended September 30, 2021.

The increase relates to provisions for federal and state income taxes on the financial results of NETSTREIT TRS.

Net income increased $4.3 million to $5.4 million for the nine months ended September 30, 2022 from a net loss of $1.1 million for the nine months ended September 30, 2021.

Net income increased primarily due to the growth in the size of our real estate investment portfolio, which generated additional rental revenues, including interest income associated with our mortgage loans receivable, in addition to decreases in provisions for impairment, offset by the impact of increases in depreciation and amortization expenses, increases in interest expense, and increases in general and administrative expenses, as set forth above.

Liquidity and Capital Resources

Our primary capital requirements are to fund property acquisitions and required interest payments, as well as working capital needs, operating expenses, and capital expenditures.

Our capital resources primarily consist of cash from operations, sales of equity securities and borrowings under our senior credit facility.

As of June 30, 2022, we had a $175.0 million senior secured term loan (“Term Loan”) and $237.0 million of borrowings outstanding under our $250.0 million senior secured revolving credit facility (“Revolver”, and collectively with the Term Loan, the “Credit Facility”).

Additionally, as of June 30, 2022, we had 4,512,003 shares that were unsettled under open forward equity contracts.

ongoing operations and to fund our debt service requirements, capital expenditures and working capital for at least the next 12 months.

We anticipate funding our long-term capital needs through cash provided from operations, borrowings under our Revolver, and issuances of common stock.

Our capital resources primarily consist of cash from operations, sales of equity securities and borrowings under our Prior Credit Facility and New Credit Facility.

As of September 30, 2022, we had the 2024 Term Loan, the 2028 Term Loan, and $30.0 million of borrowings outstanding under our New Revolver.

Additionally, as of September 30, 2022, we had 10,350,000 shares that were unsettled under open forward equity contracts.

We believe that the availability of proceeds from future issuances of shares of our common stock under the ATM Program and the physical settlement of forward sales of our common stock, coupled with our cash flows from operations and available borrowing capacity, will be adequate to support our ongoing operations and to fund our debt service requirements, capital expenditures and working capital for at least the next 12 months.

We anticipate funding our long-term capital needs through cash provided from operations, borrowings under our New Revolver, and issuances of common stock, including settlement of existing forward sales agreements.

Contractual Obligations and Commitments

As of June 30, 2022, our contractual obligations include the maturity of our $175.0 million Term Loan with the scheduled principal payment due on December 23, 2024 and repayment of borrowings on our $250.0 million Revolver with a maturity of December 23, 2023.

During the six months ended June, 30, 2022, we borrowed $245.0 million and repaid $72.0 million on our Revolver at a weighted-average interest rate of 1.78% to fund specifically identified property acquisitions.

The following table provides information with respect to our commitments as of June 30, 2022 (in thousands):

As of September 30, 2022, our contractual debt obligations primarily include the maturity of our 2024 Term Loan with the scheduled principal payment due on December 23, 2024, the maturity of our 2028 Term Loan with the scheduled principal payment due on February 11, 2028, and repayment of borrowings on our New Revolver with a maturity of August 11, 2026.

During the nine months ended September 30, 2022, we borrowed $365.0 million on our revolving credit facilities at a weighted average interest rate of 2.29%, of which $32.0 million was borrowed from the New Revolver to fully pay down the Prior Revolver, with remaining borrowings used to fund specifically identified property acquisitions.

We also repaid $399.0 million on our revolving credit facilities, of which $200.0 million was used from the proceeds received in connection with the 2028 Term Loan.

The following table provides information with respect to our debt obligations and other commitments as of September 30, 2022 (in thousands):

Payment Due by Period

Total From July 1, 2022 to December 31, 2022 1 – 3 Years 3 – 5 Years

Total From October 1, 2022 to December 31, 2022 1 – 3 Years 3 – 5 Years Thereafter

Contractual Obligations

2 unchanged sentences

5,294 594 4,700 — —

Revolver – Borrowings 237,000 — 237,000 —

Revolver – Variable interest 9,670 3,271 6,399

Unutilized borrowing fees on Revolver (2)

New Revolver – Borrowings 30,000 — — 30,000 —

New Revolver – Variable interest 4,575 296 2,370 1,909 —

Facility Fee (2)

2,317 150 1,200 967 —

2028 Term Loan – Principal 200,000 — — — 200,000

2028 Term Loan – Variable interest (3)

41,636 1,940 15,522 15,522 8,652

Mortgage Note – Principal 8,536 38 317 348 7,833

Mortgage Note – Interest 1,901 97 756 726 322

Property development under contract 11,236 11,236 — — —

1 unchanged sentence

Total $ 487,027 $ 14,462 $ 201,015 $ 50,761 $ 220,789

(1) Effective September 28, 2020, we entered into an interest rate hedge to fix the base interest rate (one-month LIBOR) on our Term Loan.

Accordingly, the projected interest rate obligations for the variable rate Term Loan are based on the hedged fixed rate of 0.21% compared to the variable Term Loan one-month LIBOR rate as of June 30, 2022 of 1.06%, plus a margin of 1.15% based on the $175.0 million Term Loan outstanding through the maturity date of December 23, 2024.

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

This reflects our projected unutilized borrowing fee at 0.25% assuming no additional borrowing through the maturity date of December 23, 2023.

(1) Effective September 28, 2020, we entered into four interest rate hedges to fix the base interest rate (one-month LIBOR) on our 2024 Term Loan.

Accordingly, the projected interest rate obligations for the variable rate 2024 Term Loan are based on the hedged fixed rate of 0.21% compared to the variable 2024 Term Loan one-month LIBOR rate as of September 30, 2022 of 2.56%, plus the applicable margin of 1.15% based on the $175.0 million 2024 Term Loan outstanding through the maturity date of December 23, 2024.

(2) We are subject to a facility fee of 0.15% on our New Revolver.

(3) Effective August 11, 2022, we entered into three interest rate hedges to fix the base interest rate (one-month SOFR) on our 2028 Term Loan.

Accordingly, the projected interest rate obligations for the variable rate 2028 Term Loan are based on the hedged fixed rate of 2.63% compared to the variable 2028 Term Loan one-month SOFR rate as of September 30, 2022 of 2.51%, plus a SOFR adjustment of 0.10% and applicable margin of 1.15% based on the $200.0 million 2028 Term Loan outstanding through the maturity date of February 11, 2028.

In August 2021, the Company entered into a lease agreement on a new corporate office space, which is classified as an operating lease.

4 unchanged sentences

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

As of June 30, 2022, the Company had commitments to fund properties under development totaling $19.1 million, all of which is expected to be funded over the next six months.

Credit Facility

In December 2019, the Company entered into a senior credit facility consisting of (i) the $175.0 million Term Loan and (ii) the $250.0 million Revolver.

Wells Fargo Securities, LLC is lead arranger and bookrunner and Wells Fargo Bank, National Association is administrative agent under the Credit Facility (the “Administrative Agent”).

The Term Loan matures on December 23, 2024 and the Revolver matures on December 23, 2023, subject to extension 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 Term Loan either (i) LIBOR, plus a margin ranging from 1.15% to 1.60%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.15% to 0.60%, based on the Company’s consolidated total leverage ratio and (B) in the case of Revolving Loans either (i) LIBOR, plus a margin ranging from 1.20% to 1.80%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.20% to 0.80%, based on the Company’s consolidated total leverage ratio.

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

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

These derivatives are considered cash flow hedges and are recorded on a gross basis at fair value.

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

The interest rate hedge is further described in “Note 7 - Derivative Financial Instruments.”

As of September 30, 2022, the Company had commitments to fund properties under development totaling $11.2 million, all of which is expected to be funded over the next six months.

As of September 30, 2022 and December 31, 2021, we did not have any off-balance sheet arrangements that have had or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures.

Historical Cash Flow Information

Six Months Ended June 30, 2022 Compared with Six Months Ended June 30, 2021

Six Months Ended

Nine Months Ended September 30, 2022 Compared with Nine Months Ended September 30, 2021

Nine Months Ended

September 30,

(In thousands) (Unaudited)

4 unchanged sentences

Cash Flows Provided By Operating Activities.

Net cash provided by operating activities increased by $8.5 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Net cash provided by operating activities increased by $19.5 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

The increase was largely attributed to the increase in the size of the Company’s real estate investment portfolio with an increase in rental receipts of $21.4 million, offset primarily by increases in operating and general and administrative expenses paid associated with our larger portfolio.

Cash Flows Used In Investing Activities.

Net cash used in investing activities increased by $91.1 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

The increase is primarily due to acquisitions, including investments in mortgage loan receivables of $46.5 million and increases in earnest money deposits of $40.0 million.

The remaining increase is related primarily to real estate development and improvements, which increased $2.4 million compared to the prior period.

Net cash used in investing activities increased by $109.2 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

The increase was primarily due to acquisition increases of $37.0 million, investments in mortgage loans receivable of $46.5 million, increases in real estate development and improvements of $6.0 million, increases in earnest money deposits of $2.7 million, and $16.6 million fewer proceeds received in connection with the sale of real estate.

Cash Flows Provided By Financing Activities.

Net cash provided by financing activities increased by $99.4 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

The increase was primarily attributed to the increase in net borrowings of $173.0 million under our Revolver during the six months ended June 30, 2022, offset by $68.7 million of fewer proceeds received in 2022 in connection with our ATM Program and physical settlement of our common stock under the forward sale agreements, than from our April 2021 public offering.

Lastly, the increase is further offset by $4.6 million of additional dividends and distributions paid during 2022 than the prior period.

Net cash provided by financing activities increased by $163.3 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

The increase was primarily attributed to proceeds received upon execution of the New Credit Agreement, which included $200.0 million from the 2028 Term Loan and initial proceeds of $32.0 million from the New Revolver, all of which were used to fully pay down the Prior Revolver.

The increase is further attributed to incremental net borrowings of $149.0 million under the revolving credit facilities and an increase in net proceeds of $24.8 million received from the issuance of common stock (as further described in “Note 9 – Shareholders’ Equity, Partners’ Capital and Preferred Equity” in the Company’s condensed consolidated financial statements).

The increase is offset by $6.6 million more of dividends and distributions paid in 2022 than the prior period and $3.8 million of deferred financing costs paid in relation to the New Credit Facility.

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

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

During the three and six months ended June 30, 2022, the Company recognized franchise and other state and local tax expenses which are included in general and administrative and recognized state and federal income tax expense which is included in income tax expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss).

During the three and nine months ended September 30, 2022, the Company recognized franchise and other state and local tax expenses which are included in general and administrative and recognized state and federal income tax expense which is included in income tax expense in the accompanying condensed consolidated statements of operations and comprehensive income.

Recent Accounting Pronouncements

35 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

(Unaudited) (Unaudited)

Net income (loss) $ 2,010 $ (2,630) $ 3,976 $ (1,889)

Net income $ 1,419 $ 2,944 $ 5,395 $ 1,055

Depreciation and amortization of real estate 13,241 7,994 35,701 20,843

26 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

(Unaudited) (Unaudited)

Net income (loss) $ 2,010 $ (2,630) $ 3,976 $ (1,889)

Net income $ 1,419 $ 2,944 $ 5,395 $ 1,055

Depreciation and amortization of real estate 13,241 7,994 35,701 20,843

23 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

(Unaudited) (Unaudited)

Net income (loss) $ 2,010 $ (2,630) $ 3,976 $ (1,889)

Net income $ 1,419 $ 2,944 $ 5,395 $ 1,055

General and administrative 4,552 3,776 13,608 10,904

5 unchanged sentences

Income tax expense 171 — 356 50

Interest income on mortgage loan receivables (586) — (997) —

Interest income on mortgage loans receivable (674) — (1,671) —

Other income — — (36) —

5 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis