NETSTREIT Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Special Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements concerning our business and growth strategies, investment, financing and leasing activities and trends in our business, including trends in the market for single-tenant, retail commercial real estate. Words such as “expects,” “anticipates,” “intends,” “plans,” “likely,” “will,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Quarterly Report on Form 10-Q may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. For a further discussion of these and other factors that could impact future results, performance or transactions, see the information under the heading “Risk Factors” Part I, Item 1A. in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on February 24, 2022, and other reports filed with the Securities and Exchange Commission from time to time. Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report on Form 10-Q. New risks and uncertainties may arise over time and it is not possible for us to predict those events or how they may affect us. Many of the risks identified have been and will continue to be heightened as a result of the ongoing numerous adverse effects arising from the novel coronavirus and instability in macroeconomic conditions. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law. Overview We are an internally managed real estate company that acquires, owns and manages a diversified portfolio of single-tenant, retail commercial real estate subject to long-term net leases with high credit quality tenants across the United States. Our diversified portfolio consists of 406 single-tenant retail net leases spanning 42 states, with 77 different tenants represented across 24 retail sectors. Our portfolio generates ABR (1) of $92.7 million and is 100% occupied, with a weighted average lease term (“WALT”) of 9.6 years and consisting of approximately 65% and 14% of investment grade tenants and investment grade profile tenants, respectively, by ABR, which we believe provides us with a strong, stable source of recurring cash flow. We focus on tenants in industries where a physical location is critical to the generation of sales and profits, with a focus on necessity goods and essential services in the retail sector, including home improvement, auto parts, drug stores and pharmacies, general retail, grocers, convenience stores, discount stores, and quick-service restaurants, which we refer to as defensive retail industries. We believe these characteristics make our tenants' businesses e-commerce resistant and resilient through all economic cycles. COVID-19 We continue to monitor the global outbreak of COVID-19 and to take steps to mitigate the potential risks to us posed by the pandemic, including new variants of the virus. In addition, we continue to stay in close contact with our tenants and monitor the timeliness of rental payments and any significant changes in our tenants' businesses. See “Note 2 – Summary of Significant Accounting Policies” to our condensed consolidated financial statements included herein. The Company’s operations and cash flows for the three and 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. 31 Table of Contents 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 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. We received net proceeds from the offering of $50.0 million, net of underwriting discounts and offering costs of $3.3 million. • On March 30, 2022, we settled 3,440,962 shares of common stock at a price of $22.25 per share in connection with the forward sale agreements. 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 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 August 3, 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 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. 32 Table of Contents ATM Program 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 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 Overall 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. Acquisitions 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 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. These properties are located in 28 states with a WALT of approximately 10.6 years. The underwritten weighted-average capitalization rate on the Company’s year-to-date acquisitions was approximately 6.6%. Development 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. Dispositions 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%. The scheduled maturity date is July 26, 2023, however we have the right, subject to certain terms and conditions, to purchase a portion of the underlying collateralized property. 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 loans receivable, net in the accompanying condensed consolidated balance sheets as of September 30, 2022. 33 Table of Contents On June 30, 2022, we executed a fully collateralized $6.0 million loan receivable with a stated interest rate of 6.5%. The scheduled maturity date is June 30, 2023, however the Company has the right, subject to certain terms and conditions, to purchase the underlying collateralized properties. 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 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, 2022 2021 Revenues Rental revenue (including reimbursable) $ 24,339 $ 15,603 Interest income on mortgage loans receivable 674 — Total revenues 25,013 15,603 Operating expenses Property 2,539 1,737 General and administrative 4,552 3,776 Depreciation and amortization 13,407 8,074 Transaction costs 51 132 Total operating expenses 20,549 13,719 Other income (expense) Interest expense, net (3,017) (895) Gain on sales of real estate, net 143 1,955 Total other income (expense), net (2,874) 1,060 Net income before income taxes 1,590 2,944 Income tax expense (171) — Net income $ 1,419 $ 2,944 Revenue. 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 $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. 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. Total operating expenses include the following: • Property Expenses. 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 $0.5 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 $0.8 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. 34 Table of Contents • Depreciation and Amortization. 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 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 $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 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, 2022 2021 Number of properties sold 1 4 Sales price, net of disposal costs $ 1,660 $ 18,118 Gain on sales of real estate, net $ 143 $ 1,955 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. 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. 35 Table of Contents 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): Nine Months Ended September 30, 2022 2021 Revenues Rental revenue (including reimbursable) $ 67,309 $ 41,333 Interest income on mortgage loans receivable 1,671 — Total revenues 68,980 41,333 Operating expenses Property 8,156 4,002 General and administrative 13,608 10,904 Depreciation and amortization 36,137 21,078 Provisions for impairment 1,114 3,539 Transaction costs 704 464 Total operating expenses 59,719 39,987 Other income (expense) Interest expense, net (5,708) (2,693) Gain on sales of real estate, net 2,162 2,452 Other income 36 — Total other expense, net (3,510) (241) Net income before income taxes 5,751 1,105 Income tax expense (356) (50) Net income $ 5,395 $ 1,055 Revenue. 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 $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. 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 operating expenses include the following: • Property Expenses. 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 $1.9 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 $2.7 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 $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 36 Table of Contents 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 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 $0.2 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 $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 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): Nine Months Ended September 30, 2022 2021 Number of properties sold 4 9 Sales price, net of disposal costs $ 13,837 $ 30,436 Gain on sales of real estate, net $ 2,162 $ 2,452 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. 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 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. 37 Table of Contents Contractual Obligations and Commitments 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 October 1, 2022 to December 31, 2022 1 – 3 Years 3 – 5 Years Thereafter Contractual Obligations 2024 Term Loan – Principal $ 175,000 $ — $ 175,000 $ — $ — 2024 Term Loan – Variable interest (1) 5,294 594 4,700 — — 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 — — — Corporate office lease obligations 6,532 111 1,150 1,289 3,982 Total $ 487,027 $ 14,462 $ 201,015 $ 50,761 $ 220,789 (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. The Company began operating out of the new office in February 2022. The lease has an initial noncancellable term of 10.3 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 approximately $0.5 million during the initial term. Additionally, in the normal course of business, the Company enters into various types of commitments to purchase real estate properties or fund development projects. These commitments are generally subject to the Company’s customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated or receives an option to purchase the properties. As of 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. 38 Table of Contents Historical Cash Flow Information Nine Months Ended September 30, 2022 Compared with Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2022 2021 (In thousands) (Unaudited) Net cash provided by (used in): Operating activities $ 38,706 $ 19,206 Investing activities (381,188) (271,963) Financing activities 351,069 187,758 Cash Flows Provided By Operating Activities. 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 $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 $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. 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 2022 to receive a full dividends paid deduction. We maintain a taxable REIT subsidiary (“TRS”) which may be subject to U.S. federal, state, and local income taxes on its taxable income. 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 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 A discussion of new accounting standards and the possible effects of these standards on our condensed consolidated financial statements is included in “Note 2 – Summary of Significant Accounting Policies” of our condensed consolidated financial statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 39 Table of Contents Critical Accounting Policies and Estimates Our accounting policies have been established to conform with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. A summary of our critical accounting policies is included in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021, which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to these policies during the periods covered by this quarterly report. Non-GAAP Financial Measures Our reported results are presented in accordance with GAAP. We also disclose the following non-GAAP financial measures: Funds From Operations (“FFO”), Core FFO, Adjusted FFO (“AFFO”), earnings before interest expense, income tax expense, and depreciation and amortization (“EBITDA”), EBITDA adjusted to exclude gains (or losses) from the sales of depreciable property and real estate impairment losses (“EBITDAre”), EBITDAre further adjusted to exclude straight-line rent and non-cash compensation expense (“Adjusted EBITDAre”), net operating income (“NOI”) and cash net operating income (“Cash NOI”). We believe these non-GAAP financial measures are industry measures used by analysts and investors to compare the operating performance of REITs. FFO, Core FFO and AFFO The National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a widely accepted non-GAAP financial measure of operating performance known as FFO. Our FFO is net income in accordance with GAAP, excluding gains (or losses) resulting from dispositions of properties, plus depreciation and amortization and impairment charges on depreciable real property. Core FFO is a non-GAAP financial measure defined as FFO adjusted to remove the effect of unusual and non-recurring items that are not expected to impact our operating performance or operations on an ongoing basis. Historically, these have included gains from forfeited earnest money deposits, non-recurring public company costs, and gains from insurance proceeds. AFFO is a non-GAAP financial measure defined as Core FFO adjusted for GAAP net income related to non-cash revenues and expenses, such as straight-line rent, amortization of above- and below-market lease-related intangibles, amortization of lease incentives, capitalized interest expense, non-cash compensation expense, and amortization of deferred financing and amortization of loan origination costs. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. In fact, real estate values historically have risen or fallen with market conditions. FFO is intended to be a standard supplemental measure of operating performance that excludes historical cost depreciation and valuation adjustments from net income. We consider FFO to be useful in evaluating potential property acquisitions and measuring operating performance. We further consider FFO, Core FFO and AFFO to be useful in determining funds available for payment of distributions. FFO, Core FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. You should not consider FFO, Core FFO and AFFO to be alternatives to net income as a reliable measure of our operating performance nor should you consider FFO, Core FFO and AFFO to be alternatives to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity. FFO, Core FFO and AFFO do not measure whether cash flow is sufficient to fund our cash needs, including principal amortization, capital improvements and distributions to stockholders. FFO, Core FFO and AFFO do not represent cash flows from operating, investing or financing activities as defined by GAAP. Further, FFO, Core FFO and AFFO as disclosed by other REITs might not be comparable to our calculations of FFO, Core FFO and AFFO. 40 Table of Contents The following table sets forth a reconciliation of FFO, Core FFO and AFFO for the periods presented to net income before allocation to noncontrolling interests, as computed in accordance with GAAP (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Unaudited) (Unaudited) Net income $ 1,419 $ 2,944 $ 5,395 $ 1,055 Depreciation and amortization of real estate 13,241 7,994 35,701 20,843 Provisions for impairment — — 1,114 3,539 Gain on sale of real estate, net (143) (1,955) (2,162) (2,452) FFO 14,517 8,983 40,048 22,985 Adjustments: Gain on insurance proceeds — — (36) — Core FFO 14,517 8,983 40,012 22,985 Adjustments: Straight-line rent adjustments (272) (244) (1,144) (707) Amortization of deferred financing costs 239 157 553 471 Amortization of loan origination costs 28 — 59 — Amortization of above/below market lease intangibles (444) (182) (1,021) (609) Amortization of lease incentives 131 23 377 26 Capitalized interest expense (115) (24) (218) (38) Non-cash compensation expense 1,302 1,025 3,645 2,623 AFFO $ 15,386 $ 9,738 $ 42,263 $ 24,751 EBITDA, EBITDA re and Adjusted EBITDA re We compute EBITDA as earnings before interest expense, income tax expense, and depreciation and amortization. In 2017, NAREIT issued a white paper recommending that companies that report EBITDA also report EBITDA re . We compute EBITDA re in accordance with the definition adopted by NAREIT. NAREIT defines EBITDA re as EBITDA (as defined above) excluding gains (or losses) from the sales of depreciable property and impairment charges on depreciable real property. Adjusted EBITDA re is a non-GAAP financial measure defined as EBITDA re further adjusted to exclude straight-line rent, non-cash compensation expense, and gain on insurance proceeds. We present EBITDA, EBITDA re and Adjusted EBITDA re as they are measures commonly used in our industry. We believe that these measures are useful to investors and analysts because they provide supplemental information concerning our operating performance, exclusive of certain non-cash items and other costs. We use EBITDA, EBITDA re and Adjusted EBITDA re as measures of our operating performance and not as measures of liquidity. EBITDA, EBITDA re and Adjusted EBITDA re do not include all items of revenue and expense included in net income, they do not represent cash generated from operating activities and they are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures. Additionally, our computation of EBITDA, EBITDA re and Adjusted EBITDA re may differ from the methodology for calculating these metrics used by other equity REITs and, therefore, may not be comparable to similarly titled measures reported by other equity REITs. 41 Table of Contents The following table sets forth a reconciliation of EBITDA, EBITDA re and Adjusted EBITDA re for the periods presented to net income before allocation to noncontrolling interests, as computed in accordance with GAAP (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Unaudited) (Unaudited) Net income $ 1,419 $ 2,944 $ 5,395 $ 1,055 Depreciation and amortization of real estate 13,241 7,994 35,701 20,843 Amortization of above/below market lease intangibles (444) (182) (1,021) (609) Amortization of lease incentives 131 23 377 26 Non-real estate depreciation and amortization 166 79 436 234 Interest expense, net 3,017 895 5,708 2,693 Income tax expense 171 — 356 50 Amortization of loan origination costs 28 — 59 — EBITDA 17,729 11,753 47,011 24,292 Adjustments: Provision for impairments — — 1,114 3,539 Gain on sale of real estate, net (143) (1,955) (2,162) (2,452) EBITDA re 17,586 9,798 45,963 25,379 Adjustments: Straight-line rent adjustments (272) (244) (1,144) (707) Gain on insurance proceeds — — (36) — Non-cash compensation expense 1,302 1,025 3,645 2,623 Adjusted EBITDA re $ 18,616 $ 10,579 $ 48,428 $ 27,295 NOI and Cash NOI NOI and Cash NOI are non-GAAP financial measures which we use to assess our operating results. We compute NOI as net income (computed in accordance with GAAP), excluding general and administrative expenses, interest expense (or income), income tax expense, depreciation and amortization, gains (or losses) from the sales of depreciable property, impairment charges on depreciable real property, transaction costs, and other income (or expense). We further adjust NOI for non-cash components of straight-line rent and amortization of lease intangibles and lease incentives to derive Cash NOI. We believe NOI and Cash NOI provide useful and relevant information because they reflect only those income and expense items that are incurred at the property level and present such items on an unlevered basis. NOI and Cash NOI are not measurements of financial performance under GAAP, and our NOI and Cash NOI may not be comparable to similarly titled measures of other companies. You should not consider our NOI and Cash NOI as alternatives to net income or cash flows from operating activities determined in accordance with GAAP. 42 Table of Contents The following table sets forth a reconciliation of NOI and Cash NOI for the periods presented (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Unaudited) (Unaudited) Net income $ 1,419 $ 2,944 $ 5,395 $ 1,055 General and administrative 4,552 3,776 13,608 10,904 Depreciation and amortization 13,407 8,074 36,137 21,078 Provisions for impairment — — 1,114 3,539 Transaction costs 51 132 704 464 Interest expense, net 3,017 895 5,708 2,693 Gain on sales of real estate, net (143) (1,955) (2,162) (2,452) Income tax expense 171 — 356 50 Interest income on mortgage loans receivable (674) — (1,671) — Other income — — (36) — NOI 21,800 13,866 59,153 37,331 Straight-line rent adjustments (272) (244) (1,144) (707) Amortization of above/below market lease intangibles (444) (182) (1,021) (609) Amortization of lease incentives 131 23 377 26 Cash NOI $ 21,215 $ 13,463 $ 57,365 $ 36,041