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Item 2. Management’s Discussion and Analysis

2023-04-26 compared with 2022-10-27 · 131 added, 223 removed, 170 unchanged (68% of the section changed)

13 unchanged sentences

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.

Business 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.

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.

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.

We also invest in property developments and mortgage loans secured by real estate.

As of March 31, 2023, we owned or had investments in 488 single-tenant retail net leased properties that were diversified by tenant, industry and geography, including 83 different tenants, across 25 retail sectors in 45 states.

This excludes four property developments where rent has yet to commence.

As of March 31, 2023, our investments generated ABR 1 of $108.9 million.

Approximately 67% of our ABR is from investment grade 2 credit rated tenants and an additional 15% of our ABR is derived from tenants with an investment grade profile 3 .

Exclusive of mortgage loans receivable, our portfolio was 100% occupied with a weighted average remaining lease term (“WALT”) of 9.4 years, which we believe provides us with a strong stable source of recurring cash flow from our portfolio.

( 1 ) Annualized base rent (“ABR”) is annualized contractual base rent in place as of the most recent quarter end for all leases that commenced as of that date, and annualized cash interest on mortgage loans receivable in place as of that date.

(2) We define “investment grade” tenants as tenants, or tenants that are subsidiaries of a parent entity, with a credit rating of BBB- (S&P/Fitch), Baa3 (Moody's) or NAIC2 (National Association of Insurance Commissioners) or higher.

(3) We define “investment grade profile” tenants as tenants with metrics of more than $1.0 billion in annual sales and a debt to adjusted EBITDA ratio of less than 2.0x but do not carry a published rating from S&P, Moody’s or NAIC.

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.

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

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

We may 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, at our election, cash settle or net share settle all or a portion of our obligations under a forward sale agreement if we concludes it is in its 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 March 30, 2023, we partially physically settled 2,612,736 shares of common stock at a price of $20.20 per share in accordance with the forward sale agreements.

We received net proceeds from the settlement of $50.0 million, net of underwriting discounts and offering costs of $2.8 million.

As of March 31, 2023, 4,763,320 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 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.

In March 2023, we issued 146,745 shares of common stock at a weighted average price of $20.22 per share for net proceeds of approximately $2.9 million, net of sales commissions and offering costs of less than $0.1 million.

We have $151.2 million remaining gross proceeds available for future issuances of shares of our common stock under the ATM Program.

Results of Operations

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 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.

We continued to grow our assets during the first quarter of 2023 through the acquisition of properties and investment 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 $50.0 million, the issuance of common stock under the ATM Program in an amount of $2.9 million, the usage of existing cash balances as a result of borrowings on our Revolver, and cash flows from operations during the three months ended March 31, 2023.

During the three months ended March 31, 2023, we acquired 20 properties for a total purchase price of $67.7 million, inclusive of $0.7 million of capitalized acquisition costs.

The acquisitions were all accounted for as asset acquisitions.

These properties are located in 12 states with a WALT of approximately 9.4 years.

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

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.

The underwritten weighted-average capitalization rate on our year to date acquisitions was approximately 6.9%.

As of March 31, 2023, we had three property developments under construction and one completed development where rent has yet to commence.

During the three months ended March 31, 2023, we invested $4.5 million in property developments.

During this period, we completed development on two projects and reclassified approximately $14.8 million from property under development to land, building, and improvements in the accompanying condensed consolidated balance sheets.

Rent commenced for the completed developments in the first quarter of 2023.

The remaining three developments in progress are expected to be substantially completed with rent commencing in the third and fourth quarters of 2023 for two of the developments and the second quarter of 2024 for the remaining development.

The purchase price, including acquisition costs, and subsequent development are included in property under development in the accompanying condensed consolidated balance sheets as of March 31, 2023.

During the three months ended March 31, 2023, we sold eight properties for a total sales price, net of disposal costs of $15.5 million, recognizing a net loss of $0.3 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.

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

On March 3, 2023, we executed a fully collateralized $41.9 million loan receivable with a stated interest rate of 9.55% and scheduled maturity date of March 10, 2026.

The loan receivable is collateralized by 46 properties leased by one investment grade tenant.

The funds provided under the loan are included in mortgage loans receivable, net in the accompanying condensed consolidated balance sheets as of March 31, 2023.

On March 24, 2023, we executed a fully collateralized $4.1 million loan receivable with a stated interest rate of 6.89% and scheduled maturity date of April 10, 2026.

The loan receivable is collateralized by three properties leased by one investment grade tenant.

The funds provided under the loan are included in mortgage loans receivable, net in the accompanying condensed consolidated balance sheets as of March 31, 2023.

Economic and Financial Environment

The average inflation rate for the three months ended March 31, 2023 was 5.0%.

While the Federal Reserve has been continuing to raise interest rates in an effort to lower inflation, the pace at which it may continue to do so is unclear leading to uncertainties in the financing market and a volatile economy.

In the commercial real estate market, property prices generally continue to fluctuate which may impact our investment capitalization rates and operating costs.

Likewise, during certain periods, including the current market, the credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital.

We continually monitor the commercial real estate and credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly.

Three Months Ended March 31, 2023 Compared with Three Months Ended March 31, 2022

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

Three Months Ended

September 30,

Rental revenue (including reimbursable) $ 28,474 $ 20,921

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 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.

• 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,

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 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):

Nine Months Ended

September 30,

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

Interest income on mortgage loans receivable 1,671 —

Interest income on loans receivable 978 411

Total revenues 29,452 21,332

3 unchanged sentences

Depreciation and amortization 14,949 10,980

Provisions for impairment 1,114 3,539

Transaction costs 109 165

2 unchanged sentences

Interest expense, net (3,944) (1,169)

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

Gain (loss) on sales of real estate, net (319) 161

Other income 152 —

1 unchanged sentence

Net income before income taxes 1,438 2,057

Income tax expense (356) (50)

Income tax benefit (expense) 43 (91)

Net income $ 1,481 $ 1,966

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.

Revenue for the three months ended March 31, 2023 increased by $8.2 million to $29.5 million from $21.3 million for the three months ended March 31, 2022 which is attributed to an increase in the number of our operating leases and properties securing our mortgage loans.

The increase includes an increase in cash rental receipts of $6.9 million, combined with net increases of property expense reimbursements of $0.9 million, and an increase of $0.6 million related to interest income on mortgage loans receivable offset by a decrease in straight-line rental revenue.

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.

Total expenses increased by $5.6 million to $23.9 million for the three months ended March 31, 2023 as compared to $18.3 million for the three months ended March 31, 2022.

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, and payroll costs.

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.

Property expenses increased $1.0 million to $3.9 million for the three months ended March 31, 2023 from $2.9 million for the three months ended March 31, 2022.

The increase is primarily attributed to the increase in the number of operating properties, including combined net increases of reimbursable property expenses of $1.0 million, of which $0.4 million, $0.3 million, and $0.3 million was related to reimbursable common area maintenance costs, reimbursable insurance costs, and reimbursable property taxes, respectively.

• 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.

General and administrative expenses increased $0.7 million to $4.9 million for the three months ended March 31, 2023 from $4.2 million for the three months ended March 31, 2022.

The increase is primarily due to an increase in payroll expenses $0.4 million in addition to smaller net increases in corporate office rent and franchise tax expense.

While our general and administrative expenses will continue to rise in some measure as our portfolio grows, we expect that such expenses as a percentage of our portfolio will decrease over time due to efficiencies and economies of scale.

• 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

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.

Depreciation and amortization expense increased $3.9 million to $14.9 million for the three months ended March 31, 2023 from $11.0 million for the three months ended March 31, 2022.

The increase in depreciation and amortization is proportionate to the increase in the size of the portfolio over the comparable period with associated increases in building depreciation expense of $2.1 million, in-place lease amortization expense of $1.1 million, and building improvements depreciation expense of $0.8 million.

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.

Interest expense increased by $2.7 million to $3.9 million for the three months ended March 31, 2023 from $1.2 million for the three months ended March 31, 2022.

The increase is primarily attributed to an increase of $1.9 million of interest incurred under our $200.0 million senior unsecured term loan (the “2028 Term Loan”), a net increase of $0.6 million under our $400.0 million senior unsecured revolving credit facility (the “New Revolver”) as a result of higher interest rates driving an increase of $0.8 million offset by a decrease in average borrowings outstanding during the respective periods.

Additional increases of $0.1 million and $0.1 million are attributed to increased facility fees and interest incurred under the mortgage note payable, respectively.

This is offset by $0.1 million of increased capitalized interest on our property developments.

Gain (loss) on sales of real estate, net.

Net loss on sales of real estate increased by $0.5 million to $0.3 million for the three months ended March 31, 2023 from a $0.2 million net gain for the three months ended March 31, 2022.

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

Nine Months Ended

September 30,

Three Months Ended

Number of properties sold 8 1

Sales price, net of disposal costs $ 15,463 $ 2,294

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 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.

Gain (loss) on sales of real estate, net $ (319) $ 161

Other income.

The change in other income is primarily related to $0.1 million of interest income earned on the Company’s cash, cash equivalents and restricted cash balances as presented in the condensed consolidated balance sheets.

Income tax benefit (expense).

Income tax expense decreased by $0.1 million for three months ended March 31, 2023.

The decrease relates to income tax benefits regarding current period losses on disposals offset by provisions for federal and state income taxes on the financial results of NETSTREIT Management TRS, LLC.

Net income decreased $0.5 million to $1.5 million for the three months ended March 31, 2023 from $2.0 million for the three months ended March 31, 2022.

Net income decreased primarily due to increases in interest expense, depreciation and amortization expense, and payroll expense offset by increases in additional rental revenues primarily due to the growth in the size of our real estate investment portfolio, including interest income associated with our mortgage loans receivable.

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.

Our capital resources primarily consist of cash from operations, sales of equity securities and borrowings under the $175.0 million senior unsecured term loan (the “2024 Term Loan”), 2028 Term Loan and New Revolver.

As of March 31, 2023, we had $175.0 million outstanding principal amount of the 2024 Term Loan, $200.0 million outstanding principal amount of the 2028 Term Loan, and $96.0 million of borrowings outstanding under our New Revolver.

Additionally, as of March 31, 2023, we had 4,763,320 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 under the New Revolver, will be adequate to support our ongoing operations and to fund our debt service requirements, capital expenditures and working capital requirements 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 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):

As of March 31, 2023, 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 three months ended March 31, 2023, we borrowed $99.0 million at a weighted average interest rate of 5.86% and also repaid $116.0 million on our revolving credit facilities.

The following table provides information with respect to our debt obligations and other commitments as of March 31, 2023 (in thousands):

Payment Due by Period

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

Total From April 1, 2023 to December 31, 2023 1 – 3 Years 3 – 5 Years Thereafter

Contractual Obligations

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Property development under contract 5,953 5,953 — — —

Tenant Improvement Allowances 4,089 — 4,089 — —

Corporate office lease obligations 6,299 412 1,253 1,323 3,311

Total $ 560,603 $ 19,119 $ 211,894 $ 125,388 $ 204,202

(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.

(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 which were converted to daily SOFR effective January 30, 2023.

Accordingly, the projected interest rate obligations for the variable rate 2024 Term Loan are based on the hedged fixed rate of 0.12% compared to the variable 2024 Term Loan daily SOFR rate as of March 31, 2023 of 4.80%, plus a SOFR adjustment of 0.10%, plus a margin of 1.15% based on the $175.0 million Term Loan outstanding through the maturity date of December 23, 2024.

(2) We are subject to a 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.

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 December 31, 2022 of 4.67%, 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, we entered into a lease agreement on a new corporate office space, which is classified as an operating lease.

We began operating out of the new office in February 2022.

The lease has a remaining noncancellable term of 9.3 years that expires on July 31, 2032 and is renewable at our 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.

Additionally, in the normal course of business, we enter into various types of commitments to purchase real estate properties or fund development projects.

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

As of March 31, 2023, we had commitments to fund properties under development totaling $6.0 million, all of which is expected to be funded over the next two years.

Credit Facilities

On January 27, 2023, we executed an amendment to the Prior Credit Agreement that replaced the interest rate benchmark from LIBOR to Secured Overnight Financing Rate (“SOFR”).

Additionally, on January 30, 2023 and effective through the maturity date of December 31, 2024, we converted its four existing LIBOR swap agreements associated with the 2024 Term Loan into four new SOFR swaps that convert the SOFR variable rate to a fixed rate of 0.12%.

We have fully hedged the 2024 Term Loan with an all-in interest rate of 1.37%.

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

Further discussion of our debt is included in “Note 6 - Debt” of our condensed consolidated financial statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

As of March 31, 2023 and December 31, 2022, 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

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

Nine Months Ended

September 30,

Three Months Ended March 31, 2023 Compared with Three Months Ended March 31, 2022

Three Months Ended

(In thousands) (Unaudited)

4 unchanged sentences

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.

Net cash provided by operating activities increased by $5.8 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

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 $6.9 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.

Net cash used in investing activities decreased by $31.3 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The decrease was primarily due to decreases in cash spent on acquisitions of real estate of $22.3 million and cash spent on real estate development and improvements of $1.9 million, offset by an increase in our investment in mortgage loans receivable of $5.5 million.

Additionally, an increase of $13.2 million of proceeds were 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.

Net cash provided by financing activities decreased by $98.1 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The decrease was primarily attributed to a reduction in net borrowings of $73.0 million under our revolving credit facilities.

Further, issuances of common stock in connection with our ATM Program and physical settlement of our common stock under the forward sale agreements provided $22.6 million fewer proceeds.

Additionally, we paid $2.8 million more in common stock dividends during the three months ended March 31, 2023.

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

7 unchanged sentences

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.

Critical Accounting Policies and Estimates

13 unchanged sentences

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”).

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 (“EBITDA re ”), EBITDA re further adjusted to exclude straight-line rent, non-cash compensation expense, non-recurring severance and related charges, and other non-recurring expenses (or income) (“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.

3 unchanged sentences

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.

These include non-recurring severance and related charges and gain on 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 lease-related intangibles, capitalized interest expense, non-cash compensation expense, amortization of deferred financing costs, amortization of above/below-market assumed debt, 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.

9 unchanged sentences

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)

Three Months Ended March 31,

Net income $ 1,481 $ 1,966

Depreciation and amortization of real estate 14,884 10,862

Provisions for impairment — — 1,114 3,539

Gain on sale of real estate, net (143) (1,955) (2,162) (2,452)

Loss (gain) on sales of real estate, net 319 (161)

FFO 16,684 12,667

Gain on insurance proceeds — — (36) —

Non-recurring severance and related charges 13 —

Other non-recurring expenses (income) (12) —

Core FFO 16,685 12,667

1 unchanged sentence

Amortization of deferred financing costs 308 157

Amortization of above/below-market assumed debt 29 —

Amortization of loan origination costs 28 13

Amortization of above/below market lease intangibles (444) (182) (1,021) (609)

Amortization of lease incentives 131 23 377 26

Amortization of lease-related intangibles (213) (165)

Capitalized interest expense (134) (56)

1 unchanged sentence

AFFO $ 17,419 $ 13,135

EBITDA, EBITDA re and Adjusted EBITDA re

EBITDA, EBITDAre and Adjusted EBITDAre

We compute EBITDA as earnings before interest expense, income tax expense, and depreciation and amortization.

2 unchanged sentences

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.

Adjusted EBITDA re is a non-GAAP financial measure defined as EBITDA re further adjusted to exclude straight-line rent, non-cash compensation expense, non-recurring severance and related charges, and gain on insurance proceeds.

We present EBITDA, EBITDA re and Adjusted EBITDA re as they are measures commonly used in our industry.

5 unchanged sentences

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)

Three Months Ended March 31,

Net income $ 1,481 $ 1,966

Depreciation and amortization of real estate 14,884 10,862

Amortization of above/below market lease intangibles (444) (182) (1,021) (609)

Amortization of lease incentives 131 23 377 26

Amortization of lease-related intangibles (213) (165)

Non-real estate depreciation and amortization 65 117

Interest expense, net 3,944 1,169

Income tax expense 171 — 356 50

Income tax (benefit) expense (43) 91

Amortization of loan origination costs 28 13

EBITDA 20,146 14,053

Provision for impairments — — 1,114 3,539

Gain on sale of real estate, net (143) (1,955) (2,162) (2,452)

Loss (gain) on sales of real estate, net 319 (161)

20,465 13,892

Straight-line rent adjustments (311) (526)

Gain on insurance proceeds — — (36) —

Non-recurring severance and related charges 13 —

Other non-recurring expenses (income) (12) —

Non-cash compensation expense 1,027 1,045

3 unchanged sentences

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 compute NOI as net income (computed in accordance with GAAP), excluding general and administrative expenses, interest expense (or income), income tax expense, transaction costs, depreciation and amortization, gains (or losses) on sales of depreciable property, real estate impairment losses, interest income on mortgage loans receivable, and other income (or expense).

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

2 unchanged sentences

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)

Three Months Ended March 31,

Net income $ 1,481 $ 1,966

1 unchanged sentence

Depreciation and amortization 14,949 10,980

Provisions for impairment — — 1,114 3,539

Transaction costs 109 165

Interest expense, net 3,944 1,169

Gain on sales of real estate, net (143) (1,955) (2,162) (2,452)

Income tax expense 171 — 356 50

Loss (gain) on sales of real estate, net 319 (161)

Income tax (benefit) expense (43) 91

Interest income on mortgage loans receivable (978) (411)

2 unchanged sentences

Straight-line rent adjustments (311) (526)

Amortization of above/below market lease intangibles (444) (182) (1,021) (609)

Amortization of lease incentives 131 23 377 26

Amortization of lease-related intangibles (213) (165)

Cash NOI $ 24,014 $ 17,298

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