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, 2022, filed with the Securities and Exchange Commission (the “SEC”) on February 23, 2023, 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. 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. 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. 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, all of which we refer to as defensive retail industries. 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. 25 Table of Contents August 2022 Follow-On Offering 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 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. 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. 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. 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 Overall 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. Acquisitions 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 our year to date acquisitions was approximately 6.9%. Development 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. 26 Table of Contents Dispositions 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 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. 27 Table of Contents 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 March 31, 2023 2022 Revenues Rental revenue (including reimbursable) $ 28,474 $ 20,921 Interest income on loans receivable 978 411 Total revenues 29,452 21,332 Operating expenses Property 3,936 2,932 General and administrative 4,909 4,190 Depreciation and amortization 14,949 10,980 Transaction costs 109 165 Total operating expenses 23,903 18,267 Other income (expense) Interest expense, net (3,944) (1,169) Gain (loss) on sales of real estate, net (319) 161 Other income 152 — Total other expense, net (4,111) (1,008) Net income before income taxes 1,438 2,057 Income tax benefit (expense) 43 (91) Net income $ 1,481 $ 1,966 Revenue. 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 $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 $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 $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 $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. 28 Table of Contents Interest Expense. 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): Three Months Ended March 31, 2023 2022 Number of properties sold 8 1 Sales price, net of disposal costs $ 15,463 $ 2,294 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. 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 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 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. 29 Table of Contents 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 April 1, 2023 to December 31, 2023 1 – 3 Years 3 – 5 Years Thereafter Contractual Obligations 2024 Term Loan – Principal $ 175,000 $ — $ 175,000 $ — $ — 2024 Term Loan – Variable interest (1) 4,154 1,803 2,351 — — New Revolver – Borrowings 96,000 — — 96,000 — New Revolver – Variable interest 19,166 4,277 11,405 3,484 — Facility Fee (2) 2,017 450 1,200 367 — 2028 Term Loan – Principal 200,000 — — — 200,000 2028 Term Loan – Variable Interest (3) 37,756 5,821 15,522 15,522 891 Mortgage Note – Principal 8,460 117 332 8,011 — Mortgage Note – Interest 1,709 286 742 681 — 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 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 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, 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. 30 Table of Contents 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 Three Months Ended March 31, 2023 Compared with Three Months Ended March 31, 2022 Three Months Ended March 31, 2023 2022 (In thousands) (Unaudited) Net cash provided by (used in): Operating activities $ 14,806 $ 8,954 Investing activities (102,412) (133,708) Financing activities 23,659 121,838 Cash Flows Provided By Operating Activities. 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 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 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. 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 2023 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. 31 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, 2022, 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 (“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. 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. 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. 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. 32 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 March 31, 2023 2022 (Unaudited) Net income $ 1,481 $ 1,966 Depreciation and amortization of real estate 14,884 10,862 Loss (gain) on sales of real estate, net 319 (161) FFO 16,684 12,667 Adjustments: Non-recurring severance and related charges 13 — Other non-recurring expenses (income) (12) — Core FFO 16,685 12,667 Adjustments: Straight-line rent adjustments (311) (526) Amortization of deferred financing costs 308 157 Amortization of above/below-market assumed debt 29 — Amortization of loan origination costs 28 13 Amortization of lease-related intangibles (213) (165) Capitalized interest expense (134) (56) Non-cash compensation expense 1,027 1,045 AFFO $ 17,419 $ 13,135 EBITDA, EBITDAre and Adjusted EBITDAre 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, 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. 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. 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): 33 Table of Contents Three Months Ended March 31, 2023 2022 (Unaudited) Net income $ 1,481 $ 1,966 Depreciation and amortization of real estate 14,884 10,862 Amortization of lease-related intangibles (213) (165) Non-real estate depreciation and amortization 65 117 Interest expense, net 3,944 1,169 Income tax (benefit) expense (43) 91 Amortization of loan origination costs 28 13 EBITDA 20,146 14,053 Adjustments: Loss (gain) on sales of real estate, net 319 (161) EBITDA re 20,465 13,892 Adjustments: Straight-line rent adjustments (311) (526) Non-recurring severance and related charges 13 — Other non-recurring expenses (income) (12) — Non-cash compensation expense 1,027 1,045 Adjusted EBITDA re $ 21,182 $ 14,411 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, 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. 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. The following table sets forth a reconciliation of NOI and Cash NOI for the periods presented (in thousands): Three Months Ended March 31, 2023 2022 (Unaudited) Net income $ 1,481 $ 1,966 General and administrative 4,909 4,190 Depreciation and amortization 14,949 10,980 Transaction costs 109 165 Interest expense, net 3,944 1,169 Loss (gain) on sales of real estate, net 319 (161) Income tax (benefit) expense (43) 91 Interest income on mortgage loans receivable (978) (411) Other income (152) — NOI 24,538 17,989 Straight-line rent adjustments (311) (526) Amortization of lease-related intangibles (213) (165) Cash NOI $ 24,014 $ 17,298 34 Table of Contents