What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-26 compared with 2023-04-26 · 233 added, 115 removed, 186 unchanged (65% of the section changed)

16 unchanged sentences

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 June 30, 2023, we owned or had investments in 525 single-tenant retail net leased properties that were diversified by tenant, industry and geography, including 87 different tenants, across 25 retail sectors in 45 states.

This excludes 23 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.

As of June 30, 2023, our investments generated ABR 1 of $116.9 million.

Approximately 68% of our ABR is from investment grade 2 credit rated tenants and an additional 14% 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.

(1 ) Annualized base rent (“ABR”) is annualized base rent as of the most recent quarter end for all leases that commenced, annualized cash interest on mortgage loans receivable, and the cash yield on amounts funded to date on interest-earning construction in process.

(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.

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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.

On June 28, 2023, we physically settled 4,763,320 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 $91.1 million, net of underwriting discounts and offering costs of $5.1 million.

As of June 30, 2023, we have fully physically settled the forward sale agreements (by the delivery of shares of common stock).

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.

In June 2023, we issued 1,364,815 shares of common stock at a weighted average price of $17.53 per share for net proceeds of approximately $23.4 million, net of sales commissions and offering costs of $0.3 million.

As of June 30, 2023, we have $127.3 million remaining gross proceeds available for future issuances of shares of our common stock under the ATM Program.

Results of Operations

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.

We continued to grow our assets during the first half 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 $141.1 million, the issuance of common stock under the ATM Program in an amount of $26.3 million, the usage of existing cash balances as a result of borrowings on our $400.0 million senior unsecured revolving credit facility (the “Revolver”), and cash flows from operations during the six months ended June 30, 2023.

During the three months ended June 30, 2023, we acquired 28 properties for a total purchase price of $96.2 million, inclusive of $1.0 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 11.7 years.

The underwritten weighted-average capitalization rate on our second quarter acquisitions was approximately 6.7%.

During the six months ended June 30, 2023, we acquired 48 properties for a total purchase price of $163.9 million, inclusive of $1.7 million of capitalized acquisition costs.

The acquisitions were all accounted for as asset acquisitions.

These properties are located in 18 states with a WALT of approximately 10.7 years.

The underwritten weighted-average capitalization rate on our year to date acquisitions was approximately 6.8%.

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.

As of June 30, 2023, we had 23 property developments under construction.

During the three months ended June 30, 2023, we invested $17.7 million in property developments.

During the six months ended June 30, 2023, we invested $22.2 million in property developments, including the acquisition of 20 new build-to-suit projects with a combined initial purchase price of $11.9 million.

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.

The remaining 23 developments in progress are expected to be substantially completed with rent commencing at various points throughout the next twelve months.

The purchase price, including acquisition costs, and subsequent development are included in property under development in the accompanying condensed consolidated balance sheets as of June 30, 2023.

During the three months ended June 30, 2023, we sold two properties for a total sales price, net of disposal costs of $3.8 million, recognizing a net gain of $0.6 million on the sales.

During the six months ended June 30, 2023, we sold ten properties for a total sales price, net of disposal costs of $19.3 million, recognizing a net gain of $0.3 million on the sales.

Investment in Mortgage Loans Receivable

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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 funds provided under the loan are included in mortgage loans receivable, net in the accompanying condensed consolidated balance sheets as of June 30, 2023.

On March 24, 2023, we executed a fully collateralized $4.1 million loan receivable with an effective interest rate of 8.03% 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.

The funds provided under the loan are included in mortgage loans receivable, net in the accompanying condensed consolidated balance sheets as of June 30, 2023.

On May 12, 2023, we executed a fully collateralized $15.5 million loan receivable with an effective interest rate of 7.57% and scheduled maturity date of June 10, 2025.

The loan receivable is collateralized by 10 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 June 30, 2023.

Economic and Financial Environment

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

The average inflation rate for the six months ended June 30, 2023 was 4.9%.

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.

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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

Three Months Ended June 30, 2023 Compared with Three Months Ended June 30, 2022

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

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Depreciation and amortization 15,847 11,751

Provisions for impairment 2,836 1,114

Transaction costs 15 488

2 unchanged sentences

Interest expense, net (5,521) (1,522)

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

Gain on sales of real estate, net 615 1,858

Loss on debt extinguishment (128) —

Other income 68 36

Total other (expense) income, net (4,966) 372

Net (loss) income before income taxes (824) 2,103

Income tax benefit (expense) 32 (93)

Net (loss) income $ (792) $ 2,010

Revenue for the three months ended June 30, 2023 increased by $9.0 million to $31.6 million from $22.6 million for the three months ended June 30, 2022, which is attributed to an increase in the number of our operating leases and properties securing our mortgage loans.

The increase includes additional cash rental receipts of $7.4 million, combined with net increases of property expense reimbursements of $0.7 million, and an increase of $1.3 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 $6.6 million to $27.5 million for the three months ended June 30, 2023 as compared to $20.9 million for the three months ended June 30, 2022.

The increase is primarily attributed to the increase in the number of operating properties, with the most significant increases being depreciation and amortization expense, provisions for impairment, property-specific reimbursable expenses, and payroll costs.

Total operating expenses include the following:

• Property Expenses.

Property expenses increased $0.8 million to $3.5 million for the three months ended June 30, 2023 from $2.7 million for the three months ended June 30, 2022.

The increase is primarily attributed to the increase in the number of operating properties, including combined net increases of reimbursable property expenses of $0.8 million, of which $0.4 million, $0.2 million, and $0.2 million were related to reimbursable property taxes, reimbursable common area maintenance costs, and reimbursable insurance costs, respectively.

• General and Administrative Expenses.

General and administrative expenses increased $0.4 million to $5.3 million for the three months ended June 30, 2023 from $4.9 million for the three months ended June 30, 2022.

The increase is primarily due to an increase in total headcount resulting in increased payroll expenses of $0.2 million and an increase in bonus expenses of $0.2 million.

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 $4.0 million to $15.8 million for the three months ended June 30, 2023 from $11.8 million for the three months ended June 30, 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 $2.2 million, in-place lease amortization expense of $1.1 million, and building improvements depreciation expense of $0.8 million.

• Provision for Impairment.

For the three months ended June 30, 2023, we recorded provisions for impairment of $2.8 million on six properties, which were classified as held-for-sale as of June 30, 2023.

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

These disposals relate to management’s continuous assessment of the Company’s portfolio in an effort to improve returns and manage risk exposure.

• Transaction costs.

Transaction costs decreased by $0.5 million to less than $0.1 million for the three months ended June 30, 2023 from $0.5 million for the three months ended June 30, 2022, which primarily relates to a decrease in costs incurred for abandoned acquisitions.

Interest Expense.

Interest expense increased by $4.0 million to $5.5 million for the three months ended June 30, 2023 from $1.5 million for the three months ended June 30, 2022.

The increase is primarily attributed to an increase of $2.1 million of interest incurred under our $200.0 million senior unsecured term loan (the “2028 Term Loan”), a net increase of $1.6 million under our Revolver primarily as a result of higher interest rates.

Gain on sales of real estate, net.

Net gain on sales of real estate decreased by $1.3 million to $0.6 million for the three months ended June 30, 2023 from $1.9 million for the three months ended June 30, 2022.

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

Three Months Ended

Number of properties sold 2 2

Sales price, net of disposal costs $ 3,836 $ 9,884

Gain on sales of real estate, net $ 615 $ 1,858

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).

The income tax benefit incurred for the three months ended June 30, 2023 is attributed to the gross loss of the Company's taxable REIT subsidiary ("TRS") compared to the income tax expense realized by the Company for the gross income earned by the TRS in the prior period.

Net (loss) income.

Net (loss) income decreased $2.8 million to a net loss of $0.8 million for the three months ended June 30, 2023 from net income of $2.0 million for the three months ended June 30, 2022.

Net (loss) income decreased primarily due to increases in interest expense, depreciation and amortization expense, and provisions for impairment, as well as a decrease in the net gain on sales of real estate, as set forth above.

These decreases are 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.

Six Months Ended June 30, 2023 Compared with Six Months Ended June 30, 2022

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

Six Months Ended

Rental revenue (including reimbursable) $ 58,180 $ 42,970

Interest income on loans receivable 2,901 997

Total revenues 61,081 43,967

Operating expenses

Property 7,467 5,617

General and administrative 10,168 9,057

Depreciation and amortization 30,795 22,730

Provisions for impairment 2,836 1,114

Transaction costs 124 653

Total operating expenses 51,390 39,171

Other income (expense)

Interest expense, net (9,465) (2,691)

Gain on sales of real estate, net 296 2,019

Loss on debt extinguishment (128) —

Other income 220 36

Total other expense, net (9,077) (636)

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Net income $ 689 $ 3,976

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.

Revenue for the six months ended June 30, 2023 increased by $17.1 million to $61.1 million from $44.0 million for the six months ended June 30, 2022 which is attributed to an increase in the number of our operating leases and properties securing our mortgage loans.

The increase includes additional cash rental receipts of $14.4 million, combined with net increases of property expense reimbursements of $1.6 million, and an increase of $1.9 million related to interest income on mortgage loans receivable, offset by a $0.6 million 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 expenses increased by $12.2 million to $51.4 million for the six months ended June 30, 2023 as compared to $39.2 million for the six months ended June 30, 2022.

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.

Property expenses increased $1.9 million to $7.5 million for the six months ended June 30, 2023 from $5.6 million for the six months ended June 30, 2022.

The increase is primarily attributed to the increase in the number of operating properties, including combined net increases of reimbursable property expenses of $1.7 million, of which $0.6 million, $0.6 million, and $0.5 million were related to reimbursable property taxes, reimbursable common area maintenance costs, and reimbursable insurance costs, 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.

General and administrative expenses increased $1.1 million to $10.2 million for the six months ended June 30, 2023 from $9.1 million for the six months ended June 30, 2022.

The increase is primarily due to an increase in total headcount resulting in increased payroll expenses of $0.7 million and increased bonus expenses of $0.3 million.

• 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.

Depreciation and amortization expense increased $8.1 million to $30.8 million for the six months ended June 30, 2023 from $22.7 million for the six months ended June 30, 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 $4.3 million, in-place lease amortization expense of $2.2 million, and building improvements depreciation expense of $1.6 million.

• Provision for Impairment.

For the six months ended June 30, 2023, we recorded provisions for impairment of $2.8 million on six properties, which were classified as held-for-sale as of June 30, 2023.

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

These disposals relate to management’s continuous assessment of the Company’s portfolio in an effort to improve returns and manage risk exposure.

• Transaction costs.

Transaction costs decreased by $0.6 million to $0.1 million for the six months ended June 30, 2023 from $0.7 million for the six months ended June 30, 2022, which primarily relates to a decrease in costs incurred for abandoned acquisitions.

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.

Interest expense increased by $6.8 million to $9.5 million for the six months ended June 30, 2023 from $2.7 million for the six months ended June 30, 2022.

The increase is primarily attributed to an increase of $4.0 million of interest incurred under our 2028 Term Loan and a net increase of $2.2 million under our Revolver, primarily as a result of higher interest rates.

Gain on sales of real estate, net.

Net gain on sales of real estate decreased by $1.7 million to $0.3 million for the six months ended June 30, 2023 from $2.0 million for the six months ended June 30, 2022.

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

Three Months Ended

Six Months Ended

Number of properties sold 10 3

Sales price, net of disposal costs $ 19,299 $ 12,179

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

Gain on sales of real estate, net $ 296 $ 2,019

Other income.

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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.

The income tax benefit incurred for the six months ended June 30, 2023 is attributed to the gross loss of the Company's taxable REIT subsidiary ("TRS") compared to the income tax expense realized by the Company for the gross income earned by the TRS in the prior period.

Net income decreased $3.3 million to $0.7 million for the six months ended June 30, 2023 from $4.0 million for the six months ended June 30, 2022.

Net income decreased primarily due to increases in interest expense, depreciation and amortization expenses, provisions for impairment, payroll expense, as well as a decrease in the net gain on sales of real estate, as set forth above.

Liquidity and Capital Resources

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

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

Our primary capital requirements are to fund property acquisitions and development and investments in mortgage loans receivable 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 borrowing facilities available to the Company.

As of June 30, 2023, we had $175.0 million outstanding principal amount of the senior unsecured term loan (the “2027 Term Loan”), $200.0 million outstanding principal amount of the 2028 Term Loan, and $106 million of borrowings outstanding under our Revolver.

Additionally, as of June 30, 2023, we had $127.3 million remaining gross proceeds available for future issuances of shares of our common stock under the ATM Program.

In addition, subsequent to June 30, 2023, the Company entered into an agreement (“2029 Term Loan Agreement”) related to a $250.0 million sustainability linked senior unsecured term loan (the “2029 Term Loan”) which may, subject to the terms of the 2029 Term Loan Agreement, be increased to an amount of up to $400.0 million at the Company’s request.

We believe that the availability of proceeds from future issuances of shares of our common stock under the ATM Program, coupled with our cash flows from operations and available borrowing capacity under the Revolver and 2029 Term Loan, 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 Revolver, 2029 Term Loan and issuances of common stock.

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.

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

As of June 30, 2023, our contractual debt obligations primarily include the maturity of our 2027 Term Loan with the scheduled principal payment due on January 15, 2026, the maturity of our 2028 Term Loan with the scheduled principal payment due on February 11, 2028, and repayment of borrowings on our Revolver with a maturity of August 11, 2026.

During the six months ended June 30, 2023, we borrowed $221.0 million at a weighted average interest rate of 5.92% and also repaid $228.0 million on our revolving credit facilities.

The following table provides information with respect to our commitments as of June 30, 2023 (in thousands):

Payment Due by Period

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

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

Contractual Obligations

2 unchanged sentences

13,642 1,496 11,883 263 —

New Revolver – Borrowings 96,000 — — 96,000 —

New Revolver – Variable interest 19,166 4,277 11,405 3,484 —

Revolver – Borrowings 106,000 — — 106,000 —

Revolver – Variable interest 20,281 3,260 13,038 3,983 —

Facility Fee (2)

5 unchanged sentences

Mortgage Note – Interest 1,613 190 742 681 —

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

Property developments under contract 27,935 27,935 — — —

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

1 unchanged sentence

Total $ 600,850 $ 37,439 $ 48,059 $ 311,150 $ 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.

(1) We entered into four interest rate hedges to fix the base interest rate (daily SOFR) on our 2027 Term Loan.

Accordingly, the projected interest rate obligations for the variable rate 2027 Term Loan are based on the hedged fixed rate of 0.12% compared to the variable 2027 Term Loan daily SOFR) rate as of June 30, 2023 of 5.05%, 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 January 15, 2026.

(2) We are subject to a facility fee of 0.15% on our 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 5.16%, 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.

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

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

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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.

As of June 30, 2023, we had commitments to fund properties under development totaling $27.9 million, all of which is expected to be funded over the next twelve months.

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.

See discussion of our debt and interest rate hedges included in “Note 6 - Debt” and “Note 7 - Derivative Financial Instruments” of our condensed consolidated financial statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

As of June 30, 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

Six Months Ended June 30, 2023 Compared with Six Months Ended June 30, 2022

Six Months Ended

(In thousands) (Unaudited)

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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.

Net cash provided by operating activities increased by $12.1 million for the six months ended June 30, 2023 compared to the six months ended June 30, 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 $14.4 million, offset primarily by increases in operating and general and administrative expenses paid associated with our larger portfolio.

Cash Flows Used In Investing Activities.

Net cash used in investing activities 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.

Net cash used in investing activities decreased by $62.7 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

The decrease was primarily due to a decrease in cash spent on acquisitions of real estate of $43.4 million, offset by increases in cash spent on investments in mortgage loans receivable of $15.0 million and cash spent on real estate development and improvements of $11.4 million.

The remaining decreases were related primarily to earnest money deposits, which decreased $38.6 million compared to the prior period, and proceeds from the sale of real estate, which increased $7.1 million compared to the prior period.

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.

Net cash provided by financing activities decreased by $144.5 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

The decrease was primarily attributed to a reduction in net borrowings of $180.0 million under our revolving credit facilities during the six months ended June 30, 2023, offset by $41.9 million of more proceeds received in 2023 due to issuances of common stock in connection with our ATM Program and physical settlement of our common stock under the forward sale agreements.

Lastly, the decrease is further attributed to $5.3 million of additional common stock dividends paid during the six months ended June 30, 2023.

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

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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.

We maintain a TRS which may be subject to U.S.

federal, state, and local income taxes on its taxable income.

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

During the three and six months ended June 30, 2023, 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.

Critical Accounting Policies and Estimates

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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”).

Funds From Operations (“FFO”), Core FFO, Adjusted FFO (“AFFO”), earnings before interest expense, income tax expense, and depreciation and amortization (“EBITDA”), EBITDA further adjusted to exclude gains (or losses) from the sales of depreciable property and real estate impairment losses (“EBITDA re ”), Adjusted EBITDA re, Annualized Adjusted EBITDA re, Net Debt, property-level net operating income (“Property-Level NOI”), property-level cash net operating income (“Property-Level Cash NOI”), property-level cash net operating income estimated run rate (“Property-Level Cash NOI Estimated Run Rate”), and total property-level cash net operating income estimated run rate (“Total Property-Level Cash NOI Estimated Run Rate”), all of which are detailed below.

We believe these non-GAAP financial measures are industry measures used by analysts and investors to compare the operating performance of REITs.

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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.

These include non-recurring executive transition costs, severance and related charges, gain on insurance proceeds, and loss on debt extinguishments and other related costs.

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, 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.

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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,

Net income $ 1,481 $ 1,966

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

(Unaudited) (Unaudited)

Net (loss) income $ (792) $ 2,010 $ 689 $ 3,976

Depreciation and amortization of real estate 15,769 11,598 30,653 22,460

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

Provisions for impairment 2,836 1,114 2,836 1,114

Gain on sales of real estate, net (615) (1,858) (296) (2,019)

FFO 17,198 12,864 33,882 25,531

Non-recurring severance and related charges 13 —

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

Non-recurring executive transition costs, severance and related charges 201 — 214 —

Loss on debt extinguishment and other related costs 223 — 223 —

Gain on insurance proceeds (35) (36) (47) (36)

Core FFO 17,587 12,828 34,272 25,495

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AFFO $ 18,747 $ 13,738 $ 36,136 $ 26,877

EBITDA, EBITDAre and Adjusted EBITDAre

EBITDA, EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre

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

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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.

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 executive transition costs, severance and related charges, loss on debt extinguishment and other related costs, gain on insurance proceeds, other non-recurring expenses (income), adjustment for construction in process, and adjustment for intraquarter activities.

Annualized Adjusted EBITDA re is Adjusted EBITDA re multiplied by four.

We present EBITDA, EBITDA re, Adjusted EBITDA re and Annualized 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;

We use EBITDA,

EBITDA re, Adjusted EBITDA re and Annualized Adjusted EBITDA re as measures of our operating performance and not as measures of liquidity.

EBITDA, EBITDA re, Adjusted EBITDA re and Annualized 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):

Three Months Ended March 31,

Net income $ 1,481 $ 1,966

Additionally, our computation of EBITDA, EBITDA re , Adjusted EBITDA re and Annualized 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 , Adjusted EBITDA re and Annualized 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

Net (loss) income $ (792) $ 2,010

Depreciation and amortization of real estate 15,769 11,598

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Interest expense, net 5,521 1,522

Income tax (benefit) expense (43) 91

Income tax expense (benefit) (32) 93

Loss on debt extinguishment 128 —

Amortization of loan origination costs 28 13

EBITDA 20,516 15,223

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

Provision for impairments 2,836 1,114

Gain on sales of real estate, net (615) (1,858)

22,737 14,479

Straight-line rent adjustments (151) (346)

Non-recurring severance and related charges 13 —

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

Loss on debt extinguishment and other related costs 223 —

Non-recurring executive transition costs, severance and related charges 201 —

Gain on insurance proceeds (35) (36)

Other non-recurring expenses 242 —

Non-cash compensation expense 1,252 1,298

Adjustment for construction in process (1)

Adjustment for intraquarter investment activities (2)

Adjusted EBITDA re

$ 25,620 $ 17,285

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,

Net income $ 1,481 $ 1,966

Annualized Adjusted EBITDA re (3)

Net Debt / Annualized Adjusted EBITDA re

(1) Adjustment reflects the estimated cash yield on non-interest earning construction in process balances as of period end.

(2) Adjustment assumes all re-leasing activity, investments in and dispositions of real estate, including interest earning development, and interest earning loan activity completed during the three months ended June 30, 2023 and 2022 had occurred on April 1, 2023 and April 1, 2022, respectively.

(3) We calculate Annualized Adjusted EBITDA re by multiplying Adjusted EBITDA re by four.

We calculate our Net Debt as our principal amount of total debt outstanding excluding deferred financing costs, net discounts and debt issuance costs less cash, cash equivalents and restricted cash available for future investment.

We believe excluding cash, cash equivalents and restricted cash available for future investment from our principal amount, all of which could be used to repay debt, provides an estimate of the net contractual amount of borrowed capital to be repaid, which we believe is a beneficial disclosure to investors and analysts.

We further adjust Net Debt by the value of outstanding forward equity as of period end.

We believe these adjustments are additional beneficial disclosures to investors and analysis.

The following table reconciles Total Debt to Net Debt:

June 30, 2023

Total Debt $ 489,435

Cash, cash equivalents and restricted cash (13,140)

Value of outstanding forward equity (1)

Net Debt $ 476,295

(1) There were no unsettled shares under forward equity contracts as of June 30, 2023.

Property-Level NOI, Property-Level Cash NOI, Property-Level Cash NOI - Estimated Run Rate, and Total Cash NOI - Estimated Run Rate

Property-Level NOI, Property-Level Cash NOI, Property-Level Cash NOI - Estimated Run Rate, and Total Cash NOI - Estimated Run Rate are non-GAAP financial measures which we use to assess our operating results.

We compute Property-Level 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, loss on debt extinguishment, and other income (or expense).

We further adjust Property-Level NOI for non-cash revenue components of straight-line rent and amortization of lease-intangibles to derive Property-Level Cash NOI.

We further adjust Property-Level Cash NOI for intraquarter acquisitions, dispositions and interest-earning development to derive Property-Level Cash NOI - Estimated Run Rate.

We further adjust Property-Level Cash NOI - Estimated Run Rate for interest income on mortgage loans receivable and intraquarter mortgage loan activity to derive Total Cash NOI - Estimated Run Rate.

We believe Property-Level NOI, Property-Level Cash NOI, Property-Level Cash NOI - Estimated Run Rate, and Total Cash NOI - Estimated Run Rate 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.

Property-Level NOI, Property-Level Cash NOI, Property-Level Cash NOI - Estimated Run Rate, and Total Cash NOI - Estimated Run Rate are not measurements of financial performance under GAAP, and may not be comparable to similarly titled measures of other companies.

You should not consider our measures as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.

The following table sets forth a reconciliation of Property-Level NOI, Property-Level Cash NOI, Property-Level Cash NOI - Estimated Run Rate, and Total Cash NOI - Estimated Run Rate for the periods presented (in thousands):

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

(Unaudited) (Unaudited)

Net (loss) income $ (792) $ 2,010 $ 689 $ 3,976

General and administrative 5,260 4,865 10,168 9,057

Depreciation and amortization 15,847 11,751 30,795 22,730

Provisions for impairment 2,836 1,114 2,836 1,114

Transaction costs 15 488 124 653

Interest expense, net 5,521 1,522 9,465 2,691

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

Income tax (benefit) expense (43) 91

Gain on sales of real estate, net (615) (1,858) (296) (2,019)

Income tax expense (benefit) (32) 93 (75) 184

Loss on debt extinguishment 128 — 128 —

Interest income on mortgage loans receivable (1,923) (586) (2,901) (997)

Other income (68) (36) (220) (36)

NOI 24,538 17,989

Property-Level NOI 26,177 19,363 50,713 37,353

Straight-line rent adjustments (151) (346) (462) (872)

Amortization of lease-related intangibles (184) (166) (397) (331)

Cash NOI $ 24,014 $ 17,298

Property-Level Cash NOI $ 25,842 $ 18,851 $ 49,854 $ 36,150

Adjustment for intraquarter acquisitions, dispositions and interest earning development (1)

Property-Level Cash NOI Estimated Run Rate 26,529

Interest income on mortgage loans receivable 1,923

Adjustments for intraquarter mortgage loan activity (2)

Total Cash NOI - Estimated Run Rate $ 28,582

(1) Adjustment assumes all re-leasing activity, investments in and dispositions of real estate, including interest earning development, completed during the three months ended June 30, 2023 had occurred on April 1, 2023.

(2) Adjustment assumes all loan activity completed during the three months ended June 30, 2023 had occurred on April 1, 2023.

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