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 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 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 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. (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. 28 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. 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. 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). 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. 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 Overall 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. Acquisitions 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%. 29 Table of Contents Development 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 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. Dispositions 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 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 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 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 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. 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. 30 Table of Contents 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): Three Months Ended June 30, 2023 2022 Revenues Rental revenue (including reimbursable) $ 29,707 $ 22,048 Interest income on loans receivable 1,923 586 Total revenues 31,630 22,634 Operating expenses Property 3,530 2,685 General and administrative 5,260 4,865 Depreciation and amortization 15,847 11,751 Provisions for impairment 2,836 1,114 Transaction costs 15 488 Total operating expenses 27,488 20,903 Other income (expense) Interest expense, net (5,521) (1,522) 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. 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 31 Table of Contents 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 June 30, 2023 2022 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. 32 Table of Contents 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 June 30, 2023 2022 Revenues 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) Net income before income taxes 614 4,160 Income tax benefit (expense) 75 (184) Net income $ 689 $ 3,976 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 $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. 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 $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 $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 $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. 33 Table of Contents • 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 $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): Six Months Ended June 30, 2023 2022 Number of properties sold 10 3 Sales price, net of disposal costs $ 19,299 $ 12,179 Gain on sales of real estate, net $ 296 $ 2,019 Other income. The change in other income is primarily related to $0.2 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 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. 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. 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. Liquidity and Capital Resources 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 34 Table of Contents 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 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 July 1, 2023 to December 31, 2023 1 – 3 Years 3 – 5 Years Thereafter Contractual Obligations 2027 Term Loan – Principal $ 175,000 $ — $ — $ 175,000 $ — 2027 Term Loan – Variable interest (1) 13,642 1,496 11,883 263 — Revolver – Borrowings 106,000 — — 106,000 — Revolver – Variable interest 20,281 3,260 13,038 3,983 — Facility Fee (2) 1,867 300 1,200 367 — 2028 Term Loan – Principal 200,000 — — — 200,000 2028 Term Loan – Variable Interest (3) 35,816 3,881 15,522 15,522 891 Mortgage Note – Principal 8,435 92 332 8,011 — Mortgage Note – Interest 1,613 190 742 681 — Property developments under contract 27,935 27,935 — — — Tenant Improvement Allowances 4,089 — 4,089 — — Corporate office lease obligations 6,172 285 1,253 1,323 3,311 Total $ 600,850 $ 37,439 $ 48,059 $ 311,150 $ 204,202 (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 ass an operating lease. We began operating out of the new office in February 2022. The lease has a remaining noncancellable term of 9.1 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 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. 35 Table of Contents Credit Facilities 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 Six Months Ended June 30, 2023 Compared with Six Months Ended June 30, 2022 Six Months Ended June 30, 2023 2022 (In thousands) (Unaudited) Net cash provided by (used in): Operating activities $ 34,395 $ 22,250 Investing activities (226,525) (289,253) Financing activities 134,727 279,250 Cash Flows Provided By Operating Activities. 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 $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 $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. 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 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. 36 Table of Contents 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 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 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. 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 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. 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. 37 Table of Contents 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. 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 June 30, Six Months Ended June 30, 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 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 Adjustments: 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 Adjustments: Straight-line rent adjustments (151) (346) (462) (872) Amortization of deferred financing costs 336 157 615 314 Amortization of above/below-market assumed debt 29 — 57 — Amortization of loan origination costs 28 13 56 31 Amortization of lease-related intangibles (184) (166) (397) (331) Capitalized interest expense (150) (46) (284) (103) Non-cash compensation expense 1,252 1,298 2,279 2,343 AFFO $ 18,747 $ 13,738 $ 36,136 $ 26,877 EBITDA, EBITDAre, Adjusted EBITDAre and Annualized 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 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, 38 Table of Contents 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 , 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 June 30, 2023 2022 (Unaudited) Net (loss) income $ (792) $ 2,010 Depreciation and amortization of real estate 15,769 11,598 Amortization of lease-related intangibles (184) (166) Non-real estate depreciation and amortization 78 153 Interest expense, net 5,521 1,522 Income tax expense (benefit) (32) 93 Loss on debt extinguishment 128 — Amortization of loan origination costs 28 13 EBITDA 20,516 15,223 Adjustments: Provision for impairments 2,836 1,114 Gain on sales of real estate, net (615) (1,858) EBITDA re 22,737 14,479 Adjustments: Straight-line rent adjustments (151) (346) 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) 334 189 Adjustment for intraquarter investment activities (2) 817 1,701 Adjusted EBITDA re $ 25,620 $ 17,285 Annualized Adjusted EBITDA re (3) $ 102,480 Net Debt / Annualized Adjusted EBITDA re 4.6 (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. 39 Table of Contents Net Debt 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: As of 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. 40 Table of Contents 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 June 30, 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 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) 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) Property-Level Cash NOI $ 25,842 $ 18,851 $ 49,854 $ 36,150 Adjustment for intraquarter acquisitions, dispositions and interest earning development (1) 687 Property-Level Cash NOI Estimated Run Rate 26,529 Interest income on mortgage loans receivable 1,923 Adjustments for intraquarter mortgage loan activity (2) 130 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.