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. 27 Table of Contents 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 September 30, 2023, we owned or had investments in 547 single-tenant retail net leased properties that were diversified by tenant, industry and geography, including 85 different tenants, across 26 retail sectors in 45 states. This excludes 32 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 September 30, 2023, our investments generated ABR 1 of $124.3 million. Approximately 69% of our ABR is from investment grade 2 credit rated tenants and an additional 15% of our ABR is derived from tenants with an investment grade profile 3 . Exclusive of mortgage loans receivable, our portfolio was 100% occupied with a weighted average remaining lease term (“WALT”) of 9.3 years, which we believe provides us with a strong stable source of recurring cash flow from our portfolio. 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. We have issued or committed to issue shares of common stock in connection with the ATM Program for the periods presented as follows: • On September 14, 2023, we entered into a forward confirmation with respect to 7,500,000 shares of our common stock under the ATM Program. On September 28, 2023, we partially physically settled 1,516,289 shares of common stock at a price of $16.49 per share under such forward confirmation for net proceeds of approximately $24.8 million, net of sales commissions and offering costs of $0.2 million. We contributed the net proceeds to the Operating Partnership in exchange for 1,516,289 Class A OP Units. 5,983,711 shares remain unsettled under the forward confirmation as of September 30, 2023. • In September 2023, we issued 46,228 shares of common stock at a weighted average price of $17.09 per share for net proceeds of approximately $0.8 million, net of sales commissions and offering costs of less than $0.1 million. • In August 2023, we issued 109,725 shares of common stock at a weighted average price of $17.18 per share for net proceeds of approximately $1.8 million, net of sales commissions and offering costs of $0.1 million. As of September 30, 2023, we have $99.6 million remaining gross proceeds available for future issuances of shares of common stock under the ATM Program, inclusive of 5,983,711 shares remaining unsettled under the outstanding forward confirmation. . 2029 Term Loan On July 3, 2023, we 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 our request. The 2029 Term Loan contains a 12-month delayed draw feature and $150.0 million was drawn on July 3, 2023. The 2029 Term Loan is prepayable at our option in whole or in part without premium or penalty. The 2029 Term Loan matures on July 3, 2026, subject to extension options at our election on two occasions, by one year and, on one occasion, by six months (subject to certain conditions). 1 Annualized base rent (“ABR”) is annualized base rent as of September 30, 2023, for all leases that commenced, and annualized cash interest on mortgage loans receivable in place as of that date. 2 We define “investment grade” tenants as tenants, or tenants that are subsidiaries of a parent entity, with a credit rating of BBB- (S&P/Fitch), Baa3 (Moody's) or NAIC2 (National Association of Insurance Commissioners) or higher. 3 We define “investment grade profile” tenants as tenants with metrics of more than $1.0 billion in annual sales and a debt to adjusted EBITDA ratio of less than 2.0x but do not carry a published rating from S&P, Moody’s or NAIC. 28 Table of Contents We hedged the entire $250.0 million of the 2029 Term Loan at an all-in fixed interest rate of 4.99%, through January 2029, which consists of the fixed rate SOFR swap of 3.74%, plus a credit spread adjustment of 0.10% and, at current leverage levels, a borrowing spread of 1.15%. Interest is payable monthly or at the end of the applicable interest period in arrears on any outstanding borrowings. See further discussion of our debt, interest rate, and interest rate hedges included in “Note 6 - Debt.” Results of Operations Overall We continued to grow our assets during the nine months ended September 30, 2023 through the acquisition of properties, property developments, 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 $53.7 million, the execution of the 2029 Term Loan Agreement and receipt of proceeds of $150.0 million under the 2029 Term Loan, net borrowings on our $400.0 million senior unsecured revolving credit facility (the “Revolver”), and cash flows from operations during nine months ended September 30, 2023. Acquisitions During the three months ended September 30, 2023, we acquired 21 properties for a total purchase price of $95.3 million, inclusive of $0.8 million of capitalized acquisition costs. The acquisitions were all accounted for as asset acquisitions. These properties are located in 10 states with a WALT of approximately 10.0 years. The underwritten weighted-average capitalization rate on our third quarter acquisitions was approximately 7.0%. During the nine months ended September 30, 2023, we acquired 69 properties for a total purchase price of $259.2 million, inclusive of $2.4 million of capitalized acquisition costs. The acquisitions were all accounted for as asset acquisitions. These properties are located in 21 states with a WALT of approximately 10.4 years. The underwritten weighted-average capitalization rate on our year to date acquisitions was approximately 6.9%. Development As of September 30, 2023, we had 27 property developments under construction. During the three months ended September 30, 2023, we invested $33.2 million in property developments, including the land acquisition of 14 new developments with a combined initial purchase price of $9.6 million. During the nine months ended September 30, 2023, we invested $55.5 million in property developments, including the land acquisition of 34 new developments with a combined initial purchase price of $21.6 million. During the nine months ended September 30, 2023, we completed development on 12 projects and reclassified approximately $38.8 million from property under development to land, building, and improvements in the accompanying condensed consolidated balance sheets. Rent commenced for seven of the 12 completed developments during the nine months ended September 30, 2023, while rent is expected to commence for the other five completed developments in the fourth quarter of 2023. The remaining 27 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 September 30, 2023. Dispositions During the three months ended September 30, 2023, we sold four properties for a total sales price, net of disposal costs of $7.2 million, recognizing a gain of $0.4 million. During the nine months ended September 30, 2023, we sold fourteen properties for a total sales price, net of disposal costs of $26.5 million, recognizing a gain of $0.7 million. Investment in Mortgage Loans Receivable During the three months ended September 30, 2023, we invested $7.2 million in fully collateralized mortgage loans receivable with stated interest rates ranging from 7.00% to 8.50%. During the nine months ended September 30, 2023, we invested $68.8 million in fully collateralized mortgage loans receivable with stated interest rates ranging from 6.89% to 9.55%. The mortgage loans receivable are collateralized by real estate. The funds provided under the loans, in addition to discount and loan origination costs of $0.1 million and $0.1 million, respectively, are included in mortgage loans receivable, net in the accompanying condensed consolidated balance sheets as of September 30, 2023. See “Note 4 - Real Estate Investments” for further discussion on our mortgage loans receivable portfolio. 29 Table of Contents Economic and Financial Environment The average inflation rate for the nine months ended September 30, 2023 was 4.4%. While the Federal Reserve has been raising interest rates in an effort to lower inflation, the pace at which it may continue to do so is unclear leading to uncertainties in the financing market and a volatile economy. In the commercial real estate market, property prices generally continue to fluctuate which may impact our investment capitalization rates and operating costs. Likewise, during certain periods, including the current market, the credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate and credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly. Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022 The following table sets forth our operating results for the periods indicated (in thousands): Three Months Ended September 30, 2023 2022 Revenues Rental revenue (including reimbursable) $ 31,167 $ 24,339 Interest income on loans receivable 2,244 674 Other revenue 550 — Total revenues 33,961 25,013 Operating expenses Property 3,883 2,539 General and administrative 5,133 4,552 Depreciation and amortization 15,804 13,407 Provisions for impairment 1,538 — Transaction costs 143 51 Total operating expenses 26,501 20,549 Other income (expense) Interest expense, net (3,946) (3,017) Gain on sales of real estate, net 373 143 Other income, net 367 — Total other income (expense), net (3,206) (2,874) Net income before income taxes 4,254 1,590 Income tax (expense) benefit (15) (171) Net income $ 4,239 $ 1,419 Revenue. Revenue for the three months ended September 30, 2023 increased by $9.0 million to $34.0 million from $25.0 million for the three months ended September 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 $6.1 million, combined with net increases of property expense reimbursements of $1.1 million, an increase of $1.6 million related to interest income on mortgage loans receivable, and an increase of $0.6 million in other revenue related to the receipt of legal settlement proceeds associated with a lease termination. The increase in revenue is offset by a $0.1 million decrease in straight-line rental revenue, a $0.1 million increase in reserves for uncollectible amounts, and a $0.1 million decrease in amortization of above- and below-market lease related intangible assets. Total Operating Expenses. Total expenses increased by $6.0 million to $26.5 million for the three months ended September 30, 2023 as compared to $20.5 million for the three months ended September 30, 2022. The increase is primarily attributed to an 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: 30 Table of Contents • Property Expenses. Property expenses increased $1.4 million to $3.9 million for the three months ended September 30, 2023 from $2.5 million for the three months ended September 30, 2022. The increase is primarily attributed to an increase in the number of operating properties, including combined net increases of reimbursable property expenses of $1.3 million, of which $0.7 million, $0.5 million, and $0.1 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 $0.5 million to $5.1 million for the three months ended September 30, 2023 from $4.6 million for the three months ended September 30, 2022. The increase is primarily due to an increase in bonus expenses of $0.4 million and an increase in payroll expenses of $0.1 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 $2.4 million to $15.8 million for the three months ended September 30, 2023 from $13.4 million for the three months ended September 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 $1.5 million, building improvements depreciation expense of $0.5 million, and in-place lease amortization expense of $0.4 million. • Provisions for Impairment. For the three months ended September 30, 2023, we recorded provisions for impairment of $1.5 million on seven properties, which were either previously classified as held-for-sale, newly classified as held-for-sale or disposed of during the three months ended September 30, 2023. For the three months ended September 30, 2022, we recorded no provisions for impairment. For the three months ended September 30, 2023, we sold two properties that were impaired. 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 increased by less than $0.1 million for the three months ended September 30, 2023 from less than $0.1 million for the three months ended September 30, 2022, which primarily relates to an increase in costs incurred for abandoned acquisitions. Interest Expense. Interest expense increased by $0.9 million to $3.9 million for the three months ended September 30, 2023 from $3.0 million for the three months ended September 30, 2022. The increase is primarily attributed to an increase of $0.7 million of interest incurred under our $200.0 million senior unsecured term loan (the “2028 Term Loan”), an increase of $2.2 million of interest incurred under the 2029 Term Loan, and an increase of $0.3 million in loan fee amortization. This is offset by $1.1 million in amortization of deferred gains on interest rate swaps, $0.3 million of increased capitalized interest on our property developments, and a net decrease of $0.9 million under the Revolver primarily due to a decrease in average borrowings outstanding during the respective periods. Gain on sales of real estate, net. Net gain on sales of real estate increased by $0.3 million to a net gain of $0.4 million for the three months ended September 30, 2023 from a net gain of $0.1 million for the three months ended September 30, 2022. The table below summarizes the properties sold for the periods indicated (dollars in thousands): Three Months Ended September 30, 2023 2022 Number of properties sold 4 1 Sales price, net of disposal costs $ 7,224 $ 1,660 Gain on sales of real estate, net $ 373 $ 143 Other income, net. Other income increased by $0.4 million for the three months ended September 30, 2023. The increase relates to $0.4 million of interest income earned on our cash, cash equivalents and restricted cash balances as presented in the condensed consolidated balance sheets. Income tax (expense) benefit. Income tax expense decreased by $0.2 million for the three months ended September 30, 2023. The decrease relates to lower provisions for federal and state income taxes on the financial results of our taxable REIT subsidiary (“TRS”). 31 Table of Contents Net income. Net income increased $2.8 million to $4.2 million for the three months ended September 30, 2023 from $1.4 million for the three months ended September 30, 2022. Net income increased primarily due to increases in rental revenues due to the growth in the size of our real estate investment portfolio, including interest income associated with our mortgage loans receivable. This is offset by increases in depreciation and amortization expense, interest expense, reimbursable property expenses, and provisions for impairment as set forth above. Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022 The following table sets forth our operating results for the periods indicated (in thousands): Nine Months Ended September 30, 2023 2022 Revenues Rental revenue (including reimbursable) $ 89,347 $ 67,309 Interest income on loans receivable 5,145 1,671 Other revenue 550 — Total revenues 95,042 68,980 Operating expenses Property 11,350 8,156 General and administrative 15,299 13,608 Depreciation and amortization 46,599 36,137 Provisions for impairment 4,374 1,114 Transaction costs 267 704 Total operating expenses 77,889 59,719 Other income (expense) Interest expense, net (13,412) (5,708) Gain on sales of real estate, net 669 2,162 Loss on debt extinguishment (128) — Other income, net 586 36 Total other income (expense), net (12,285) (3,510) Net income before income taxes 4,868 5,751 Income tax (expense) benefit 60 (356) Net income $ 4,928 $ 5,395 Revenue. Revenue for the nine months ended September 30, 2023 increased by $26.0 million to $95.0 million from $69.0 million for the nine months ended September 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 $20.5 million, combined with net increases of property expense reimbursements of $2.8 million, an increase of $3.5 million related to interest income on mortgage loans receivable, and an increase of $0.6 million in other revenue related to the receipt of legal settlement proceeds associated with a lease termination. The increase in revenue is offset by a $0.8 million decrease in straight-line rental revenue and a $0.4 million increase in reserves for uncollectible amounts. Total Operating Expenses. Total expenses increased by $18.2 million to $77.9 million for the nine months ended September 30, 2023 from $59.7 million for the nine months ended September 30, 2022. The increase is primarily attributed to an 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 $3.2 million to $11.4 million for the nine months ended September 30, 2023 from $8.2 million for the nine months ended September 30, 2022. The increase is primarily attributed to an increase in the number of operating properties, including combined net increases of reimbursable property expenses of $3.1 million, of which $1.3 million, $1.2 million, and $0.6 million were related to reimbursable property taxes, reimbursable common area maintenance costs, and reimbursable insurance costs, respectively. 32 Table of Contents • General and Administrative Expenses. General and administrative expenses increased $1.7 million to $15.3 million for the nine months ended September 30, 2023 from $13.6 million for the nine months ended September 30, 2022. The increase is primarily due to increased payroll expenses of $0.8 million, bonus expenses of $0.7 million, franchise taxes of $0.2 million, corporate office lease expenses of $0.2 million, and executive severance and transition costs of $0.2 million. This is offset by decreased corporate insurance of $0.3 million and accounting service and consulting fees of $0.3 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 $10.5 million to $46.6 million for the nine months ended September 30, 2023 from $36.1 million for the nine months ended September 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 $5.8 million, in-place lease amortization expense of $2.6 million, building improvements depreciation expense of $2.0 million, and leasehold improvements depreciation expense of $0.2 million. This is offset by a decrease in assembled workforce amortization expense of $0.2 million. • Provision for Impairment. For the nine months ended September 30, 2023, we recorded provisions for impairment of $4.4 million on 10 properties, which were either previously classified as held-for-sale, newly classified as held-for-sale or disposed of during the nine months ended September 30, 2023. For the nine months ended September 30, 2022, we recorded provisions for impairment of $1.1 million on one property. For the nine months ended September 30, 2023, we sold two properties that were impaired. 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 $0.4 million to $0.3 million for the nine months ended September 30, 2023 from $0.7 million for the nine months ended September 30, 2022, which primarily relates to a decrease in costs incurred for abandoned acquisitions. Interest Expense. Interest expense increased by $7.7 million to $13.4 million for the nine months ended September 30, 2023 from $5.7 million for the nine months ended September 30, 2022. The increase is primarily attributed to an increase of $4.7 million of interest incurred under the 2028 Term Loan, an increase of $2.2 million of interest incurred under the 2029 Term Loan, and a net increase of $1.3 million under the Revolver as a result of higher interest rates driving an increase of $2.2 million offset by a decrease in average borrowings outstanding during the respective periods. Additional increases of $0.4 million and $0.6 million are attributed to increased facility fees and increased loan fee amortization, respectively. This is offset by $1.1 million in amortization of deferred gains on interest rate swaps, $0.5 million of increased capitalized interest on our property developments. Gain on sales of real estate, net. Net gain on sales of real estate decreased by $1.5 million to a net gain of $0.7 million for the nine months ended September 30, 2023 from a net gain of $2.2 million for the nine months ended September 30, 2022. The table below summarizes the properties sold for the periods indicated (in thousands): Nine Months Ended September 30, 2023 2022 Number of properties sold 14 4 Sales price, net of disposal costs $ 26,523 $ 13,837 Gain on sales of real estate, net $ 669 $ 2,162 Other income, net. Other income increased by $0.6 million for the nine months ended September 30, 2023. The increase relates to $0.6 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 (expense) benefit. Income tax expense decreased by $0.5 million to an income tax benefit of $0.1 million for the nine months ended September 30, 2023 from an income tax expense of $0.4 million for the nine months ended September 30, 2022. The decrease relates to lower provisions for federal and state income taxes on the financial results of our TRS. Net income. Net income decreased $0.5 million to $4.9 million for the nine months ended September 30, 2023 from a net income of $5.4 million for the nine months ended September 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 net gains on sales of real estate, as set forth above. This is offset primarily by increases in rental revenues due to the growth in the size of our real estate investment portfolio, including interest income associated with our mortgage loans receivable. 33 Table of Contents 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 available borrowing facilities. As of September 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, $150.0 million outstanding principal amount of the 2029 Term Loan, and $42.0 million of borrowings outstanding under our Revolver. Additionally, as of September 30, 2023, we had $99.6 million remaining gross proceeds available for future issuances of shares of our common stock under the ATM Program, inclusive of 5,983,711 shares remaining unsettled under the outstanding forward confirmation. We believe that the availability of proceeds from future issuances of shares of our common stock under the current ATM Program or subsequent at-the-market sale programs, 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 September 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, the maturity of our 2029 Term Loan with the scheduled principal payment due on July 3, 2026, and repayment of borrowings on our Revolver with a maturity of August 11, 2026. During the nine months ended September 30, 2023, we borrowed $288.0 million at a weighted average interest rate of 5.98% and also repaid $359.0 million on our revolving credit facilities. The following table provides information with respect to our commitments as of September 30, 2023 (in thousands): Payment Due by Period Total From October 1, 2023 to December 31, 2023 2024 – 2025 2026 – 2027 Thereafter Contractual Obligations 2027 Term Loan – Principal $ 175,000 $ — $ — $ 175,000 $ — 2027 Term Loan – Variable interest (1) 13,024 889 11,873 262 — Revolver – Borrowings 42,000 — — 42,000 — Revolver – Variable interest 7,714 674 5,393 1,647 — Facility Fee (2) 1,717 150 1,200 367 — 2028 Term Loan – Principal 200,000 — — — 200,000 2028 Term Loan – Variable interest (3) 33,873 1,940 15,521 15,521 891 2029 Term Loan – Principal 150,000 — — 150,000 — 2029 Term Loan – Variable interest (4) 20,192 1,833 14,663 3,696 — Mortgage Note – Principal 8,382 39 332 8,011 — Mortgage Note – Interest 1,518 95 742 681 — Property developments under contract 37,946 37,946 — — — Tenant Improvement Allowances 4,089 — 4,089 — — Corporate office lease obligations 6,033 146 1,253 1,323 3,311 Total $ 701,488 $ 43,712 $ 55,066 $ 398,508 $ 204,202 (1) We entered into five interest rate hedges to fix the base interest rate (daily SOFR) on our 2027 Term Loan. The hedged fixed rate will reset effective November 27, 2023 to 1.87% and December 23, 2024 to 2.40%. Accordingly, the projected interest rate obligations for the variable rate 2027 Term Loan are based on the hedged fixed rates of 0.12% through November 27, 2023, 1.87% through December 23, 2024, and 2.40% thereafter, compared to the variable 2027 Term Loan daily SOFR rate as of September 30, 2023 of 5.30%, plus a SOFR adjustment of 0.10% and applicable margin of 1.15% based on the $175.0 million 2027 Term Loan outstanding through the contractual maturity date of January 15, 2026. (2) We are subject to a facility fee of 0.15% on our Revolver. 34 Table of Contents (3) We entered into three interest rate hedges to fix the base interest rate (one-month SOFR) on our 2028 Term Loan. Accordingly, the projected interest rate obligations for the variable rate 2028 Term Loan are based on the hedged fixed rate of 2.63% compared to the variable 2028 Term Loan one-month SOFR rate as of September 30, 2023 of 5.33%, 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. (4) We entered into four interest rate hedges to fix the base interest rate (daily SOFR) on our 2029 Term Loan. Accordingly, the projected interest rate obligations for the variable rate 2029 Term Loan are based on the hedged fixed rate of 3.64% compared to the variable 2029 Term Loan daily SOFR rate as of September 30, 2023 of 5.32%, plus a SOFR adjustment of 0.10% and applicable margin of 1.15% based on the $150.0 million of the 2029 Term Loan outstanding through the contractual maturity date of July 3, 2026. In August 2021, we entered into a lease agreement on a new corporate office space, which is classified as an operating lease. We began operating out of the new office in February 2022. The lease has a remaining noncancellable term of 8.8 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 we are obligated or receive an option to purchase the properties. As of September 30, 2023, we had commitments to fund properties under development totaling $37.9 million, all of which is expected to be funded over the next two years. 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 September 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 Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2023 2022 (In thousands) (Unaudited) Net cash provided by (used in): Operating activities $ 51,512 $ 38,706 Investing activities (345,731) (381,188) Financing activities 231,610 351,069 Cash Flows Provided By Operating Activities. Net cash provided by operating activities increased by $12.8 million for the nine months ended September 30, 2023 compared to the nine months ended September 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 $20.5 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 $35.5 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease was primarily due to a decrease in cash spent on acquisitions of real estate of $74.3 million, offset by increases in cash spent on investments in mortgage loans receivable of $19.0 million and cash spent on real estate development and improvements of $32.2 million. The remaining decrease is primarily related to proceeds from the sale of real estate, which increased $10.9 million compared to the prior period. 35 Table of Contents Cash Flows Provided By Financing Activities. Net cash provided by financing activities decreased by $119.5 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease was primarily attributed to a reduction in net borrowings of $37.0 million under our revolving credit facilities, a reduction in term loan proceeds of $50.0 million, a decrease of proceeds from issuances of common stock in connection with our ATM Program of $24.1 million, an increase in payments of common stock dividends of $9.1 million, and a decrease in proceeds under property development incentives of $0.6 million during the nine months ended September 30, 2023. The decrease was offset by decreases in deferred offering costs and deferred financing costs of $0.8 million and $0.5 million, respectively, during the nine months ended September 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. During the three and nine months ended September 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 (“EBITDAre”), Adjusted EBITDAre, Annualized Adjusted EBITDAre, 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. 36 Table of Contents 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 and earned development interest, non-cash interest expense, non-cash compensation expense, amortization of deferred financing costs, amortization of above/below-market assumed debt, and amortization of loan origination costs. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. In fact, real estate values historically have risen or fallen with market conditions. FFO is intended to be a standard supplemental measure of operating performance that excludes historical cost depreciation and valuation adjustments from net income. We consider FFO to be useful in evaluating potential property acquisitions and measuring operating performance. We further consider FFO, Core FFO and AFFO to be useful in determining funds available for payment of distributions. FFO, Core FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. You should not consider FFO, Core FFO and AFFO to be alternatives to net income as a reliable measure of our operating performance nor should you consider FFO, Core FFO and AFFO to be alternatives to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity. FFO, Core FFO and AFFO do not measure whether cash flow is sufficient to fund our cash needs, including principal amortization, capital improvements and distributions to stockholders. FFO, Core FFO and AFFO do not represent cash flows from operating, investing or financing activities as defined by GAAP. Further, FFO, Core FFO and AFFO as disclosed by other REITs might not be comparable to our calculations of FFO, Core FFO and AFFO. 37 Table of Contents The following table sets forth a reconciliation of FFO, Core FFO and AFFO for the periods presented to net income before allocation to noncontrolling interests, as computed in accordance with GAAP (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (Unaudited) (Unaudited) Net income $ 4,239 $ 1,419 $ 4,928 $ 5,395 Depreciation and amortization of real estate 15,726 13,241 46,379 35,701 Provisions for impairment 1,538 — 4,374 1,114 Gain on sales of real estate, net (373) (143) (669) (2,162) FFO $ 21,130 $ 14,517 $ 55,012 $ 40,048 Adjustments: Non-recurring executive transition costs, severance and related charges 62 — 276 — Loss on debt extinguishment and other related costs — — 223 — Gain on insurance proceeds (1) — (47) (36) Core FFO $ 21,191 $ 14,517 $ 55,464 $ 40,012 Adjustments: Straight-line rent adjustments (245) (272) (707) (1,144) Amortization of deferred financing costs 578 239 1,165 553 Amortization of above/below-market assumed debt 29 — 86 — Amortization of loan origination costs 26 28 83 59 Amortization of lease-related intangibles (121) (313) (517) (644) Earned development interest 189 — 189 — Capitalized interest expense (404) (115) (688) (218) Non-cash interest expense (1,134) — (1,134) — Non-cash compensation expense 1,280 1,302 3,559 3,645 AFFO $ 21,389 $ 15,386 $ 57,500 $ 42,263 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), lease termination fees, 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, 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. 38 Table of Contents 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 September 30, 2023 2022 (Unaudited) Net income $ 4,239 $ 1,419 Depreciation and amortization of real estate 15,726 13,241 Amortization of lease-related intangibles (121) (313) Non-real estate depreciation and amortization 78 166 Interest expense, net 3,946 3,017 Income tax expense (benefit) 15 171 Amortization of loan origination costs 26 28 EBITDA 23,909 17,729 Adjustments: Provision for impairments 1,538 — Gain on sales of real estate, net (373) (143) EBITDAre 25,074 17,586 Adjustments: Straight-line rent adjustments (245) (272) Non-recurring executive transition costs, severance and related charges 62 — Gain on insurance proceeds (1) — Non-cash compensation expense 1,280 1,302 Lease termination fees (550) — Adjustment for construction in process (1) 720 263 Adjustment for intraquarter investment activities (2) 1,341 1,182 Adjusted EBITDA re $ 27,681 $ 20,061 Annualized Adjusted EBITDA re (3) $ 110,724 Net Debt Adjusted for Outstanding Forward Equity / Annualized Adjusted EBITDA re 4.2 (1) Adjustment reflects the estimated cash yield on developments in process balances as of period end. (2) Adjustment assumes all re-leasing activity, investments in and dispositions of real estate, including developments and interest earning loan activity completed during the three months ended September 30, 2023 and 2022 had occurred on July 1, 2023 and July 1, 2022, respectively. (3) We calculate Annualized Adjusted EBITDA re by multiplying Adjusted EBITDA re by four. Net Debt and Net Debt Adjusted for Outstanding Forward Equity 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 further adjust Net Debt by the value of outstanding forward equity as of period end to derive Net Debt Adjusted for Outstanding Forward Equity. We believe excluding cash, cash equivalents and restricted cash available for future investment from our principal amount in addition to excluding the value of outstanding forward equity, all of which could be used to repay debt, provides an estimate of the net contractual amount of borrowed capital to be repaid. We believe these adjustments are additional beneficial disclosures to investors and analysts. The following table reconciles the principal amount of total debt to Net Debt Adjusted for Outstanding Forward Equity: As of September 30, 2023 Principal amount of total debt $ 575,399 Less: Cash, cash equivalents and restricted cash (7,934) Net Debt 567,465 Value of outstanding forward equity (1) (98,671) Net Debt Adjusted for Outstanding Forward Equity $ 468,794 39 Table of Contents (1) There were 5,983,711 unsettled shares under forward equity contracts under the ATM Program as of September 30, 2023 at the available net settlement price of $16.49. 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, lease termination fees 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 completed 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (Unaudited) (Unaudited) Net income $ 4,239 $ 1,419 $ 4,928 $ 5,395 General and administrative 5,133 4,552 15,299 13,608 Depreciation and amortization 15,804 13,407 46,599 36,137 Provisions for impairment 1,538 — 4,374 1,114 Transaction costs 143 51 267 704 Interest expense, net 3,946 3,017 13,412 5,708 Gain on sales of real estate, net (373) (143) (669) (2,162) Income tax expense (benefit) 15 171 (60) 356 Loss on debt extinguishment — — 128 — Interest income on mortgage loans receivable (2,244) (674) (5,145) (1,671) Lease termination fees (550) — (550) — Other income, net (367) — (586) (36) Property-Level NOI 27,284 21,800 77,997 59,153 Straight-line rent adjustments (245) (272) (707) (1,144) Amortization of lease-related intangibles (121) (313) (517) (644) Property-Level Cash NOI $ 26,918 $ 21,215 $ 76,773 $ 57,365 Adjustment for intraquarter acquisitions, dispositions and completed development (1) 1,320 Property-Level Cash NOI Estimated Run Rate 28,238 Interest income on mortgage loans receivable 2,244 Adjustments for intraquarter mortgage loan activity (2) 21 Total Cash NOI - Estimated Run Rate $ 30,503 40 Table of Contents (1) Adjustment assumes all re-leasing activity, investments in and dispositions of real estate, including developments completed during the three months ended September 30, 2023 had occurred on July 1, 2023. (2) Adjustment assumes all loan activity completed during the three months ended September 30, 2023 had occurred on July 1, 2023.