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, 2023, filed with the Securities and Exchange Commission (the “SEC”) on February 14, 2024, 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. 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. 26 Table of Contents Business Overview We are an internally managed real estate company that acquires, owns, invests in 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. As of March 31, 2024, we owned or had investments in 628 single-tenant retail net leased properties that were diversified by tenant, industry and geography, including 88 different tenants, across 26 retail sectors in 45 states. This excludes 16 property developments where rent has yet to commence. We focus on tenants in industries where a physical location is critical to the generation of sales and profits, with a focus on necessity goods and essential services in the retail sector, including home improvement, auto parts, drug stores and pharmacies, general retail, grocers, convenience stores, discount stores, and quick-service restaurants, all of which we refer to as defensive retail industries. As of March 31, 2024, our investments generated ABR 1 of $140.3 million. Approximately 71% of our ABR is from investment grade 2 credit rated tenants and an additional 13% 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 9.2 years, which we believe provides us with a strong stable source of recurring cash flow from our portfolio. January Follow-On Offering In January 2024, we completed a registered public offering of 11,040,000 shares of our common stock at a public offering price of $18.00 per share. In connection with the offering, we entered into forward sale agreements for 11,040,000 shares of our common stock. We did not initially receive any proceeds from the sale of shares of common stock by the forward purchasers. We expect to physically settle the forward sale agreements (by delivery of shares of common stock) and receive proceeds from the sale of those shares upon one or more forward settlement dates, which shall occur no later than January 9, 2025. We may also elect to cash settle or net share settle all or a portion of our obligations under a forward sale agreement if we conclude it is in our best interest to do so. If we elect to cash settle a forward sale agreement, we may not receive any proceeds and we may owe cash to the relevant counterparty in certain circumstances. No physical settlement has occurred under the January 2024 forward sale agreements through March 31, 2024. 2023 ATM Program On October 25, 2023, we entered into a $300.0 million at-the-market equity program (the “2023 ATM Program”) through which, from time to time, we may sell shares of our common stock in registered transactions. On March 28, 2024, we entered into a forward sale agreement for 107,500 shares of our common stock under the 2023 ATM Program at a public offering price of $18.29 per share. As of March 31, 2024, we had $222.7 million in remaining gross proceeds available for future issuances of shares of our common stock under the 2023 ATM Program, inclusive of unsettled shares under forward confirmation. 2029 Term Loan On July 3, 2023, we entered into an agreement (the “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. We drew an additional $100.0 million under the 2029 Term Loan on March 1, 2024. We have 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” in “Item 1 - Financial Statements (unaudited).” ( 1 ) Annualized base rent (“ABR”) is annualized base rent as of March 31, 2024, 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. 27 Table of Contents Results of Operations Overall We continued to grow our assets during the first quarter of 2024 through the acquisition of properties, property developments, and investment in mortgage loans receivable. This growth was financed through a $100.0 million draw on our 2029 Term Loan, the usage of existing cash balances as a result of borrowings on our Revolver, the usage of existing restricted cash balances as a result of tax-free exchanges under Section 1031 of the Internal Revenue Code of 1986, and cash flows from operations during the three months ended March 31, 2024. Acquisitions During the three months ended March 31, 2024, we acquired 28 properties for a total purchase price of $95.2 million, inclusive of $1.2 million of capitalized acquisition costs. The acquisitions were all accounted for as asset acquisitions. These properties are located in 16 states with a WALT of approximately 10.6 years. The underwritten weighted-average capitalization rate on our year to date acquisitions was approximately 7.3%. Development As of March 31, 2024, we had 13 property developments under construction. During the three months ended March 31, 2024, we invested $11.0 million in property developments, including the land acquisition of two new developments with a combined initial purchase price of $0.8 million. During the three months ended March 31, 2024, we completed development on seven projects and reclassified approximately $18.4 million from property under development to land, buildings and improvements, and other assets (leasing commissions) in the accompanying condensed consolidated balance sheets. Rent commenced for four of the seven completed developments in the first quarter of 2024, while rent is expected to commence for the other three completed developments in the second quarter of 2024. The remaining 13 developments are expected to be substantially completed with rent commencing at various points throughout 2024. The purchase price, including acquisition costs, and subsequent development are included in property under development in the accompanying condensed consolidated balance sheets as of March 31, 2024. Dispositions During the three months ended March 31, 2024, we sold 12 properties for a total sales price, net of disposal costs, of $20.5 million, recognizing a net loss of $1.0 million. Investment in Mortgage Loans Receivable During the three months ended March 31, 2024, we invested an additional $10.2 million in fully collateralized mortgage loans receivable with stated interest rates of 10.25%. The mortgage loans receivable are collateralized by real estate, primarily leased by investment grade credit rated tenants. The funds provided under the loans, in addition to loan origination costs, net of loan origination fees of less than $0.1 million, are included in mortgage loans receivable, net in the accompanying consolidated balance sheets as of March 31, 2024. See “Note 4 - Real Estate Investments” in “Item 1 - Financial Statements (unaudited)” for further discussion on our mortgage loans receivable portfolio. Economic and Financial Environment The average inflation rate for the three months ended March 31, 2024 was 3.5% as compared to 5.0% for the prior year period. While the Federal Reserve had been raising interest rates in an effort to lower inflation throughout 2022 and the first half of 2023, there continues to be uncertainty entering into 2024 as to whether rates will be maintained or potentially cut, and the timing of potential cuts, 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. 28 Table of Contents Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023 The following table sets forth our operating results for the periods indicated (in thousands): Three Months Ended March 31, 2024 2023 Revenues Rental revenue (including reimbursable) $ 35,189 $ 28,474 Interest income on loans receivable 2,484 978 Total revenues 37,673 29,452 Operating expenses Property 4,102 3,936 General and administrative 5,707 4,909 Depreciation and amortization 17,541 14,949 Provisions for impairment 3,662 — Transaction costs 129 109 Total operating expenses 31,141 23,903 Other (expense) income Interest expense, net (6,180) (3,944) Gain (loss) on sales of real estate, net 997 (319) Other (expense) income, net (280) 152 Total other (expense) income, net (5,463) (4,111) Net income before income taxes 1,069 1,438 Income tax (expense) benefit (17) 43 Net income $ 1,052 $ 1,481 Revenue. Revenue for the three months ended March 31, 2024 increased by $8.2 million to $37.7 million from $29.5 million for the three months ended March 31, 2023 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 $6.9 million, combined with net increases of property expense reimbursements of $0.1 million, an increase of $1.5 million related to interest income on mortgage loans receivable, and an increase in straight-line rental revenue of $0.2 million. The increase in revenue is offset by a $0.2 million decrease in above/below market lease adjustments and a $0.3 million decrease related to prior year recoveries. Total Operating Expenses. Total expenses increased by $7.2 million to $31.1 million for the three months ended March 31, 2024 as compared to $23.9 million for the three months ended March 31, 2023. 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 and severance costs. Total operating expenses include the following: • Property Expenses. Property expenses increased $0.2 million to $4.1 million for the three months ended March 31, 2024 from $3.9 million for the three months ended March 31, 2023. The increase is primarily attributed to the increase in the number of operating properties, including combined net increases of reimbursable property expenses, including $0.3 million of reimbursable property taxes, offset by a decrease of $0.3 million of reimbursable common area maintenance costs. Additionally, non-reimbursable expenses increased by $0.1 million, primarily consisting of roof repairs. • General and Administrative Expenses. General and administrative expenses increased $0.8 million to $5.7 million for the three months ended March 31, 2024 from $4.9 million for the three months ended March 31, 2023. The increase is primarily due to an increase in employee severance of $0.8 million, including cash severance of $0.5 million and the expense associated with the accelerated vesting of stock-based compensation of $0.3 million, an increase of $0.4 million of stock-based compensation, offset by a decrease of $0.2 million of payroll expenses, and other combined net decreases 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. 29 Table of Contents • Depreciation and Amortization. Depreciation and amortization expense increased $2.6 million to $17.5 million for the three months ended March 31, 2024 from $14.9 million for the three months ended March 31, 2023. 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 $1.7 million, building improvements depreciation expense of $0.5 million, in-place lease amortization expense of $0.2 million, and leasing commissions amortization expense of $0.2 million. • Provisions for impairment. For the three months ended March 31, 2024, we recorded provisions for impairment of $3.7 million on 12 properties, the majority of which were either previously classified as held-for-sale, newly classified as held-for-sale or disposed of during three months ended March 31, 2024. Four of the properties are held for investment as of the three months ended March 31, 2024. For the three months ended March 31, 2023, we recorded no provisions for impairment. For the three months ended March 31, 2024, 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. Interest Expense. Interest expense increased by $2.3 million to $6.2 million for the three months ended March 31, 2024 from $3.9 million for the three months ended March 31, 2023. The increase is primarily attributed to an increase of $2.3 million of interest incurred under the 2029 Term Loan executed on July 3, 2023, an increase of $0.8 million of interest incurred under the 2027 Term Loan (amendment and restatement of the 2024 Term Loan on June 15, 2023), offset by a net decrease of less than $0.1 million under the Revolver as a result of a decrease in average borrowings outstanding which was offset by higher interest rates. An additional increase of $0.3 million was attributable to increased loan fee amortization. This is offset by $1.0 million in amortization of deferred gains on interest rate swaps and $0.2 million of increased capitalized interest on our property developments. Gain (loss) on sales of real estate, net. Net gain on sales of real estate increased by $1.3 million to $1.0 million for the three months ended March 31, 2024 from a $0.3 million net loss for the three months ended March 31, 2023. The table below summarizes the properties sold for the periods indicated (in thousands): Three Months Ended March 31, 2024 2023 Number of properties sold 12 8 Sales price, net of disposal costs $ 20,466 $ 15,463 Gain (loss) on sales of real estate, net $ 997 $ (319) Other (expense) income, net. Other (expense) income, net decreased by $0.4 million for the three months ended March 31, 2024 primarily due to a $0.4 million loss recorded on one property as a result of foundation issues in 2024. Net income. Net income decreased $0.4 million to $1.1 million for the three months ended March 31, 2024 from $1.5 million for the three months ended March 31, 2023. Net income decreased primarily due to increases in provisions for impairment, interest expense, and depreciation and amortization expense, offset by increases in gains on sales of real estate and 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 developments, fund investments in mortgage loans receivable and required interest payments, and fund 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 March 31, 2024, we had $175.0 million outstanding principal amount under the senior unsecured term loan (the “2027 Term Loan”), $200.0 million outstanding principal amount under the senior unsecured term loan (the “2028 Term Loan”), $250.0 million outstanding principal amount under the 2029 Term Loan, and $75.0 million of borrowings outstanding under our $400.0 million senior unsecured revolving credit facility (the “Revolver”). Additionally, as of March 31, 2024, we had $98.5 million and $1.9 million of unsettled forward equity under the 2021 ATM Program and 2023 ATM Program, respectively. As of March 31, 2024, $222.7 million of remaining gross proceeds were available for future issuances of shares of our common stock under the 2023 ATM Program, inclusive of unsettled shares under forward confirmation. Lastly, we had $190.5 million of unsettled forward equity under the January 2024 forward sale agreements as of March 31, 2024. 30 Table of Contents We believe the availability of proceeds from the settlement of unsettled outstanding forward confirmations, future issuances of shares of our common stock under the 2023 ATM Program or subsequent at-the-market sale programs, as well as our cash flows from operations and available borrowing capacity under the Revolver, will be adequate to support our ongoing operations and to fund our debt service requirements, capital expenditures and working capital requirements for at least the next 12 months. We anticipate funding our long-term capital needs through cash provided from operations, borrowings under our Revolver, and issuances of common stock. Contractual Obligations and Commitments As of March 31, 2024, 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 three months ended March 31, 2024, we borrowed $82.0 million at a weighted average interest rate of 6.54% and also repaid $87.0 million on our revolving credit facilities. The following table provides information with respect to our commitments as of March 31, 2024 (in thousands): Payment Due by Period Total From April 1, 2024 to December 31, 2024 2025 - 2026 2027 - 2028 Thereafter Contractual Obligations 2027 Term Loan – Principal $ 175,000 $ — $ 175,000 $ — $ — 2027 Term Loan – Variable interest (1) 10,775 4,132 6,643 — — 2028 Term Loan – Principal 200,000 — — 200,000 — 2028 Term Loan – Variable Interest (2) 29,992 5,820 15,521 8,651 — 2029 Term Loan – Principal 250,000 — 250,000 — — 2029 Term Loan – Variable interest (3) 28,096 9,348 18,748 — — Revolver – Borrowings 75,000 — 75,000 — — Revolver – Variable interest 11,368 3,611 7,757 — — Facility Fee (4) 1,417 450 967 — — Mortgage Note – Principal 8,322 123 348 7,851 — Mortgage Note – Interest 1,328 280 726 322 — Property development under contract 24,961 24,961 — — — Additional principal under mortgage notes receivable 12,371 12,371 — — — Tenant improvement allowances 4,089 4,089 — — — Corporate office lease obligations 5,736 466 1,289 1,359 2,622 Total $ 838,455 $ 65,651 $ 551,999 $ 218,183 $ 2,622 (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 reset effective November 27, 2023 to 1.87% and will reset 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 rate of 1.87% through December 23, 2024, and 2.40% thereafter, compared to the variable 2027 Term Loan daily SOFR rate as of March 31, 2024 of 5.31%, 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 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 March 31, 2024 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. (3) 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 3.74% compared to the variable 2029 Term Loan daily SOFR rate as of March 31, 2024 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. (4) We are subject to a facility fee of 0.15% on our Revolver. 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 8.3 years that expires on July 31, 2032 and is renewable at our option for two additional periods of five years. Annual rent expense, excluding operating expenses, is approximately $0.5 million during the initial term. 31 Table of Contents Additionally, in the normal course of business, we enter into various types of commitments to purchase real estate properties, fund development projects, or extend funds under mortgage notes receivable. 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 to purchase or extend funding. As of March 31, 2024, we had commitments to fund properties under development and extend funds under mortgage notes receivable totaling $25.0 million and $12.4 million, respectively, all of which is expected to be funded throughout 2024. Debt See discussion of our debt and interest rate hedges included in “Note 6 - Debt” and “Note 7 - Derivative Financial Instruments” in “Item 1 – Financial Statements (unaudited).” Historical Cash Flow Information Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023 Three Months Ended March 31, 2024 2023 (In thousands) (Unaudited) Net cash provided by (used in): Operating activities $ 11,651 $ 14,806 Investing activities (97,202) (102,412) Financing activities 77,956 23,659 Cash Flows Provided By Operating Activities. Net cash provided by operating activities decreased by $3.1 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The decrease was largely attributed to the timing of corporate and property related vendor payments and changes to other working capital accounts, including the payment of our annual insurance policies, payments of employee severance and bonus, and increased interest payments along with other net increases in operating and general and administrative expenses associated with our larger portfolio. This was offset by an increase in rental receipts of $6.9 million and an increase in mortgage loan receivable interest of $1.5 million. Cash Flows Used In Investing Activities. Net cash used in investing activities decreased by $5.2 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The decrease was primarily due to decreases in cash spent on investments in mortgage loans receivable of $35.7 million and $1.8 million less in earnest money deposits made, offset by increases in cash spent on acquisitions of real estate and real estate developments and improvements of $27.5 million and $9.8 million, respectively. The remaining decrease is primarily related to proceeds from the sale of real estate, which increased $5.0 million compared to the prior period. Cash Flows Provided By Financing Activities. Net cash provided by financing activities increased by $54.3 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase was primarily attributed to a $100.0 million draw on our 2029 Term Loan during the three months ended March 31, 2024 and an increase in net borrowings of $12.0 million under our Revolver. The increase was offset by a decrease of $52.9 million from the issuance of our common stock, further offset by an increase in payments of common stock dividends of $3.3 million and increases in the repurchase of common stock for tax withholding obligations of $0.7 million. 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 2024 to receive a full dividends paid deduction. 32 Table of Contents We maintain a taxable REIT subsidiary (“TRS”) which may be subject to U.S. federal, state, and local income taxes on its taxable income. In general, our TRS may perform services for tenants of the Company, hold assets that the Company cannot hold directly and may engage in any real estate or non-real estate-related business. Recent Accounting Pronouncements A discussion of recent accounting pronouncements and their possible effects on our condensed consolidated financial statements is included in “Note 2 – Summary of Significant Accounting Policies” in “Item 1 – Financial Statements (unaudited).” 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, 2023, 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, Adjusted 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, other loss (gain), net, 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. 33 Table of Contents 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. The following table sets forth a reconciliation of FFO, Core FFO and AFFO for the periods presented to net income before allocation to noncontrolling interests, as computed in accordance with GAAP (in thousands): Three Months Ended March 31, 2024 2023 (Unaudited) Net income $ 1,052 $ 1,481 Depreciation and amortization of real estate 17,462 14,884 Provisions for impairment 3,662 — (Gain) loss on sales of real estate, net (997) 319 FFO 21,179 16,684 Adjustments: Non-recurring executive transition costs, severance and related charges 857 13 Non-recurring other loss (gain), net 414 (12) Core FFO 22,450 16,685 Adjustments: Straight-line rent adjustments (542) (311) Amortization of deferred financing costs 558 308 Amortization of above/below-market assumed debt 29 29 Amortization of loan origination costs and discounts 39 28 Amortization of lease-related intangibles (95) (213) Earned development interest 332 — Capitalized interest expense (353) (134) Non-cash interest expense (979) — Non-cash compensation expense 1,424 1,027 AFFO $ 22,863 $ 17,419 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, other loss (gain), net, 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. 34 Table of Contents 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. The following table sets forth a reconciliation of EBITDA and EBITDA re for the periods presented to net income before allocation to noncontrolling interests, as computed in accordance with GAAP (in thousands): Three Months Ended March 31, 2024 2023 (Unaudited) Net income $ 1,052 $ 1,481 Depreciation and amortization of real estate 17,462 14,884 Amortization of lease-related intangibles (95) (213) Non-real estate depreciation and amortization 79 65 Interest expense, net 6,180 3,944 Income tax expense (benefit) 17 (43) Amortization of loan origination costs 39 28 EBITDA 24,734 20,146 Adjustments: Provisions for impairments 3,662 — (Gain) loss on sales of real estate, net (997) 319 EBITDA re 27,399 20,465 35 Table of Contents The following table sets forth a reconciliation of EBITDA, EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre for the period presented to net income before allocation to noncontrolling interests, as computed in accordance with GAAP (in thousands): Three Months Ended March 31, 2024 Net income $ 1,052 Depreciation and amortization of real estate 17,462 Amortization of lease-related intangibles (95) Non-real estate depreciation and amortization 79 Interest expense, net 6,180 Income tax expense (benefit) 17 Amortization of loan origination costs 39 EBITDA 24,734 Adjustments: Provisions for impairments 3,662 (Gain) loss on sales of real estate, net (997) EBITDA re 27,399 Adjustments: Straight-line rent adjustments (542) Non-recurring executive transition costs, severance and related charges 857 Non-recurring other loss (gain), net 414 Other non-recurring expenses, net 158 Non-cash compensation expense 1,424 Adjustment for construction in process (1) 497 Adjustment for intraquarter investment activities (2) 1,469 Adjusted EBITDA re $ 31,676 Annualized Adjusted EBITDA re (3) $ 126,704 Adjusted Net Debt / Annualized Adjusted EBITDA re 3.1 (1) Adjustment reflects the estimated cash yield on developments in process as of March 31, 2024. (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 March 31, 2024 had occurred on January 1, 2024. (3) We calculate Annualized Adjusted EBITDA re by multiplying Adjusted EBITDA re by four. Net Debt and Adjusted 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 further adjust Net Debt by the net value of unsettled forward equity as of period end to derive Adjusted Net Debt. We believe excluding cash, cash equivalents and restricted cash available for future investment from our principal amount in addition to excluding the net value of unsettled 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. 36 Table of Contents The following table reconciles the principal amount of total debt to Net Debt and Adjusted Net Debt: As of March 31, 2024 Principal amount of total debt $ 708,322 Less: Cash, cash equivalents and restricted cash (22,334) Net Debt 685,988 Less: Value of unsettled forward equity (1) (290,908) Adjusted Net Debt $ 395,080 (1) There were 17,131,211 unsettled shares under forward equity contracts as of March 31, 2024 at the available weighted-average net settlement price of $16.98. 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 expense (income), net. 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 and Property-Level Cash NOI for the periods presented (in thousands): Three Months Ended March 31, 2024 2023 (Unaudited) Net income $ 1,052 $ 1,481 General and administrative 5,707 4,909 Depreciation and amortization 17,541 14,949 Provisions for impairment 3,662 — Transaction costs 129 109 Interest expense, net 6,180 3,944 (Gain) loss on sales of real estate, net (997) 319 Income tax expense (benefit) 17 (43) Interest income on mortgage loans receivable (2,484) (978) Other expense (income), net 280 (152) Property-Level NOI 31,087 24,538 Straight-line rent adjustments (542) (311) Amortization of lease-related intangibles (95) (213) Property-Level Cash NOI $ 30,450 $ 24,014 37 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 period presented (in thousands): Three Months Ended March 31, 2024 Net income $ 1,052 General and administrative 5,707 Depreciation and amortization 17,541 Provisions for impairment 3,662 Transaction costs 129 Interest expense, net 6,180 (Gain) loss on sales of real estate, net (997) Gain on forfeited earnest money deposit — Income tax expense (benefit) 17 Interest income on mortgage loans receivable (2,484) Other expense (income), net 280 Property-Level NOI 31,087 Straight-line rent adjustments (542) Amortization of lease-related intangibles (95) Property-Level Cash NOI $ 30,450 Adjustment for intraquarter acquisitions, dispositions and interest earning development (1) 1,358 Property-Level Cash NOI Estimated Run Rate 31,808 Interest income on mortgage loans receivable 2,484 Adjustments for intraquarter mortgage loan activity (2) 111 Total Cash NOI - Estimated Run Rate $ 34,403 (1) Adjustment assumes all re-leasing activity, investments in and dispositions of real estate, including developments completed during the three months ended March 31, 2024 had occurred on January 1, 2024. (2) Adjustment assumes all loan activity completed during the three months ended March 31, 2024 had occurred on January 1, 2024.