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Item 2. Management’s Discussion and Analysis

2024-07-29 compared with 2024-04-29 · 200 added, 129 removed, 248 unchanged (57% of the section changed)

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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.

We are an internally managed real estate company that acquires, owns, and manages a diversified portfolio of single-tenant, retail commercial real estate subject to long-term net leases with high credit quality tenants across the United States.

We also invest in property developments and mortgage loans secured by real estate.

As of June 30, 2024, we owned or had investments in 649 single-tenant retail net leased properties that were diversified by tenant, industry and geography, including 90 different tenants, across 26 retail sectors in 45 states.

This excludes 12 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.

As of June 30, 2024, our investments generated ABR 1 of $148.3 million.

Approximately 69% of our ABR is from investment grade 2 credit rated tenants and an additional 14% of our ABR is derived from tenants with an investment grade profile 3 .

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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.

No physical settlement has occurred under the January 2024 forward sale agreements through June 30, 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.

During April 2024, we entered into forward sale agreements for an aggregate of 1,635,600 shares of our common stock under the 2023 ATM Program at a weighted average price of $17.63 per share, none of which have been physically settled.

As of June 30, 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.

2021 ATM Program

On September 1, 2021, we entered into a $250.0 million at-the-market equity program (the “2021 ATM Program”).

On September 14, 2023, we entered into a forward confirmation with respect to 7,500,000 shares of our common stock under the 2021 ATM Program.

On June 26, 2024, we partially physically settled 4,000,000 shares of common stock at a price of $16.43 per share under such forward confirmation for net proceeds of approximately $65.3 million, net of sales commissions and offering costs of $0.7 million.

1,983,711 shares remain unsettled under the forward confirmation as of June 30, 2024.

We may physically settle this forward confirmation (by the delivery of shares of common stock) and receive proceeds from the sale of those shares on one or more forward settlement dates, which shall occur no later than September 13, 2024.

1 Annualized base rent (“ABR”) is annualized base rent as of June 30, 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.

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Results of Operations

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.

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.

We continued to grow our assets during the first half 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 $250.0 million sustainably-linked senior unsecured term loan (the “2029 Term Loan”), settlement of shares of common stock through our forward sale agreements in an amount of $65.3 million, the usage of cash balances as a result of borrowings on our Revolver, the usage of 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 six months ended June 30, 2024.

During the three months ended June 30, 2024, we acquired 18 properties for a total purchase price of $95.6 million, inclusive of $0.6 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 17.1 years.

The underwritten weighted-average capitalization rate on our second quarter acquisitions was approximately 7.3%.

During the six months ended June 30, 2024, we acquired 46 properties for a total purchase price of $190.8 million, inclusive of $1.8 million of capitalized acquisition costs.

The acquisitions were all accounted for as asset acquisitions.

These properties are located in 22 states with a WALT of approximately 13.9 years.

The underwritten weighted-average capitalization rate on our year to date acquisitions was approximately 7.3%.

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.

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.

As of June 30, 2024, we had eight property developments under construction.

During the three months ended June 30, 2024, we invested $12.0 million in property developments, including the land acquisition of two new developments with a combined initial purchase price of $1.2 million.

During the six months ended June 30, 2024, we invested $23.0 million in property developments, including the land acquisition of four new developments with a combined initial purchase price of $2.0 million.

During the six months ended June 30, 2024, we completed development on 14 projects and reclassified approximately $35.3 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 10 of the completed developments during the six months ended June 30, 2024, while rent is expected to commence for the other four completed developments in the third quarter of 2024.

The remaining eight 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 June 30, 2024.

During the three months ended June 30, 2024, we sold six properties for a total sales price, net of disposal costs of $12.1 million, recognizing a net gain of less than $0.1 million on the sales.

During the six months ended June 30, 2024, we sold 18 properties for a total sales price, net of disposal costs of $32.5 million, recognizing a net gain of $1.0 million on the sales.

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%.

During the three and six months ended June 30, 2024, we invested an additional $7.8 million and $18.0 million, respectively, in fully collateralized mortgage loans receivable with stated interest rates of 10.25%.

In addition, during the three and six months ended June 30, 2024, we collected $2.3 million in principal on our mortgage loans receivable.

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.

The funds provided under the loans, in addition to discount and loan origination costs, net of loan origination fees of less than $0.2 million, are included in mortgage loans receivable, net in the accompanying condensed consolidated balance sheets as of June 30, 2024.

See “Note 4 - Real Estate Investments” in “Item 1 - Financial Statements (unaudited)” for further discussion on our mortgage loans receivable portfolio.

During the quarter ended June 30, 2024, the Company was the victim of a criminal scheme involving a business email compromise of an employee that led to two fraudulent transfers totaling $3.3 million to a third-party impersonating one of our development partners.

The result was a $2.8 million loss, net of insurance recoveries.

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.

The annual inflation rate for both the the six months ended June 30, 2024 and 2023 was 3.0%.

While the Federal Reserve had been raising interest rates in an effort to lower inflation throughout 2022 and the first half of 2023, rates have remained unchanged for nearly a year and there continues to be uncertainty in 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 broader economy.

In the commercial real estate market, property prices generally continue to fluctuate which may impact our investment capitalization rates and operating costs.

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We continually monitor the commercial real estate and credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly.

Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023

Three Months Ended June 30, 2024 Compared with Three Months Ended June 30, 2023

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

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Interest expense, net (7,604) (5,521)

Gain (loss) on sales of real estate, net 997 (319)

Gain on sales of real estate, net 8 615

Loss on debt extinguishment — (128)

Other (expense) income, net (2,588) 68

Total other (expense) income, net (5,463) (4,111)

Net income before income taxes 1,069 1,438

Total other expense, net

(10,184) (4,966)

Net loss before income taxes

(2,294) (824)

Income tax (expense) benefit (12) 32

Net income $ 1,052 $ 1,481

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.

$ (2,306) $ (792)

Revenue for the three months ended June 30, 2024 increased by $8.0 million to $39.6 million from $31.6 million for the three months ended June 30, 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 $6.6 million, an increase of $0.8 million related to interest income on mortgage loans receivable, combined with net increases of property expense reimbursements of $0.1 million, and an increase of $0.4 million in straight-line rental revenue.

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 expenses increased by $4.2 million to $31.7 million for the three months ended June 30, 2024 as compared to $27.5 million for the three months ended June 30, 2023.

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.

Property expenses increased $0.5 million to $4.0 million for the three months ended June 30, 2024 from $3.5 million for the three months ended June 30, 2023.

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

• 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.

General and administrative expenses were $5.3 million for both the three months ended June 30, 2024 and 2023.

The increases within general and administrative expense were primarily related to employee severance of $0.6 million, including cash severance of $0.4 million and the expense associated with the accelerated vesting of stock-based compensation of $0.2 million, and an increase of $0.1 million of stock-based compensation.

These expenses were offset by decreases of $0.3 million of payroll expenses and $0.5 million of bonus expenses, and other combined net decreases 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 $2.6 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.

Depreciation and amortization expense increased $2.7 million to $18.5 million for the three months ended June 30, 2024 from $15.8 million for the three months ended June 30, 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 primarily in building depreciation expense of $1.7 million, building improvements depreciation expense of $0.5 million, and in-place lease amortization expense of $0.4 million.

• Provision for impairment.

For the three months ended June 30, 2024, we recorded provisions for impairment of $3.8 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 June 30, 2024.

Two of the properties were held for investment as of June 30, 2024.

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

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, net.

Interest expense increased by $2.1 million to $7.6 million for the three months ended June 30, 2024 from $5.5 million for the three months ended June 30, 2023.

The increase is primarily attributed to an increase of $3.2 million of interest incurred under our $250.0 million senior unsecured term loan (the “2029 Term Loan”), an increase of $0.8 million of interest incurred under our $175.0 million senior unsecured term loan (the “2027 Term Loan”), and an increase of $0.3 million of loan fee amortization.

This is offset by a decrease of $0.9 million of interest incurred under our Revolver primarily due to a decrease in average borrowings outstanding during the respective periods and $1.0 million in amortization of deferred gains on interest rate swaps.

Gain on sales of real estate, net.

Net gain on sales of real estate decreased by $0.6 million for the three months ended June 30, 2024 from $0.6 million for the three months ended June 30, 2023.

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

Three Months Ended

Number of properties sold 6 2

Sales price, net of disposal costs $ 12,064 $ 3,836

Gain on sales of real estate, net $ 8 $ 615

Other (expense) income, net.

Other (expense) income, net decreased by $2.7 million to $2.6 million for the three months ended June 30, 2024 from $0.1 million for the three months ended June 30, 2023.

The net increase to expense is primarily related to a transfer fraud loss of $2.8 million, net of insurance recoveries, $0.5 million of losses associated with property damages related to flooding, offset by $0.5 million of proceeds received from the settlement of a lease escrow agreement.

Refer to “Other Events” above for further detail on the transfer fraud loss.

Net loss increased $1.5 million to a net loss of $2.3 million for the three months ended June 30, 2024 from a net loss of $0.8 million for the three months ended June 30, 2023.

Net loss increased primarily due to increases in interest expense, depreciation and amortization expense, provisions for impairment, a decrease in the net gain on the sales of real estate, and net expense associated with the transfer fraud loss, as set forth above.

These decreases are offset by increases in additional rental revenues primarily due to the growth in the size of our real estate investment portfolio, in addition to increased interest income associated with our mortgage loans receivable.

Six Months Ended June 30, 2024 Compared with Six Months Ended June 30, 2023

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

Six Months Ended

Rental revenue (including reimbursable) $ 72,053 $ 58,180

Interest income on loans receivable 5,187 2,901

Total revenues 77,240 61,081

Operating expenses

Property 8,084 7,467

General and administrative 10,978 10,168

Depreciation and amortization 36,084 30,795

Provisions for impairment 7,498 2,836

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.

Transaction costs 175 124

Total operating expenses 62,819 51,390

Other (expense) income

Interest expense, net (13,784) (9,465)

Gain on sales of real estate, net 1,006 296

Loss on debt extinguishment — (128)

Other (expense) income, net (2,868) 220

Total other expense, net (15,646) (9,077)

Net (loss) income before income taxes

Income tax (expense) benefit (29) 75

Net (loss) income

$ (1,254) $ 689

Revenue for the six months ended June 30, 2024 increased by $16.1 million to $77.2 million from $61.1 million for the six months ended June 30, 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 $13.5 million, an increase of $2.3 million related to interest income on mortgage loans receivable, and an increase of $0.6 million in straight-line rental revenue, offset by $0.2 million of combined net decreases of property expense reimbursements.

Total operating expenses.

Total expenses increased by $11.4 million to $62.8 million for the six months ended June 30, 2024 as compared to $51.4 million for the six months ended June 30, 2023.

Total operating expenses include the following:

• Property expenses.

Property expenses increased $0.6 million to $8.1 million for the six months ended June 30, 2024 from $7.5 million for the six months ended June 30, 2023.

The increase is primarily attributed to the increase in the number of operating properties, including combined net increases of reimbursable property expenses of $0.5 million, of which $0.6 million was related to reimbursable property taxes, offset by a $0.2 million decrease in reimbursable common area maintenance costs, respectively.

• General and administrative expenses.

General and administrative expenses increased $0.8 million to $11.0 million for the six months ended June 30, 2024 from $10.2 million for the six months ended June 30, 2023.

The increase is primarily due to employee severance of $1.4 million, including cash severance of $0.9 million and the expense associated with the accelerated vesting of stock-based compensation of $0.5 million, and an increase of $0.5 million of stock-based compensation.

These expenses were offset by decreases of $0.4 million of payroll expenses and $0.4 million of bonus expenses, decreases of $0.2 millions of corporate insurance premiums, and other combined net decreases of $0.1 million.

• Depreciation and amortization.

Depreciation and amortization expense increased $5.3 million to $36.1 million for the six months ended June 30, 2024 from $30.8 million for the six months ended June 30, 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 primarily in building depreciation expense of $3.4 million, building improvements depreciation expense of $1.0 million, and in-place lease amortization expense of $0.6 million.

• Provision for impairment.

For the six months ended June 30, 2024, we recorded provisions for impairment of $7.5 million on 23 properties, the majority of which were either previously classified as held-for-sale, newly classified as held-for-sale or disposed of during six months ended June 30, 2024.

Six of the properties were held for investment as of June 30, 2024.

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

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.

Interest expense, net.

Interest expense increased by $4.3 million to $13.8 million for the six months ended June 30, 2024 from $9.5 million for the six months ended June 30, 2023.

The increase is primarily attributed to an increase of $5.5 million of interest incurred under our 2029 Term Loan, an increase of $1.6 million of interest incurred under our 2027 Term Loan, and an increase of $0.5 million of loan fee amortization.

This is offset by a decrease of $1.0 million of interest incurred under our Revolver primarily due to a decrease in average borrowings outstanding during the respective periods, $2.0 million in amortization of deferred gains on interest rate swaps, and an increase of $0.3 million of interest capitalized on our property developments.

Gain on sales of real estate, net.

Net gain on sales of real estate increased by $0.7 million to $1.0 million for the six months ended June 30, 2024 from $0.3 million for the six months ended June 30, 2023.

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

Three Months Ended

Six Months Ended

Number of properties sold 18 10

Sales price, net of disposal costs $ 32,542 $ 19,299

Gain (loss) on sales of real estate, net $ 997 $ (319)

Gain on sales of real estate, net $ 1,006 $ 296

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 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.

Other (expense) income, net increased by $3.1 million to $2.9 million for the six months ended June 30, 2024 from $0.2 million for the six months ended June 30, 2023.

The net increase to expense is primarily related to a transfer fraud loss of $2.8 million, net of insurance recoveries, $0.9 million of losses associated with property damages related to flooding and foundation issues, offset by $0.5 million of proceeds received from the settlement of a lease escrow agreement.

Refer to “Other Events” above for further detail on the transfer fraud loss.

Net (loss) income.

Net (loss) income decreased $2.0 million to a net loss of $1.3 million for the six months ended June 30, 2024 from net income of $0.7 million for the six months ended June 30, 2023.

Net (loss) income decreased primarily due to increases in interest expense, depreciation and amortization expense, provisions for impairment, and net expense associated with the transfer fraud loss, as set forth above.

These decreases are offset by an increase in the net gain on the sales of real estate, increases in additional rental revenues primarily due to the growth in the size of our real estate investment portfolio, in addition to increased interest income associated with our mortgage loans receivable.

Liquidity and Capital Resources

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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.

As of June 30, 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 $98.0 million of borrowings outstanding under our $400.0 million senior unsecured revolving credit facility (the “Revolver”).

Additionally, as of June 30, 2024, we had $32.6 million and $30.6 million of unsettled forward equity under the 2021 ATM Program and 2023 ATM Program, respectively.

As of June 30, 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 $190.4 million of unsettled forward equity under the January 2024 forward sale agreements as of June 30, 2024.

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.

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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):

As of June 30, 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 July 3, 2026, and repayment of borrowings on our Revolver with a maturity of August 11, 2026.

During the six months ended June 30, 2024, we borrowed $190.0 million at a weighted average interest rate of 6.51% and also repaid $172.0 million on our Revolver.

The following table provides information with respect to our commitments as of June 30, 2024 (in thousands):

Payment Due by Period

Total From April 1, 2024 to December 31, 2024 2025 - 2026 2027 - 2028 Thereafter

Total From July 1, 2024 to December 31, 2024 2025 - 2026 2027 - 2028 Thereafter

Contractual Obligations

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(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.

The hedged fixed rate reset effective November 27, 2023 to 1.87% and will reset again effective 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 June 30, 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.

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 June 30, 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.

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 June 30, 2024 of 5.34%, plus a SOFR adjustment of 0.10% and applicable margin of 1.15% based on the $250.0 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.

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These commitments are generally subject to our customary due diligence process and, accordingly, a number of specific conditions must be met before 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.

As of June 30, 2024, we had commitments to fund properties under development and extend funds under mortgage notes receivable totaling $16.1 million and $3.7 million, respectively.

Funding of properties under development is expected to occur over the next 18 months and funding of mortgage notes receivable is expected to occur throughout 2024 and the first half of 2025.

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

Six Months Ended June 30, 2024 Compared with Six Months Ended June 30, 2023

Six Months Ended

(In thousands) (Unaudited)

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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.

Net cash provided by operating activities increased by $2.6 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

The increase was largely attributed to the increase in the size of our real estate investment portfolio with an increase in rental receipts of $13.5 million, offset primarily by increases in operating and general and administrative expenses paid associated with our larger portfolio, and further offset by changes in working capital accounts.

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.

Net cash used in investing activities decreased by $22.6 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

The decrease was primarily due to a decrease in cash invested in mortgage loans receivable of $43.4 million, an increase of $13.2 million from proceeds from the sale of real estate, an increase of $2.3 million in principal collections on mortgage loans receivable, a decrease of $1.1 million of earnest money deposits, offset by an increase of $26.9 million in acquisitions of real estate and increase of $10.6 million in real estate development and improvements.

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.

Net cash provided by financing activities increased by $16.0 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

The increase was primarily attributed to an increase in net borrowings of $25.0 million under our Revolver and an increase in proceeds received of $100.0 million from term loans during the six months ended June 30, 2024.

This increase is offset by $102.1 million of less proceeds received in 2024 due to fewer issuances of common stock in connection with our 2021 ATM Program and settlements of common stock under forward sale agreements.

Lastly, the increase is further offset by $6.3 million of additional common stock dividends paid during the six months ended June 30, 2024.

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

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We also disclose the following non-GAAP financial measures:

Funds From Operations (“FFO”), Core FFO, Adjusted FFO (“AFFO”), earnings before interest expense, income tax expense, and depreciation and amortization (“EBITDA”), EBITDA 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.

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, 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.

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The following table sets forth a reconciliation of FFO, Core FFO and AFFO for the periods presented to net income before allocation to noncontrolling interests, as computed in accordance with GAAP (in thousands):

Three Months Ended March 31,

Net income $ 1,052 $ 1,481

Three Months Ended

June 30, Six Months Ended

2024 2023 2024 2023

(Unaudited) (Unaudited)

Net (loss) income $ (2,306) $ (792) $ (1,254) $ 689

Depreciation and amortization of real estate 18,465 15,769 35,926 30,653

Provisions for impairment 3,836 2,836 7,498 2,836

(Gain) loss on sales of real estate, net (997) 319

Gain on sales of real estate, net (8) (615) (1,006) (296)

FFO 19,987 17,198 41,164 33,882

Non-recurring executive transition costs, severance and related charges 624 201 1,481 214

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

Non-recurring other loss (gain), net 2,778 (35) 3,192 (47)

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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.

We use EBITDA, EBITDAre, 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;

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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,

Net income $ 1,052 $ 1,481

Three Months Ended

June 30, Six Months Ended

2024 2023 2024 2023

(Unaudited) (Unaudited)

Net (loss) income $ (2,306) $ (792) $ (1,254) $ 689

Depreciation and amortization of real estate 18,465 15,769 35,926 30,653

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Income tax expense (benefit) 12 (32) 29 (75)

Amortization of loan origination costs 39 28

Amortization of loan origination costs and discounts (16) 28 23 56

EBITDA 23,740 20,388 48,473 40,533

Provisions for impairments 3,662 —

(Gain) loss on sales of real estate, net (997) 319

Provisions for impairment 3,836 2,836 7,498 2,836

Gain on sales of real estate, net (8) (615) (1,006) (296)

$ 27,568 $ 22,609 $ 54,965 $ 43,073

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

The following table sets forth a reconciliation of EBITDA, EBITDA re , Adjusted EBITDA re and Annualized Adjusted EBITDAre for the period presented to net loss income before allocation to noncontrolling interests, as computed in accordance with GAAP (in thousands):

Three Months Ended June 30, 2024

Depreciation and amortization of real estate 18,465

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Interest expense, net 7,604

Income tax expense (benefit) 17

Amortization of loan origination costs 39

Income tax expense

Amortization of loan origination costs and discounts (16)

EBITDA 23,740

Provisions for impairments 3,662

(Gain) loss on sales of real estate, net (997)

Provisions for impairment 3,836

Gain on sales of real estate, net (8)

Straight-line rent adjustments (538)

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Adjusted Net Debt / Annualized Adjusted EBITDA re

(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.

(1) Adjustment reflects the estimated cash yield on developments in process as of June 30, 2024.

(3) We calculate Annualized Adjusted EBITDAre by multiplying Adjusted EBITDAre by four.

Net Debt and Adjusted Net Debt

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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 and Adjusted Net Debt:

March 31, 2024

The following table reconciles the principal amount of total debt to Net Debt and Adjusted Net Debt (in thousands):

June 30, 2024

Principal amount of total debt $ 731,284

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Adjusted Net Debt $ 463,979

(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.

(1) There were 14,766,811 unsettled shares under forward equity contracts as of June 30, 2024 at the available weighted-average net settlement price of $17.17.

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

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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,

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

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

Three Months Ended

June 30, Six Months Ended

2024 2023 2024 2023

(Unaudited) (Unaudited)

Net (loss) income $ (2,306) $ (792) $ (1,254) $ 689

General and administrative 5,268 5,260 10,978 10,168

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Interest expense, net 7,604 5,521 13,784 9,465

(Gain) loss on sales of real estate, net (997)

Gain on forfeited earnest money deposit —

Gain on sales of real estate, net (8) (615) (1,006) (296)

Income tax expense (benefit) 12 (32) 29 (75)

Loss on debt extinguishment — 128 — 128

Interest income on mortgage loans receivable (2,703) (1,923) (5,187) (2,901)

Other expense (income), net

2,588 (68) 2,868 (220)

Property-Level NOI 32,882 26,177 63,969 50,713

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Total Cash NOI - Estimated Run Rate $ 36,209

(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.

(1) 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 June 30, 2024 had occurred on April 1, 2024.

(2) Adjustment assumes all loan activity completed during the three months ended June 30, 2024 had occurred on April 1, 2024.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis