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. 28 Table of Contents Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report on Form 10-Q. New risks and uncertainties may arise over time and it is not possible for us to predict those events or how they may affect us. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law. Business Overview We are an internally managed real estate company that acquires, owns, and manages a diversified portfolio of single-tenant, retail commercial real estate subject to long-term net leases with high credit quality tenants across the United States. We also invest in property developments and mortgage loans secured by real estate. As of September 30, 2024, we owned or had investments in 671 single-tenant retail net leased properties that were diversified by tenant, industry and geography, including 93 different tenants, across 26 retail sectors in 45 states. This excludes eight property developments where rent has yet to commence. We focus on tenants in industries where a physical location is critical to the generation of sales and profits, with a focus on necessity goods and essential services in the retail sector, including home improvement, auto parts, drug stores and pharmacies, general retail, grocers, convenience stores, discount stores, and quick-service restaurants, all of which we refer to as defensive retail industries. As of September 30, 2024, our investments generated ABR 1 of $157.0 million. Approximately 61% of our ABR is from investment grade 2 credit rated tenants and an additional 14% of our ABR is derived from tenants with an investment grade profile 3 . Exclusive of mortgage loans receivable, our portfolio was 100% occupied with a weighted average remaining lease term (“WALT”) of 9.5 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. On September 26, 2024, we partially physically settled 2,200,000 shares of common stock at a price of $17.22 per share in accordance with the forward sale agreements. We received net proceeds from the settlement of $37.8 million, net of underwriting discounts and offering costs of $1.8 million. As of September 30, 2024, 8,840,000 shares remain unsettled under the January 2024 forward sale agreements. 2024 ATM Program On August 12, 2024, we entered into a $300.0 million at-the-market equity program (the “2024 ATM Program”) through which, from time to time, we may sell shares of our common stock in registered transactions. During August and September 2024, we entered into forward sale agreements with respect to 152,547 shares of our common stock under the 2024 ATM Program, at a public offering price of $17.13 per share. As of September 30, 2024, 152,547 shares remain unsettled under the forward sale agreements. We may physically settle these forward sale agreements (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 October 20, 2025. 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. During 2024, we entered into forward sale agreements for an aggregate of 1,743,100 shares of our common stock under the 2023 ATM Program at a weighted average price of $17.67 per share, none of which have been physically settled as of September 30, 2024. We may physically settle the forward sale agreements (by the delivery of shares of common stock) and receive proceeds from the sale of those shares upon one or more forward settlement dates, which shall occur no later than April 12, 2025. 1 Annualized base rent (“ABR”) is annualized base rent as of September 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. 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. 29 Table of Contents 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 sale agreement with respect to 7,500,000 shares of our common stock under the 2021 ATM Program. On September 26, 2024, we physically settled 1,983,711 shares of common stock at a price of $16.41 per share under such forward sale agreement for net proceeds of approximately $32.3 million, net of sales commissions and offering costs of $0.4 million. As of September 30, 2024, we had fully settled the forward sale agreement. Results of Operations Overall We continued to grow our assets during the nine months ended September 30, 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 $135.4 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 nine months ended September 30, 2024. Acquisitions During the three months ended September 30, 2024, we acquired 22 properties for a total purchase price of $111.5 million, inclusive of $1.1 million of capitalized acquisition costs. The acquisitions were all accounted for as asset acquisitions. These properties are located in 10 states with a WALT of approximately 12.1 years. The underwritten weighted-average capitalization rate on our second quarter acquisitions was approximately 7.3%. During the nine months ended September 30, 2024, we acquired 68 properties for a total purchase price of $302.3 million, inclusive of $2.8 million of capitalized acquisition costs. The acquisitions were all accounted for as asset acquisitions. These properties are located in 24 states with a WALT of approximately 13.2 years. The underwritten weighted-average capitalization rate on our year to date acquisitions was approximately 7.3%. Development As of September 30, 2024, we had six property developments under construction. During the three months ended September 30, 2024, we invested $5.0 million in property developments. During the nine months ended September 30, 2024, we invested $27.9 million in property developments, including the land acquisition of four new developments with a combined initial purchase price of $2.0 million. During the nine months ended September 30, 2024, we completed development on 16 projects and reclassified approximately $47.8 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 14 of the completed developments during the nine months ended September 30, 2024, while rent is expected to commence for the other two completed developments in the fourth quarter of 2024. The remaining six developments are expected to be substantially completed with rent commencing at various points throughout the fourth quarter of 2024 and the first quarter of 2025. The purchase price, including acquisition costs, and subsequent development are included in property under development in the accompanying condensed consolidated balance sheets as of September 30, 2024. Dispositions During the three months ended September 30, 2024, we sold eight properties for a total sales price, net of disposal costs, of $23.0 million, recognizing a net loss of $0.1 million. During the nine months ended September 30, 2024, we sold 26 properties for a total sales price, net of disposal costs, of $55.6 million, recognizing a net gain of $0.9 million. 30 Table of Contents Investment in Mortgage Loans Receivable During the three and nine months ended September 30, 2024, we invested an additional $21.0 million and $39.0 million, respectively, in fully collateralized mortgage loans receivable with stated interest rates ranging from 6.9% to 13.1%, inclusive of $12.7 million provided through seller financing transactions for both periods presented. In addition, during the three and nine months ended September 30, 2024, we collected $8.9 million and $11.3 million, respectively, 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 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 September 30, 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 annual inflation rate for the nine months ended September 30, 2024 and 2023 was 2.4% and 3.7%, respectively. While the Federal Reserve raised interest rates in an effort to lower inflation throughout 2022 and the first half of 2023, rates had remained unchanged for nearly a year until the first rate cut occurred in September 2024. There continues to be uncertainty in 2024 as to whether rates will be maintained or further 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. Likewise, during certain periods, including the current market, the credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate and credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly. Three Months Ended September 30, 2024 Compared with Three Months Ended September 30, 2023 The following table sets forth our operating results for the periods indicated (in thousands): Three Months Ended September 30, 2024 2023 Revenues Rental revenue (including reimbursable) $ 38,172 $ 31,167 Interest income on loans receivable $ 3,272 $ 2,244 Other revenue — 550 Total revenues 41,444 33,961 Operating expenses Property 4,494 3,883 General and administrative 4,287 5,133 Depreciation and amortization 20,438 15,804 Provisions for impairment 9,838 1,538 Transaction costs 26 143 Total operating expenses 39,083 26,501 Other (expense) income Interest expense, net (7,965) (3,946) (Loss) gain on sales of real estate, net (132) 373 Other income, net 416 367 Total other expense, net (7,681) (3,206) Net (loss) income before income taxes (5,320) 4,254 Income tax expense (2) (15) Net (loss) income $ (5,322) $ 4,239 31 Table of Contents Revenue. Revenue for the three months ended September 30, 2024 increased by $7.4 million to $41.4 million from $34.0 million for the three months ended September 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 $6.8 million, an increase of $1.0 million related to interest income on mortgage loans receivable, and an increase of $0.5 million in straight-line rental revenue. The increase in revenue is offset by $0.6 million in other revenue recognized in the prior year related to the receipt of legal settlement proceeds associated with a lease termination, combined with net decreases of property expense reimbursements of $0.4 million. Total operating expenses. Total expenses increased by $12.6 million to $39.1 million for the three months ended September 30, 2024 as compared to $26.5 million for the three months ended September 30, 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, and property-specific reimbursable expenses. The increase is offset by a decrease in payroll related costs. Total operating expenses include the following: • Property expenses. Property expenses increased $0.6 million to $4.5 million for the three months ended September 30, 2024 from $3.9 million for the three months ended September 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 $0.6 million, of which $0.3 million, $0.1 million, and $0.2 million were related to reimbursable common area maintenance costs, reimbursable property insurance, and reimbursable property taxes, respectively. • General and administrative expenses. General and administrative expenses decreased $0.8 million to $4.3 million for the three months ended September 30, 2024 from $5.1 million for the three months ended September 30, 2023. The decreases within general and administrative expense were primarily related to decreases of $0.3 million of payroll expenses and $0.7 million of bonus expenses, offset by other combined net increases of $0.2 million. While our general and administrative expenses will continue to rise in some measure as our portfolio grows, we expect that such expenses as a percentage of our portfolio will decrease over time due to efficiencies and economies of scale. • Depreciation and amortization. Depreciation and amortization expense increased $4.6 million to $20.4 million for the three months ended September 30, 2024 from $15.8 million for the three months ended September 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 $2.5 million, building improvements depreciation expense of $0.9 million, and in-place lease amortization expense of $0.9 million. • Provision for impairment. For the three months ended September 30, 2024, we recorded provisions for impairment of $9.8 million on 18 properties, the majority of which were newly classified as held-for-sale or disposed of during the three months ended September 30, 2024. Three of the properties were held for investment as of September 30, 2024. For the three months ended September 30, 2023, we recorded provisions for impairment of $1.5 million on seven properties, which were either previously classified as held-for-sale, newly classified as held-for-sale, or disposed of during the three months ended September 30, 2023. These disposals relate to management’s continuous assessment of our portfolio in an effort to improve returns and manage risk exposure. Interest expense, net. Interest expense increased by $4.1 million to $8.0 million for the three months ended September 30, 2024 from $3.9 million for the three months ended September 30, 2023. The increase is primarily attributed to an increase of $1.2 million of interest incurred under our $250.0 million senior unsecured term loan (the “2029 Term Loan”), an increase of $1.0 million of interest incurred under our $175.0 million senior unsecured term loan (the “2027 Term Loan”), an increase of $1.5 million of interest incurred under our Revolver primarily due to a increase in average borrowings outstanding during the respective periods, and a decrease of $0.3 million of interest capitalized on our property developments. (Loss) gain on sales of real estate, net. Net loss on sales of real estate increased by $0.5 million to $0.1 million for the three months ended September 30, 2024 from a $0.4 million net gain for the three months ended September 30, 2023. The table below summarizes the properties sold for the periods indicated (dollars in thousands): Three Months Ended September 30, 2024 2023 Number of properties sold 8 4 Sales price, net of disposal costs $ 23,018 $ 7,224 (Loss) gain on sales of real estate, net $ (132) $ 373 32 Table of Contents Other income (expense), net. The change in other income (expense), net is primarily related to a $0.2 million decrease in interest income earned on our cash, cash equivalents and restricted cash balances as presented in the condensed consolidated balance sheets, offset by a $0.3 million increase in insurance proceeds associated with property damages related to flooding. Net (loss) income. Net (loss) income decreased $9.5 million to a net loss of $5.3 million for the three months ended September 30, 2024 from net income of $4.2 million for the three months ended September 30, 2023. Net (loss) income decreased primarily due to increases in interest expense, depreciation and amortization expense, and provisions for impairment, 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. Nine Months Ended September 30, 2024 Compared with Nine Months Ended September 30, 2023 The following table sets forth our operating results for the periods indicated (in thousands): Nine Months Ended September 30, 2024 2023 Revenues Rental revenue (including reimbursable) $ 110,226 $ 89,347 Interest income on loans receivable 8,458 5,145 Other revenue — 550 Total revenues 118,684 95,042 Operating expenses Property 12,578 11,350 General and administrative 15,266 15,299 Depreciation and amortization 56,522 46,599 Provisions for impairment 17,336 4,374 Transaction costs 201 267 Total operating expenses 101,903 77,889 Other (expense) income Interest expense, net (21,749) (13,412) Gain on sales of real estate, net 874 669 Loss on debt extinguishment — (128) Other (expense) income, net (2,451) 586 Total other expense, net (23,326) (12,285) Net (loss) income before income taxes (6,545) 4,868 Income tax (expense) benefit (31) 60 Net (loss) income $ (6,576) $ 4,928 Revenue. Revenue for the nine months ended September 30, 2024 increased by $23.7 million to $118.7 million from $95.0 million for the nine months ended September 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 $20.2 million, an increase of $3.3 million related to interest income on mortgage loans receivable, and an increase of $1.0 million in straight-line rental revenue, offset by $0.6 million of combined net decreases of property expense reimbursements. Total operating expenses. Total expenses increased by $24.0 million to $101.9 million for the nine months ended September 30, 2024 as compared to $77.9 million for the nine months ended September 30, 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, and property-specific reimbursable expenses. Total operating expenses include the following: • Property expenses. Property expenses increased $1.2 million to $12.6 million for the nine months ended September 30, 2024 from $11.4 million for the nine months ended September 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 $0.8 million, of which $0.7 million was related to reimbursable property taxes, and combined net increases of non-reimbursable property expenses of $0.4 million, of which $0.2 million, $0.1 million, and $0.1 million were related to common area maintenance costs, property insurance, and property taxes, respectively. 33 Table of Contents • General and administrative expenses. General and administrative expenses were $15.3 million for both the nine months ended September 30, 2024 and 2023. The net changes within general and administrative expense were primarily related to decreases of $0.7 million of payroll expenses and $1.1 million of bonus expenses, and decreases of $0.3 million of corporate insurance premiums, offset by increases in employee severance of $1.5 million, including cash severance of $1.0 million and the expense associated with the accelerated vesting of stock-based compensation of $0.5 million, and an increase of $0.6 million of stock-based compensation. 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 $9.9 million to $56.5 million for the nine months ended September 30, 2024 from $46.6 million for the nine months ended September 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 $5.9 million, building improvements depreciation expense of $1.9 million, in-place lease amortization expense of $1.5 million, leasehold improvements depreciation expense of $0.3 million, and amortization of leasing commissions of $0.3 million. • Provision for impairment. For the nine months ended September 30, 2024, we recorded provisions for impairment of $17.3 million on 40 properties, the majority of which were either previously classified as held-for-sale, newly classified as held-for-sale or disposed of during the nine months ended September 30, 2024. Nine of the properties were held for investment as of September 30, 2024. For the nine months ended September 30, 2023, we recorded provisions for impairment of $4.4 million on 10 properties, which were either previously classified as held-for-sale, newly classified as held-for-sale, or disposed of during the nine months ended September 30, 2023. These disposals relate to management’s continuous assessment of our portfolio in an effort to improve returns and manage risk exposure. Interest expense, net. Interest expense increased by $8.3 million to $21.7 million for the nine months ended September 30, 2024 from $13.4 million for the nine months ended September 30, 2023. The increase is primarily attributed to an increase of $6.6 million of interest incurred under our 2029 Term Loan, an increase of $2.5 million of interest incurred under our 2027 Term Loan, an increase of $0.5 million of interest incurred under our Revolver primarily due to an increase in average borrowings outstanding during the respective periods, and an increase of $0.5 million of loan fee amortization. This is offset by $1.8 million in amortization of deferred gains on interest rate swaps. Gain on sales of real estate, net. Net gain on sales of real estate increased by $0.2 million to $0.9 million for the nine months ended September 30, 2024 from $0.7 million for the nine months ended September 30, 2023. The table below summarizes the properties sold for the periods indicated (in thousands): Nine Months Ended September 30, 2024 2023 Number of properties sold 26 14 Sales price, net of disposal costs $ 55,559 $ 26,523 Gain on sales of real estate, net $ 874 $ 669 Other (expense) income, net. Other (expense) income, net increased by $3.1 million to $2.5 million for the nine months ended September 30, 2024 from $0.6 million for the nine months ended September 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. Net (loss) income. Net (loss) income decreased $11.5 million to a net loss of $6.6 million for the nine months ended September 30, 2024 from net income of $4.9 million for the nine months ended September 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 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. 34 Table of Contents 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 September 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 $150.0 million of borrowings outstanding under our $400.0 million senior unsecured revolving credit facility (the “Revolver”). Additionally, as of September 30, 2024, we had $30.6 million and $2.6 million of unsettled forward equity under the 2023 ATM Program and 2024 ATM Program, respectively. As of September 30, 2024, $300.0 million of remaining gross proceeds were available for future issuances of shares of our common stock under the 2024 ATM Program, inclusive of unsettled shares under forward sale agreements. Lastly, we had $152.3 million of unsettled forward equity under the January 2024 forward sale agreements as of September 30, 2024. We believe the availability of proceeds from the settlement of unsettled outstanding forward sale agreements, future issuances of shares of our common stock under the 2024 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 September 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 the repayment of borrowings on our Revolver with a contractual maturity of August 11, 2026. During the nine months ended September 30, 2024, we borrowed $251.0 million at a weighted average interest rate of 6.49% and also repaid $181.0 million on our Revolver. The following table provides information with respect to our commitments as of September 30, 2024 (in thousands): Payment Due by Period Total Remainder of 2024 2025 - 2026 2027 - 2028 Thereafter Contractual Obligations 2027 Term Loan – Principal $ 175,000 $ — $ 175,000 $ — $ — 2027 Term Loan – Variable interest (1) 8,039 1,396 6,643 — — 2028 Term Loan – Principal 200,000 — — 200,000 — 2028 Term Loan – Variable interest (2) 26,112 1,940 15,521 8,651 — 2029 Term Loan – Principal 250,000 — 250,000 — — 2029 Term Loan – Variable interest (3) 21,864 3,116 18,748 — — Revolver – Borrowings 150,000 — 150,000 — — Revolver – Variable interest 16,582 2,228 14,354 — — Facility Fee (4) 1,117 150 967 — — Mortgage Note – Principal 8,245 44 348 7,853 — Mortgage Note – Interest 1,141 93 726 322 — Property development under contract 11,207 8,017 3,190 — — Additional principal under mortgage notes receivable 13,534 1,265 12,269 — — Tenant improvement allowances 5,089 1,000 4,089 — — Corporate office lease obligations 5,427 157 1,289 1,359 2,622 Total $ 893,357 $ 19,406 $ 653,144 $ 218,185 $ 2,622 35 Table of Contents (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 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 September 30, 2024 of 4.83%, 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 September 30, 2024 of 5.20%, 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 September 30, 2024 of 4.83%, plus a SOFR adjustment of 0.10% and applicable margin of 1.15% based on the $250.0 million 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 7.8 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. 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 September 30, 2024, we had commitments to fund properties under development and extend funds under mortgage notes receivable totaling $11.2 million and $13.5 million, respectively. Funding of properties under development is expected to occur over the next 9 months and funding of mortgage notes receivable is expected to occur throughout 2024 and 2025. 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 Nine Months Ended September 30, 2024 Compared with Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2024 2023 (In thousands) (Unaudited) Net cash provided by (used in): Operating activities $ 62,128 $ 51,512 Investing activities (319,379) (345,731) Financing activities 256,072 231,610 Cash Flows Provided By Operating Activities. Net cash provided by operating activities increased by $10.6 million for the nine months ended September 30, 2024 compared to the nine months ended September 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 $20.2 million, additional interest received under our mortgage loans receivable, offset primarily by an increase in cash interest paid of $10.0 million, 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 $26.3 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The decrease was primarily due to a decrease in cash invested in mortgage loans receivable of $39.3 million, an increase of $18.1 million from proceeds from the sale of real estate, an increase of $11.3 million in principal collections on mortgage loans receivable, and a decrease of $10.4 million in real estate development and improvements, offset by an increase of $5.4 million of earnest money deposits and an increase of $47.6 million in acquisitions of real estate. 36 Table of Contents Cash Flows Provided By Financing Activities. Net cash provided by financing activities increased by $24.5 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase was primarily attributed to an increase in net borrowings of $141.0 million under our Revolver during the nine months ended September 30, 2024, and a $3.3 million decrease in deferred financing costs. This increase is offset by a decrease in proceeds received of $50.0 million from term loans during the nine months ended September 30, 2024, $59.4 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 $8.7 million of additional common stock dividends paid during the nine months ended September 30, 2024, and a $0.8 million increase in the repurchase of common stock for tax withholding obligations. 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. 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 (“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. 37 Table of Contents FFO, Core FFO and AFFO The National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a widely accepted non-GAAP financial measure of operating performance known as FFO. Our FFO is net income in accordance with GAAP, excluding gains (or losses) resulting from dispositions of properties, plus depreciation and amortization and impairment charges on depreciable real property. Core FFO is a non-GAAP financial measure defined as FFO adjusted to remove the effect of unusual and non-recurring items that are not expected to impact our operating performance or operations on an ongoing basis. These include non-recurring executive transition costs, severance and related charges, 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. 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. 38 Table of Contents The following table sets forth a reconciliation of FFO, Core FFO and AFFO for the periods presented to net income before allocation to noncontrolling interests, as computed in accordance with GAAP (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (Unaudited) (Unaudited) Net (loss) income $ (5,322) $ 4,239 $ (6,576) $ 4,928 Depreciation and amortization of real estate 20,360 15,726 56,286 46,379 Provisions for impairment 9,838 1,538 17,336 4,374 Loss (gain) on sales of real estate, net 132 (373) (874) (669) FFO 25,008 21,130 66,172 55,012 Adjustments: Non-recurring executive transition costs, severance and related charges 14 62 1,495 276 Loss on debt extinguishment and other related costs — — — 223 Other non-recurring (gain) loss, net (115) (1) 3,077 (47) Core FFO 24,907 21,191 70,744 55,464 Adjustments: Straight-line rent adjustments (749) (245) (1,829) (707) Amortization of deferred financing costs 558 578 1,673 1,165 Amortization of above/below-market assumed debt 29 29 86 86 Amortization of loan origination costs and discounts (265) 26 (242) 83 Amortization of lease-related intangibles (170) (121) (363) (517) Earned development interest 259 189 962 189 Capitalized interest expense (130) (404) (709) (688) Non-cash interest expense (990) (1,134) (2,948) (1,134) Non-cash compensation expense 1,376 1,280 4,128 3,559 AFFO $ 24,825 $ 21,389 $ 71,502 $ 57,500 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 non-recurring 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. 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, 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; 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. 39 Table of Contents 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (Unaudited) (Unaudited) Net (loss) income $ (5,322) $ 4,239 $ (6,576) $ 4,928 Depreciation and amortization of real estate 20,360 15,726 56,286 46,379 Amortization of lease-related intangibles (170) (121) (363) (517) Non-real estate depreciation and amortization 78 78 236 220 Interest expense, net 7,965 3,946 21,749 13,412 Income tax expense (benefit) 2 15 31 (60) Amortization of loan origination costs and discounts (265) 26 (242) 83 EBITDA 22,648 23,909 71,121 64,445 Adjustments: Provisions for impairment 9,838 1,538 17,336 4,374 Loss (gain) on sales of real estate, net 132 (373) (874) (669) EBITDA re $ 32,618 $ 25,074 $ 87,583 $ 68,150 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 September 30, 2024 (Unaudited) Net loss $ (5,322) Depreciation and amortization of real estate 20,360 Amortization of lease-related intangibles (170) Non-real estate depreciation and amortization 78 Interest expense, net 7,965 Income tax expense 2 Amortization of loan origination costs and discounts (265) EBITDA 22,648 Adjustments: Provisions for impairment 9,838 Loss on sales of real estate, net 132 EBITDA re 32,618 Adjustments: Straight-line rent adjustments (749) Non-recurring executive transition costs, severance and related charges 14 Other non-recurring gain, net (115) Other non-recurring expenses, net 523 Non-cash compensation expense 1,376 Adjustment for construction in process (1) 258 Adjustment for intraquarter investment activities (2) 1,921 Adjusted EBITDA re $ 35,846 Annualized Adjusted EBITDA re (3) $ 143,384 Adjusted Net Debt / Annualized Adjusted EBITDA re 4.0 (1) Adjustment reflects the estimated cash yield on developments in process as of September 30, 2024. (2) Adjustment assumes all re-leasing activity, investments in and dispositions of real estate, including developments completed during the three months ended September 30, 2024, had occurred on July 1, 2024. (3) We calculate Annualized Adjusted EBITDAre by multiplying Adjusted EBITDAre by four. 40 Table of Contents 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. The following table reconciles the principal amount of total debt to Net Debt and Adjusted Net Debt (in thousands): As of September 30, 2024 Principal amount of total debt $ 783,245 Less: Cash, cash equivalents and restricted cash (28,750) Net Debt 754,495 Less: Value of unsettled forward equity (1) (185,474) Adjusted Net Debt $ 569,021 (1) There were 10,735,647 unsettled shares under forward equity contracts as of September 30, 2024 at the available weighted-average net settlement price of $17.28. 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. 41 Table of Contents 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (Unaudited) (Unaudited) Net (loss) income $ (5,322) $ 4,239 $ (6,576) $ 4,928 General and administrative 4,287 5,133 15,266 15,299 Depreciation and amortization 20,438 15,804 56,522 46,599 Provisions for impairment 9,838 1,538 17,336 4,374 Transaction costs 26 143 201 267 Interest expense, net 7,965 3,946 21,749 13,412 Loss (gain) on sales of real estate, net 132 (373) (874) (669) Income tax expense (benefit) 2 15 31 (60) Loss on debt extinguishment — — — 128 Interest income on mortgage loans receivable (3,272) (2,244) (8,458) (5,145) Lease termination fees — (550) — (550) Other expense (income), net 107 (367) 2,451 (586) Property-Level NOI 34,201 27,284 97,648 77,997 Straight-line rent adjustments (749) (245) (1,829) (707) Amortization of lease-related intangibles (170) (121) (363) (517) Property-Level Cash NOI $ 33,282 $ 26,918 $ 95,456 $ 76,773 Adjustment for intraquarter acquisitions, dispositions and completed developments (1) 1,722 Property-Level Cash NOI Estimated Run Rate 35,004 Interest income on mortgage loans receivable 3,272 Adjustments for intraquarter mortgage loan activity (2) 199 Total Cash NOI - Estimated Run Rate $ 38,475 (1) Adjustment assumes all re-leasing activity, investments in and dispositions of real estate, including developments completed during the three months ended September 30, 2024, had occurred on July 1, 2024. (2) Adjustment assumes all loan activity completed during the three months ended September 30, 2024 had occurred on July 1, 2024.