NETSTREIT Corp.: Form 10-Q for the period ended Jun 30, 2024

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements concerning our business and growth strategies, investment, financing and leasing activities and trends in our business, including trends in the market for single-tenant, retail commercial real estate. Words such as “expects,” “anticipates,” “intends,” “plans,” “likely,” “will,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Quarterly Report on Form 10-Q may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. For a further discussion of these and other factors that could impact future results, performance or transactions, see the information under the heading “Risk Factors” Part I, Item 1A. in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission (the “SEC”) on February 14, 2024, and other reports filed with the Securities and Exchange Commission from time to time.

Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report on Form 10-Q. New risks and uncertainties may arise over time and it is not possible for us to predict those events or how they may affect us. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.

Business Overview

We are an internally managed real estate company that acquires, owns, and manages a diversified portfolio of single-tenant, retail commercial real estate subject to long-term net leases with high credit quality tenants across the United States. We also invest in property developments and mortgage loans secured by real estate. As of June 30, 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 June 30, 2024, our investments generated ABR1 of $148.3 million. Approximately 69% of our ABR is from investment grade2 credit rated tenants and an additional 14% of our ABR is derived from tenants with an investment grade profile3. 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. We expect to physically settle the forward sale agreements (by delivery of shares of common stock) and receive proceeds from the sale of those shares upon one or more forward settlement dates, which shall occur no later than January 9, 2025. We may also elect to cash settle or net share settle all or a portion of our obligations under a forward sale agreement if we conclude it is in our best interest to do so. If we elect to cash settle a forward sale agreement, we may not receive any proceeds and we may owe cash to the relevant counterparty in certain circumstances. No physical settlement has occurred under the January 2024 forward sale agreements through 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. 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.

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.

Results of Operations

Overall

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.

Acquisitions

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%.

Development

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.

Dispositions

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 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 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.

Other Events

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 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. 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 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):

Revenue. 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 $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. 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 related costs. Total operating expenses include the following:

• Property expenses. 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 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 $2.7 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):

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. 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):

Revenue. 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. 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 related costs. 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. 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 $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, 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):

Other (expense) income, net. 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

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 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. 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 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):

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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 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 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 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.

In August 2021, we entered into a lease agreement on a new corporate office space, which is classified as an operating lease. We began operating out of the new office in February 2022. The lease has a remaining noncancellable term of 8.1 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 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.

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

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

(In thousands)

(Unaudited)

Cash Flows Provided By Operating Activities. 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 $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 $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.

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 (http://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.

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.

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):

(Unaudited)

(Unaudited)

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 EBITDAre. We compute EBITDAre in accordance with the definition adopted by NAREIT. NAREIT defines EBITDAre as EBITDA (as defined above) excluding gains (or losses) from the sales of depreciable property and impairment charges on depreciable real property.

Adjusted EBITDAre is a non-GAAP financial measure defined as EBITDAre further adjusted to exclude straight-line rent, non-cash compensation expense, non-recurring executive transition costs, severance and related charges, loss on debt extinguishment and other related costs, other loss (gain), net, other non-recurring expenses (income), lease termination fees, adjustment for construction in process, and adjustment for intraquarter activities. Annualized Adjusted EBITDAre is Adjusted EBITDAre multiplied by four.

We present EBITDA, EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre 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 EBITDAre and Annualized Adjusted EBITDAre as measures of our operating performance and not as measures of liquidity.

EBITDA, EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre 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, EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre may differ from the methodology for calculating these metrics used by other equity REITs and, therefore, may not be comparable to similarly titled measures reported by other equity REITs.

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

(Unaudited)

(Unaudited)

The following table sets forth a reconciliation of EBITDA, EBITDAre, Adjusted EBITDAre 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):

(Unaudited)

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

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

Net Debt and Adjusted Net Debt

We calculate our Net Debt as our principal amount of total debt outstanding excluding deferred financing costs, net discounts and debt issuance costs less cash, cash equivalents and restricted cash available for future investment.

We further adjust Net Debt by the net value of unsettled forward equity as of period end to derive Adjusted Net Debt. We believe excluding cash, cash equivalents and restricted cash available for future investment from our principal amount in addition to excluding the net value of unsettled forward equity, all of which could be used to repay debt, provides an estimate of the net contractual amount of borrowed capital to be repaid. We believe these adjustments are additional beneficial disclosures to investors and analysts.

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

(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

Property-Level NOI, Property-Level Cash NOI, Property-Level Cash NOI - Estimated Run Rate, and Total Cash NOI - Estimated Run Rate are non-GAAP financial measures which we use to assess our operating results. We compute Property-Level NOI as net income (computed in accordance with GAAP), excluding general and administrative expenses, interest expense (or income), income tax expense, transaction costs, depreciation and amortization, gains (or losses) on sales of depreciable property, real estate impairment losses, interest income on mortgage loans receivable, loss on debt extinguishment, lease termination fees and other expense (income), net. We further adjust Property-Level NOI for non-cash revenue components of straight-line rent and amortization of lease-intangibles to derive Property-Level Cash NOI. We further adjust Property-Level Cash NOI for intraquarter acquisitions, dispositions and completed development to derive Property-Level Cash NOI - Estimated Run Rate. We further adjust Property-Level Cash NOI - Estimated Run Rate for interest income on mortgage loans receivable and intraquarter mortgage loan activity to derive Total Cash NOI - Estimated Run Rate. We believe Property-Level NOI, Property-Level Cash NOI, Property-Level Cash NOI - Estimated Run Rate, and Total Cash NOI - Estimated Run Rate provide useful and relevant information because they reflect only those income and expense items that are incurred at the property level and present such items on an unlevered basis.

Property-Level NOI, Property-Level Cash NOI, Property-Level Cash NOI - Estimated Run Rate, and Total Cash NOI - Estimated Run Rate are not measurements of financial performance under GAAP, and may not be comparable to similarly titled measures of other companies. You should not consider our measures as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.

The following table sets forth a reconciliation of Property-Level NOI and Property-Level Cash NOI for the periods presented (in thousands):

(Unaudited)

(Unaudited)

(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.

Our future income, cash flows and fair value relevant to our financial instruments depend upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Based upon the nature of our operations, the principal market risk to which we are exposed is the risk related to interest rate fluctuations. As of June 30, 2024, we had total indebtedness of approximately $175.0 million under the 2027 Term Loan, $200.0 million under the 2028 Term Loan, $250.0 million under the 2029 Term Loan, and $98.0 million of borrowings under our Revolver, all of which is floating rate debt with a variable interest rate. For the three and six months ended June 30, 2024, we had average daily outstanding borrowings on our Revolver of $91.7 million and $75.6 million, respectively.

Effective through the maturity dates of January 15, 2027, February 11, 2028, and January 3, 2029, we entered into interest rate derivative contracts in order to hedge our market interest risk associated with the 2027 Term Loan, 2028 Term Loan, and 2029 Term Loan, respectively. The interest rate derivative contracts convert the variable rate debt on the term loans to a fixed interest rate (as further described in “Note 6 - Debt” in our condensed consolidated financial statements).

Additionally, we will occasionally fund acquisitions through the use of our Revolver which bears an interest rate determined by either (i) SOFR, plus a SOFR adjustment of 0.10%, plus a margin ranging from 1.00% to 1.45%, based on our consolidated total leverage ratio, or (ii) a Base Rate (as defined in the New Credit Facility), plus a margin ranging from 0.00% to 0.45%, based on our consolidated total leverage ratio. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control contribute to our interest rate risk. Based on the results of our sensitivity analysis and daily outstanding borrowings on the Revolver during 2024, which assumes a 1% adverse change in the interest rate as of June 30, 2024, the estimated market risk exposure was approximately $0.8 million.

Evaluation of Disclosure Controls and Procedures.

At the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that its disclosure controls and procedures were effective as of June 30, 2024 to ensure that information required to be disclosed by us in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Changes in Internal Control over Financial Reporting.

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. While the Company subsequently identified the unauthorized transfers, our internal controls did not operate effectively to prevent the loss from occurring. Following these events, we strengthened our processes and controls related to fund transfers and vendor-related information updates, and reinforced existing policies and procedures around these processes. We also conducted additional training to emphasize the importance of exercising professional skepticism and judgment related to the procurement and payment process. Management believes that the foregoing actions have strengthened our procurement and payment process and improved our ability to detect fraudulent activities and safeguard Company assets.

Other than the control enhancements discussed above, there were no changes to our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

For a discussion of the most significant factors that may adversely affect us, see the information under the heading “Risk Factors” 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 (http://www.sec.gov). There have been no material changes to the risk factors disclosed in the Annual Report. These risk factors may not describe every risk facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and results of operations.