NETSTREIT Corp. (NTST) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with the “Business” section as well as the consolidated financial statements and related notes in Part II, Item 8 in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategies for our business, includes forward-looking statements that involve risks and uncertainties. You should read “Item 1A. Risk Factors” and the “Forward-Looking Statements” section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by these forward-looking statements. Also refer to “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s previously filed Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 4, 2021, for additional discussion of our financial condition and results of operations, including a comparison of our results of operations for the year ended December 31, 2020 and for the periods from December 23, 2019 to December 31, 2019 and from January 1, 2019 to December 22, 2019, which is incorporated herein by reference.

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. Our diversified portfolio consists of 327 single-tenant retail net leased properties spanning 41 states, with 67 different tenants represented across 23 retail sectors. Our portfolio generates ABR1 of $71.2 million and is 100% occupied, with a WALT of 9.9 years and consisting of approximately 65% and 16% of investment grade tenants and investment grade profile tenants, respectively by ABR, which we believe provides us with a strong, stable source of recurring cash flow. 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, convenient stores, discount stores, and quick-service restaurants, which we refer to as defensive retail industries. We believe these characteristics make our tenants' businesses e-commerce resistant and resilient through all economic cycles. We completed our initial public offering on August 17, 2020 and our common stock trades on the New York Stock Exchange under the symbol “NTST.”

COVID-19

The ongoing COVID-19 pandemic, and the measures taken to limit its spread have negatively impacted the economy across many industries, including industries in which our tenants operate. The impacts may continue and/or increase in severity as the duration of the pandemic lengthens. We continue to monitor the global outbreak of COVID-19 and to take steps to mitigate the potential risks to us posed by the pandemic, including the identification and spread of variants. In addition, we continue to stay in close contact with our tenants and monitor the timeliness of rental payments and any significant changes in our tenants' businesses. During 2020, a number of our tenants across various industries announced temporary closures of their locations and requested rent deferral or rent abatement. During 2020, we granted rent deferral and rent abatement to 12 and 15 of our properties, respectively, representing 0.5%, and 1.7% of ABR as of December 31, 2020, respectively. The Company has not granted any abatements or deferrals since August 1, 2020. See “Note 2 - Summary of Significant Accounting Policies” to our consolidated financial statements included herein. The Company’s operations and cash flows for the years ended December 31, 2021 and 2020 were not materially impacted by COVID-19.

Financing Activities

On April 12, 2021, we completed a registered public offering of 10,915,688 shares of common stock at a public offering price of $18.65 per share. We received net proceeds from the offering of $194.2 million, net of transaction costs and underwriting discounts of $9.4 million.

On September 1, 2021, we entered into a $250.0 million ATM Program through which, from time to time, we may sell shares of our common stock in registered transactions. During the fourth quarter of 2021, we issued 3,852,436 shares of common stock at a weighted average price of $23.36 per share in connection with the ATM Program for gross proceeds of approximately $90.0 million.

(1) ABR is calculated by multiplying (i) cash rental payments (a) for the month ended December 31, 2021 (or, if applicable, the next full month's cash rent contractually due in the case of rent abatements, rent deferrals, recently acquired properties and properties with contractual rent increases, other than properties under development) for leases in place as of December 31, 2021, plus (b) for properties under development, the first full month's permanent cash rent contractually due after the development period by (ii) 12.

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Effective September 1, 2021, the board of directors authorized a repurchase program for up to $150.0 million of common stock. Repurchases of common stock may be made at management’s discretion from time to time in open market transactions, privately negotiated transactions or by other means (including through Rule 10b5-1 trading plans or one or more accelerated stock repurchase programs). The timing of share repurchases and the number of shares of common stock to be repurchased will depend upon prevailing market conditions and other factors and there can be no assurances that the Company will make any purchases under the common stock repurchase program.

On January 13, 2022, we completed a registered public offering of 10,350,000 shares of our common stock at a public offering price of $22.25 per share. In connection with the offering, we entered into forward sale agreements for 10,350,000 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 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 January 10, 2023. 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 forward counterparty in certain circumstances.

Results of Operations

Overall

The Company continued to grow its assets held for investment by increasing its property portfolio from 203 properties as of December 31, 2020 to 328 properties as of the end of December 31, 2021, which includes eight real estate development projects owned by the Company and one property under development with a non-binding option to purchase. Total actual and projected capital spend on current development projects that have completed or are under construction during 2021 is $40.3 million, of which $20.8 million has been funded as of December 31, 2021. This growth was facilitated by successfully raising net equity capital of $219.0 million, $227.3 million, $194.2 million, and $89.0 million as result of a private offering (the “Private Offering”), initial public offering, follow-on offering, and ATM Program, respectively, totaling $729.5 million of net capital raised by the Company since December 23, 2019.

Acquisitions

During the year ended December 31, 2021, the Company acquired 124 properties, for a total purchase price of $441.3 million, including $4.2 million of capitalized acquisition costs. The acquisitions were all accounted for as asset acquisitions. These properties are located in 33 states with a WALT of approximately 10.3 years. The underwritten weighted-average capitalization rate on the Company’s year to date acquisitions was approximately 6.5%.

Development

During the year ended December 31, 2021, the Company invested a total of $20.8 million, including total purchase price of $12.0 million, in ten properties, including one that contains a non-binding purchase option to acquire the property upon completion. Upon acquisition or investment in these properties, the Company commenced or assumed development of build-to-suit projects. As of December 31, 2021, the Company completed development on one of the projects and reclassified approximately $2.9 million from property under development to land, building, and improvements in the accompanying consolidated balance sheets. The remaining developments are expected to be substantially completed with rent commencing at various points throughout 2022. The purchase price, including acquisitions costs, and subsequent development are included in property under development in the accompanying consolidated balance sheets as of December 31, 2021.

Dispositions

During the year ended December 31, 2021, the Company sold nine properties for a total sales price, net of disposal costs of $31.1 million, recognizing a net gain of $3.0 million on the sales.

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Year Ended December 31, 2021 Compared with the Year Ended December 31, 2020

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

Revenue. Revenue for the year ended December 31, 2021 increased by $25.4 million to $59.1 million from $33.7 million for the year ended December 31, 2020. This is primarily due to an increase in the real estate portfolio from 94 operating properties as of January 1, 2020 to 318 operating properties as of December 31, 2021. The increase includes an increase in cash rental receipts of $23.1 million, combined net increases of property expense reimbursements of $2.7 million, of which $1.4 million was related to tax reimbursements, and an increase in amortization of above- and below-market lease related intangible assets of $0.3 million, partially offset by a decrease in straight-line rental revenue of $0.6 million.

Total Operating Expenses. Total expenses increased by $20.5 million to $55.7 million for the year ended December 31, 2021 as compared to $35.2 million for the year ended December 31, 2020. The increase in operating expenses is primarily attributed to increases in the number of operating properties, and provisions for impairment and stock-based compensation expense, partially offset by prior period expenses associated with the consummation of the Company’s initial public offering in August 2020. Total operating expenses include the following:

•Property Expenses. Property expenses increased $3.2 million to $5.8 million for the year ended December 31, 2021 from $2.6 million for the year ended December 31, 2020. The increase is primarily attributed to the increase in the real estate portfolio from 94 to 318 operating properties. The largest increases are from reimbursable property taxes of $1.4 million, reimbursable maintenance expense of $1.2 million, and reimbursable insurance expenses of $0.4 million. Remaining net increases are from non-reimbursable expenses of $0.2 million.

•General and Administrative Expenses. General and administrative expenses increased $3.5 million to $14.8 million for the year ended December 31, 2021 from $11.3 million for the year ended December 31, 2020. The increase is primarily due to payroll expense associated with increased management and staff to support the Company as a newly public company of $1.0 million, an increase in stock-based compensation expense of $1.3 million, an increase in insurance related expenses of $0.6 million, and an increase in professional and consulting services of $0.4 million, partially offset by a decrease in audit related fees of $0.3 million.

•Depreciation and Amortization. Depreciation and amortization expense increased by $15.3 million to $30.8 million for the year ended December 31, 2021 from $15.5 million for the year ended December 31, 2020. The increase in depreciation and amortization is proportionate to the increase in the size of the portfolio over the comparable period with associated increases in building depreciation expense of $6.4 million, in-place lease amortization expense of $5.0 million, and building and leasehold improvements depreciation expense of $3.3 million and $0.6 million, respectively.

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•Provisions for Impairment. For the year ended December 31, 2021, we recorded a provision for impairment of $3.5 million on three properties. One of the properties was classified as held-for-sale as of December 31, 2020 and sold during 2021 and two of the properties were classified as held-for-sale and sold during 2021. For the year ended December 31, 2020, we recorded a provision for impairment of $2.7 million on five properties which were all either classified as held-for-sale as of December 31, 2020 and sold during 2021 or 2020. These impairments and subsequent disposals relate to our plan of strategically identifying properties that can be re-leased or disposed of in an effort to improve returns and manage risk exposure.

•Transaction costs. Transaction costs decreased by $2.5 million to $0.7 million for the year ended December 31, 2021 from $3.2 million for the year ended December 31, 2020. The decrease in transaction costs includes a decrease of $2.2 million of expenses incurred in 2020 to facilitate our initial public offering and a decrease of $0.3 million of expenses incurred for abandoned acquisitions and expenses associated with property acquisitions.

Interest Expense. Interest expense decreased by $1.0 million to $3.7 million for the year ended December 31, 2021 from $4.7 million for the year ended December 31, 2020. The decrease is primarily due to the decrease in the effective interest rate of the Term Loan translating into a decrease in Term Loan interest expense of $1.2 million, offset by increased interest expense associated with interest rate swaps of $0.2 million, further offset by less than $0.1 million related to average balances in borrowings outstanding under the Revolver (as defined in “Note 6 - Debt” to our consolidated statements of operations and comprehensive income (loss) included herein).

Gain on sales of real estate, net. Gain on sales of real estate, net decreased $3.2 million to $3.0 million for the year ended December 31, 2021 from $6.2 million for the year ended December 31, 2020. The table below summarizes the properties sold for the periods indicated (in thousands):

Other income (expense), net. Other income (expense), net increased by $0.4 million to $0.4 million for the year ended December 31, 2021 solely related to $0.5 million of loss recorded due to damages incurred from Hurricane Ida as described in further detail in “Note 4 - Real Estate Investments,” offset by insurance proceeds received during 2021 of $0.9 million.

Net Income (loss). Net income increased $3.0 million to $3.2 million for the year ended December 31, 2021 from $0.2 million for the year ended December 31, 2020. Net income increased primarily due to the growth in the size of our real estate investment portfolio, which generated additional rental revenues, offset by a decrease related to net gains on sales of real estate, further offset partially by increases in depreciation and amortization expenses, and to increases in general and administrative expenses related to both our growth and incremental costs associated with becoming a public company, as set forth above.

Liquidity and Capital Resources

Our primary capital requirements are to fund property acquisitions and required interest payments, as well as working capital needs, operating expenses and capital expenditures. Our capital resources primarily consist of cash from operations, sales of equity securities and borrowings under our Credit Facility. As of December 31, 2021, we had a $175.0 million Term Loan and $64.0 million of borrowings outstanding under our $250.0 million Revolver. We believe that the availability of proceeds from future issuances of shares of our common stock under the ATM Program and the physical settlement of forward sales of our common stock, coupled with our cash flows from operations and available borrowing capacity, will be adequate to support our ongoing operations and to fund our debt service requirements, capital expenditures and working capital for at least the next 12 months.

Contractual Obligations and Commitments

As of December 31, 2021, our contractual obligations include the maturity of our $175.0 million Term Loan with the scheduled principal payment due on December 23, 2024 and repayment of borrowings on our $250.0 million Revolver. During the year ended December 31, 2021, we borrowed $150.0 million and repaid $86.0 million on our Revolver at a weighted-average interest rate of 1.31% to fund specifically identified property acquisitions. Additionally, a portion of the net proceeds from our April 12, 2021 public offering were used to repay $13.0 million of borrowings in the second quarter of 2021.

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The following table provides information with respect to our commitments as of December 31, 2021 (in thousands):

(1) Effective September 28, 2020, we entered into an interest rate hedge to fix the interest rate on our Term Loan. Accordingly, the projected interest rate obligations for the variable rate Term Loan is based on the hedged fixed rate (one-month) of 0.21% compared to the variable Term Loan one-month LIBOR rate as of December 31, 2021 of 0.10%, plus a margin of 1.15% based on the $175.0 million Term Loan outstanding through the maturity date of December 23, 2024.

(2) We are subject to a variable unutilized borrowing fee on our $250.0 million Revolver. This reflects our projected unutilized borrowing fee at 0.25% assuming no additional borrowing through the maturity date of December 23, 2023.

In August 2021, the Company entered into a lease agreement on a new corporate office space, which is classified as an operating lease. The Company began operating out of the new office in February 2022. The Company expects to incur approximately $0.5 million of additional improvement, furniture and fixtures, and computer and computer related equipment costs in the first quarter of 2022. The lease has an initial noncancellable term of 10.5 years that expires on July 31, 2032, with a one-time option to terminate in 2029 exercisable by the Company. The lease is also renewable at the Company’s option for two additional periods of five years. Future minimum base rental payments under the lease are outlined in “Note - 3 - Leases”. Annual rent expense, excluding operating expenses, is expected to be approximately $0.5 million during the initial term.

Additionally, in the normal course of business, the Company enters into various types of commitments to purchase real estate properties or fund development projects. These commitments are generally subject to the Company’s customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated or receives an option to purchase the properties. As of December 31, 2021, the Company had commitments to fund properties under development totaling $21.6 million, all of which is is expected to be funded over the next 12 months.

Credit Facility

In December 2019, the Company entered into a senior credit facility consisting of (i) a $175.0 million senior secured term loan (“Term Loan”) and (ii) a $250.0 million senior secured revolving credit facility (“Revolver”, and collectively with the Term Loan, the “Credit Facility”). Wells Fargo Securities, LLC is lead arranger and bookrunner and Wells Fargo Bank, National Association is administrative agent under the Credit Facility (the “Administrative Agent”).

The Term Loan matures on December 23, 2024 and the Revolver matures on December 23, 2023, subject to extension up to one year. The Credit Facility, effective during the fourth quarter of 2020, is unsecured as the Administrative Agent released the collateral in connection with the Company’s satisfaction of the collateral release requirements. Therefore interest rates under the Credit Facility are based on the Company’s consolidated total leverage ratio, and are determined by (A) in the case of the Term Loan either (i) LIBOR, plus a margin ranging from 1.15% to 1.60%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.15% to 0.60%, based on the Company’s consolidated total leverage ratio and (B) in the case of the Revolver either (i) LIBOR, plus a margin ranging from 1.20% to 1.80%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.20% to 0.80%, based on the Company’s consolidated total leverage ratio. Interest is payable monthly or at the end of the applicable interest period in arrears on any outstanding borrowings.

The Company uses interest rate derivative contracts to manage its exposure to changes in interest rates on its variable rate debt. These derivatives are considered cash flow hedges and are recorded on a gross basis at fair value. Effective September 28, 2020, such derivatives were used to hedge the variable cash flows associated with the Term Loan. The interest rate hedge is further described in “Note 7 - Derivative Financial Instruments.”

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Historical Cash Flow Information

Year Ended December 31, 2021 Compared with the Year Ended December 31, 2020

Cash Flows Provided By Operating Activities. Net cash provided by operating activities increased by $18.8 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was largely attributed to the increase in the size of the Company’s real estate investment portfolio with an increase in rental receipts of $23.1 million, a decrease of $1.9 million for leasehold improvement obligations paid in the prior year, offset primarily by $5.8 million of lease incentives paid during the period and other net increases in operating and general and administrative expenses associated with our larger portfolio.

Cash Flows Used In Investing Activities. Net cash used in investing activities increased by $68.0 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase is primarily due to acquisition, development and disposal activity. The Company spent $32.7 million and $17.9 million more on the acquisition and development of real estate, respectively, increased further by $17.0 million of fewer proceeds received from disposals. Additional increases are comprised of $0.6 million more spent on the purchase of computer equipment and other corporate assets, $0.7 million in net increases in earnest money deposits, offset by $0.9 million of proceeds received from the settlement of property-related insurance claims.

Cash Flows Provided By Financing Activities. Net cash provided by financing activities increased by $40.9 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase is primarily attributed to receiving $1.2 million more in aggregate net proceeds from the April 2021 follow-on public offering and proceeds from sales under the ATM Program as compared to the proceeds from the sale of unregistered securities in February 2020 and our initial public offering in August 2020. Additionally, the Company paid $22.4 million and $1.7 million more of dividends and distributions and deferred offering costs, respectively, during the year ended December 31, 2021 than the prior year. The Company also net borrowed $64.0 million more under the Revolver during the year ended December 31, 2021 than the prior year.

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 2021 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.

Our predecessor was not a federal taxable entity and no provision for federal income taxes was recognized in its consolidated financial information.

During the years ended 2021 and 2020, the Company recognized franchise and other state and local tax expenses in general and administrative and recognized state and federal income tax expense in income tax expense in the accompanying consolidated statements of operations and comprehensive income (loss).

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Recent Accounting Pronouncements

A discussion of new accounting standards and the possible effects of these standards on our consolidated financial statements is included in “Note 2 - Summary of Significant Accounting Policies” of our consolidated financial statements, included in Part II, “Item 8 - Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

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. This summary should be read in conjunction with the more complete discussion of our accounting policies and procedures included in “Note 2 - Summary of Significant Accounting Policies” of our consolidated financial statements.

Purchase Price Allocation of Acquired Properties

We evaluate each acquisition transaction to determine whether the acquired asset meets the definition of a business and therefore accounted for as a business combination or if the acquisition transaction should be accounted for as an asset acquisition. Under Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”), an acquisition does not qualify as a business when substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets or the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. Transaction costs related to acquisitions that qualify as asset acquisitions are capitalized as part of the cost basis of the acquired assets, while transaction costs for acquisitions that are deemed to be acquisitions of a business are expensed as incurred.

We allocate the purchase price of acquired properties accounted for as asset acquisitions to tangible and identifiable intangible assets or liabilities based on their relative fair values. Tangible assets may include land, buildings, site improvements and tenant improvements. Intangible assets include the value of in-place leases and above-market leases and intangible liabilities include below-market leases.

The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases based on the specific characteristics of each tenant’s lease. We estimate the cost to execute leases with terms similar to the remaining lease terms of the in-place leases, including leasing commissions, legal and other related expenses. The fair value of above-market or below-market leases is recorded based on the net present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between the contractual amount to be paid pursuant to the in-place lease and our estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining non-cancelable term of the lease including any below-market fixed rate renewal options for below-market leases. In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including real estate valuations prepared by an independent valuation firm. We also consider information and other factors including market conditions, the industry that the tenant operates in, characteristics of the real estate; e.g., location, size, demographics, value and comparative rental rates; tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business. Additionally, we consider information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets and liabilities acquired.

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Impairment of Long-Lived Assets

Fair value measurement of an asset group occurs when events or changes in circumstances related to an asset indicate that the carrying amount of the asset group is no longer recoverable. An example of an event or changed circumstance is a reduction in the expected holding period of a property. If indicators are present, we will prepare a projection of the undiscounted future cash flows of the property, excluding interest charges, and determine if the carrying amount of the asset group is recoverable. When a carrying amount is not recoverable, an impairment loss is recognized to the extent that the carrying amount of the asset group exceeds its fair market value. We estimate fair value using data such as operating income, estimated capitalization rates or multiples, leasing prospects, local market information, and with regard to assets held for sale, based on the estimated or negotiated selling price, less estimated costs of disposal.

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, taxes, depreciation and amortization (“EBITDA”), EBITDA adjusted to exclude gains (or losses) on sales of depreciable property and real estate impairment losses (“EBITDAre”), EBITDAre further adjusted to exclude straight-line rent, gains from forfeited earnest money deposits, non-recurring public company costs, representing consulting fees incurred in preparing to become a public company, gains on insurance proceeds, and non-cash compensation expense (“Adjusted EBITDAre”), net operating income (“NOI”) and cash net operating income (“Cash NOI”). 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

FFO is a non-GAAP financial measure defined by NAREIT as net income (computed in accordance with GAAP), excluding real estate-related expenses including, but not limited to, gains (losses) from sales, impairment adjustments, and depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of FFO is consistent with FFO as defined by NAREIT.

Core FFO is a non-GAAP financial measure defined as FFO adjusted for gains from forfeited earnest money deposits, non-recurring public company costs, and gains on insurance proceeds. We believe the presentation of Core FFO provides investors with a metric to assist in their evaluation of our operating performance across multiple periods because it removes the effect of unusual and non-recurring items that are not expected to impact our operating performance on an ongoing basis.

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, non-cash compensation expense, and amortization of deferred financing 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 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 all of 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.

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

(1) These expenses represent a subset of transaction costs as presented on the consolidated statements of operations and comprehensive income (loss).

EBITDA, EBITDAre and Adjusted EBITDAre

We compute EBITDA as earnings before interest, income taxes 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 real estate impairment losses.

Adjusted EBITDAre is a non-GAAP financial measure defined as EBITDAre further adjusted to exclude straight-line rent, gains from forfeited earnest money deposits, non-recurring public company costs, representing consulting fees that we incurred in preparing to become a public company, gains on insurance proceeds, and non-cash compensation expense.

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

EBITDA, EBITDAre and 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 and 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.

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

(1) These expenses represent a subset of transaction costs as presented on the consolidated statements of operations and comprehensive income (loss).

NOI and Cash NOI

NOI and Cash NOI are non-GAAP financial measures which we use to assess our operating results. We compute NOI as net income (loss) (computed in accordance with GAAP), excluding general and administrative expenses, interest expense (or income), income tax expense, depreciation and amortization, gains (or losses) on sales of depreciable property, gain from forfeited earnest money deposits, real estate impairment losses, and other income (or expense). We further adjust NOI for non-cash revenue components of straight-line rent and amortization of lease intangibles and lease incentives to derive Cash NOI. We believe NOI and Cash NOI 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.

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

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Table of Contents

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