AGREE REALTY CORP (ADC) FY 2022 MD&A

Overview

The Company is a fully integrated REIT primarily focused on the ownership, acquisition, development and management of retail properties net leased to industry leading tenants. The Company was founded in 1971 by its current Executive Chairman, Richard Agree, and its common stock was listed on the NYSE in 1994.  The Company’s assets are held by, and all of its operations are conducted through, directly or indirectly, the Operating Partnership, of which the Company is the sole general partner and in which the Company held a 99.6% common interest as of December 31, 2022.  Refer to Note 1-Organization in the Notes to the Consolidated Financial Statements in this Form 10-K for further information on the ownership structure.  Under the agreement of limited partnership of the Operating Partnership, the Company, as the sole general partner, has exclusive responsibility and discretion in the management and control of the Operating Partnership.

As of December 31, 2022, the Company’s portfolio consisted of 1,839 properties located in 48 states and totaling approximately 38.1 million square feet of GLA. The Company’s portfolio was approximately 99.7% leased and had a weighted average remaining lease term of approximately 8.8 years. A significant majority of the Company’s properties are leased to national tenants and approximately 67.8% of our annualized base rent was derived from tenants, or parent entities thereof, with an investment grade credit rating from S&P Global Ratings, Moody’s Investors Service, Fitch Ratings or the National Association of Insurance Commissioners. A net lease typically requires the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance.

The Company elected to be taxed as a REIT for federal income tax purposes commencing with the taxable year ended December 31, 1994. We believe that we have been organized and have operated in a manner that has allowed us to qualify as a REIT for federal income tax purposes and we intend to continue operating in such a manner.

Results of Operations

Overall

The Company’s real estate investment portfolio grew from approximately $4.37 billion in net investment amount representing 1,404 properties with 29.1 million square feet of gross leasable space as of December 31, 2021 to

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approximately $5.74 billion in net investment amount representing 1,839 properties with 38.1 million square feet of gross leasable space at December 31, 2022. The Company’s real estate investments were made throughout the periods presented and were not all outstanding for the entire period; accordingly, a portion of the increase in rental income between periods is related to recognizing revenue in 2022 on acquisitions that were made during 2021. Similarly, the full rental income impact of acquisitions made during 2022 will not be seen until 2023.

Acquisitions

During the year ended December 31, 2022, the Company acquired 434 retail net lease assets for approximately $1.6 billion, which includes acquisition and closing costs. These properties are located in 43 states and are leased to tenants operating in 27 diverse retail sectors for a weighted average lease term of approximately 10.2 years. The underwritten weighted-average capitalization rate on the acquisitions was 6.2%.1

Dispositions

During the year ended December 31, 2022, the Company sold seven assets for net proceeds of $44.9 million. The weighted-average capitalization rate on the dispositions was 6.5%.1

Development and Partner Capital Solutions

During the year ended December 31, 2022, the Company commenced 28 development or PCS projects. At December 31, 2022 the Company had 24 development or Partner Capital Solutions projects under construction.

Comparison of Year Ended December 31, 2022 to Year Ended December 31, 2021

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The variances in rental income, real estate tax expense, property operating expense and depreciation and amortization expense shown above were due to the acquisition and the ownership of an increased number of properties during the year ended December 31, 2022 compared to the year ended December 31, 2021, as further described under Results of Operations - Overall above.

General and administrative expenses increased $4.6 million, or 18%, to $30.1 million for the year ended December 31, 2022, compared to $25.5 million for the year ended December 31, 2021.  The increase was primarily the result of increased employee headcount and increased compensation costs. General and administrative expenses as a percentage of total revenue decreased to 7.0% for the year ended December 31, 2022 compared to 7.5% for the year ended December 31, 2021.

Provision for impairment decreased to $1.0 million for the year ended December 31, 2022, compared to $1.9 million for the year ended December 31, 2021. Provisions for impairment are recorded when events or changes in circumstances indicate that the carrying amount may not be recoverable through operations plus estimated disposition proceeds and are not necessarily comparable period-to-period.

Interest expense increased $13.0 million, or 26%, to $63.4 million for the year ended December 31, 2022, compared to $50.4 million for the year ended December 31, 2021.  The increase in interest expense was primarily a result of higher levels of borrowings in 2022 in comparison to 2021, as well as higher interest rates under the Revolving Credit Facility.

1 When used within this discussion, “weighted average capitalization rate” for acquisitions and dispositions is defined by the Company as the sum of contractual fixed annual rents computed on a straight-line basis over the primary lease terms and anticipated annual net tenant recoveries, divided by the purchase and sale prices for occupied properties.

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Borrowings increased in order to finance the acquisition and development of additional properties (see Liquidity and Capital Resources – Debt below).

Gain on sale of assets decreased to $5.3 million for the year ended December 31, 2022, compared to $14.9 million for the year ended December 31, 2021.  Gains on sales of assets are dependent on the levels of disposition activity and the assets’ basis relative to their sales prices.  As a result, such gains are not necessarily comparable period-to-period.

Income tax expense increased $0.5 million, or 19%, to $2.9 million for the year ended December 31, 2022, compared to $2.4 million for the year ended December 31, 2021. The increase in income tax expense was due to the acquisitions and the ownership of an increased number of properties during the year ended December 31, 2022 compared to 2021, partially offset by additional tax expense of approximately $0.5 million recognized during 2021 relating to the true-up of expense upon filing of the 2020 annual tax returns.

In May 2021, the Company used the net proceeds from the offering of the 2028 Senior Unsecured Public Notes and the 2033 Senior Unsecured Public Notes to repay all amounts outstanding under its unsecured term loans and settle the related swap agreements. The Company incurred a charge of $14.6 million upon this repayment and settlement, including swap termination costs of $13.4 million and the write-off of previously unamortized debt issuance costs of $1.2 million.

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Net income increased $30.1 million, or 25%, to $153.0 million for the year ended December 31, 2022, compared to $122.9 million for the year ended December 31, 2021.  The increase was primarily driven by the growth of our portfolio during the year ended December 31, 2022, and the repayment and settlement charge in 2021 discussed above.  After allocation of income to non-controlling interest and preferred stockholders, net income attributable to common stockholders increased $24.9 million, or 21% to $145.0 million for the year ended December 31, 2022, compared to $120.1 million for the year ended December 31, 2021. The allocation of income to the preferred stockholders began upon the September 2021 issuance of the Series A Preferred Stock.

Liquidity and Capital Resources

The Company’s principal demands for funds include payment of operating expenses, payment of principal and interest on our outstanding indebtedness, dividends and distributions to its stockholders and holders of the units of the Operating Partnership (the “Operating Partnership Common Units”), and future property acquisitions and development.

The Company expects to meet its short-term liquidity requirements through cash provided from operations and borrowings under its revolving credit facility. As of December 31, 2022, available cash and cash equivalents, including cash held in escrow, was $28.9 million. As of December 31, 2022, the Company had $100.0 million outstanding on its revolving credit facility and $900.0 million was available for future borrowings, subject to its compliance with covenants.  The Company anticipates funding its long-term capital needs through cash provided from operations, borrowings under its revolving credit facility, the issuance of debt and common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity.

We continually evaluate alternative financing and believe that we can obtain financing on reasonable terms. However, there can be no assurance that additional financing or capital will be available, or that the terms will be acceptable or advantageous to us. Our ability to access capital on favorable terms as well as to use cash from operations to continue to meet our liquidity needs, is uncertain and cannot be predicted and could be affected by various risks and uncertainties, including, but not limited to, risks detailed in Part I, Item 1A, “Risk Factors.”

Capitalization

As of December 31, 2022, the Company’s total enterprise value was approximately $8.53 billion.  Total enterprise value consisted of $6.42 billion of common equity (based on the December 31, 2022 closing price of Company common stock on the NYSE of $70.93 per share and assuming the conversion of Operating Partnership Common Units), $175 million of preferred equity (stated at liquidation value), and $1.96 billion of total debt including (i) $100.0 million of borrowings under its revolving credit facility; (ii) $1.81 billion of senior unsecured notes; (iii) $50.4 million of mortgage notes payable;

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less $28.9 million cash, cash equivalents, and cash held in escrow. The Company’s ratio of total debt to total enterprise value was 23.0% at December 31, 2022.

At December 31, 2022, the non-controlling interest in the Operating Partnership consisted of a 0.4% common ownership interest in the Operating Partnership. The Operating Partnership Common Units may, under certain circumstances, be exchanged for shares of Company common stock on a one-for-one basis. The Company, as sole general partner of the Operating Partnership, has the option to settle exchanged Operating Partnership Common Units held by others for cash based on the current trading price of our shares. Assuming the exchange of all Operating Partnership Common Units, there would have been 90,521,043 shares of common stock outstanding at December 31, 2022.

Equity

Shelf Registration

The Company has filed with the SEC an automatic shelf registration statement on Form S-3, registering an unspecified amount of common stock, preferred stock, depositary shares, warrants and guarantees of debt securities of the Operating Partnership, as well as an unspecified amount of debt securities of the Operating Partnership, at an indeterminate aggregate initial offering price. The Company may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if these securities are offered.  The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering.

Common Stock Offerings

In May 2022, the Company completed a follow-on public offering of 5,750,000 shares of common stock, including the full exercise of the underwriters’ option to purchase 750,000 shares in connection with forward sale agreements.  The offering resulted in net proceeds to the Company of approximately $386.7 million, after deducting fees and expenses and making certain other adjustments as provided in the equity distribution agreements.

In October 2022, the Company completed a follow-on public offering of 5,750,000 shares of common stock, including the full exercise of the underwriters' option to purchase 750,000 shares, in connection with forward sale agreements. Upon settlement, the offering is anticipated to raise net proceeds of approximately $380.7 million after deducting fees and expenses and making certain other adjustments as provided in the equity distribution agreements. During 2022, the Company settled 1,600,000 shares of common stock under the forward sale agreements, realizing net proceeds of $106.2 million.

Preferred Stock Offering

As of December 31, 2022, we had 7,000,000 depositary shares (the “Depositary Shares”) outstanding, each representing 1/1,000th of a share of Series A Preferred Stock.

Dividends on the Series A Preferred Shares are payable monthly in arrears on the first day of each month (or, if not on a business day, on the next succeeding business day). The dividend rate is 4.25% per annum of the $25,000 (equivalent to $25.00 per Depositary Share) liquidation preference. Dividends on the Series A Preferred Shares are in the amount of $0.08854 per Depositary Share, equivalent to $1.0625 per annum.

The Company may not redeem the Series A Preferred Shares before September 2026 except in limited circumstances to preserve its status as a real estate investment trust for federal income tax purposes and except in certain circumstances upon the occurrence of a change of control of the Company.  Beginning in September 2026, the Company, at its option, may redeem the Series A Preferred Shares, in whole or from time to time in part, by paying $25.00 per Depositary Share, plus any accrued and unpaid dividends. Upon the occurrence of a change in control of the Company, if the Company does not otherwise redeem the Series A Preferred Shares, the holders have a right to convert their shares into common stock of the Company at the $25.00 per share liquidation value, plus any accrued and unpaid dividends.  This conversion value is limited by a share cap if the Company’s stock price falls below a certain threshold.

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ATM Programs

The Company enters into ATM programs through which the Company, from time to time, sells shares of common stock and enters into forward sale agreements.  The results of ATM programs entered into during 2020 and 2021 are shown in the following table.  These ATM programs have been terminated and no future issuances will occur under them.

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In September 2022, the Company entered into a new $750 million ATM program (the “2022 ATM Program”) through which the Company, from time to time, may sell shares of common stock and/or enter into forward sale agreements.

As of December 31, 2022, the Company entered into forward sale agreements to sell an aggregate of 4,350,232 shares of common stock under the 2022 ATM Program, for anticipated net proceeds of $300.9 million. The Company has settled  245,591 shares of these forward sale agreements as of December 31, 2022 for net proceeds of approximately $18.1 million after deducting fees and expenses. The Company is required to settle the remaining outstanding shares of common stock under the 2022 ATM Program by various dates between November and December 2023. After considering the 4,350,232 shares of common stock subject to forward sale agreements issued under the 2022 ATM Program, the Company had approximately $446.6 million of availability remaining under this program as of December 31, 2022.

Debt

The below table summarizes the Company’s outstanding debt as of December 31, 2022 and December 31, 2021 (presented in thousands):

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Senior Unsecured Revolving Credit Facility

The Company’s Third Amended and Restated Revolving Credit Agreement provides for a $1.0 billion Revolving Credit Facility. The Revolving Credit Facility includes an accordion option that allows the Company to request additional lender commitments up to a total of $1.75 billion. The Revolving Credit Facility will mature in January 2026 with Company options to extend the maturity date to January 2027.

The Revolving Credit Facility's interest rate is based on a pricing grid with a range of 72.5 to 140 basis points over SOFR, determined by the Company's credit ratings and leverage ratio, plus a SOFR adjustment of 10 basis points. The margins for the Revolving Credit Facility are subject to improvement based on the Company's leverage ratio, provided its credit ratings meet a certain threshold. Based on the Company's credit ratings and leverage ratio at the time of closing, pricing on the Revolving Credit Facility was 87.5 basis points over SOFR. In connection with the Company's ongoing environmental, social and governance ("ESG") initiatives, pricing may be reduced if specific ESG ratings are achieved.

The Company and Richard Agree, the Executive Chairman of the Company, are parties to a Reimbursement Agreement dated November 18, 2014 (the “Reimbursement Agreement”).  Pursuant to the Reimbursement Agreement, Mr. Agree has agreed to reimburse the Company for any loss incurred under the Revolving Credit Facility in an amount not to exceed $14.0 million to the extent that the value of the Operating Partnership’s assets available to satisfy the Operating Partnership’s obligations under the Revolving Credit Facility is less than $14.0 million.

Senior Unsecured Notes

The 2025 Senior Unsecured Notes, 2027 Senior Unsecured Notes, 2028 Senior Unsecured Notes, 2029 Senior Unsecured Notes, 2030 Senior Unsecured Notes, and 2031 Senior Unsecured Notes (collectively the “Private Placements”) were issued in private placements to individual investors. The Private Placements did not involve a public offering in reliance on the exemption from registration pursuant to Section 4(a)(2) of the Securities Act.

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The 2030 Senior Unsecured Public Notes, 2028 Senior Unsecured Public Notes, 2033 Senior Unsecured Public Notes and 2032 Senior Unsecured Public Notes,  (collectively the “Public Notes”) are fully and unconditionally guaranteed by Agree Realty Corporation and certain wholly owned subsidiaries of the Operating Partnership. The Public Notes are governed by an Indenture, dated August 17, 2020, among the Operating Partnership, the Company and trustee (as supplemented by an officer’s certificate dated at the issuance of each of the Public Notes). The Indenture contains various restrictive covenants, including limitations on the ability of the guarantors and the issuer to incur additional indebtedness and requirements to maintain a pool of unencumbered assets.

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In August 2022, the Operating Partnership issued the 2032 Senior Unsecured Public Notes in an underwritten public offering of $300 million aggregate principal amount of notes with a stated interest rate of 4.80% due October 2032. The Company terminated related swap agreements of $300 million notional amount that hedged the 2032 Senior Unsecured Public Notes, receiving $28.4 million upon termination. Considering the effect of the terminated swap agreements, the blended all-in rate to the Company for the 2032 Senior Unsecured Public Notes is 3.96%.

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Mortgage Notes Payable

As of December 31, 2022, the Company had total gross mortgage indebtedness of $50.4 million which was collateralized by related real estate and tenants’ leases with an aggregate net book value of $86.5 million. The weighted average interest rate on the Company’s mortgage notes payable was 3.94% as of December 31, 2022.

The Company has entered into mortgage loans which are secured by multiple properties and contain cross-default and cross-collateralization provisions. Cross-collateralization provisions allow a lender to foreclose on multiple properties in

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the event that the Company defaults under the loan. Cross-default provisions allow a lender to foreclose on the related property in the event a default is declared under another loan.

Loan Covenants

Certain loan agreements contain various restrictive covenants, including the following financial covenants: maximum leverage ratio, maximum secured leverage ratios, consolidated net worth requirements, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, a minimum unsecured interest expense ratio, a minimum interest coverage ratio, a minimum unsecured debt yield and a minimum unencumbered interest expense ratio. As of December 31, 2022, the most restrictive covenant was the minimum unencumbered interest expense ratio. The Company was in compliance with all of its material loan covenants and obligations as of December 31, 2022.

Cash Flows

Operating -- Most of the Company’s cash from operations is generated by rental income from its investment portfolio.  Net cash provided by operating activities for the year ended December 31, 2022 increased by $115.8 million over 2021, primarily due to the increase in the size of the Company’s real estate investment portfolio, as well as an increase in cash received upon settlement of outstanding interest rate swap agreements.

Investing -- Net cash used in investing activities was $229.4 million higher during the year ended December 31, 2022, compared to 2021.  Acquisitions of properties during 2022 were $177.8 million higher than 2021, due to overall increases in the level of acquisition activity.  Development costs during the year ended December 31, 2022 were $40.4 million higher than 2021, due to the increased number of development projects ongoing in 2022 as compared to 2021. Proceeds from asset sales decreased by $11.1 million during the year ended December 31, 2022 compared to 2021. Proceeds from asset sales are dependent on levels of disposition activity and the specific assets sold. Proceeds from asset sales are not necessarily comparable period-to-period.

Financing -- Net cash provided by financing activities was $59.9 million higher during the year ended December 31, 2022, compared to 2021.

Net proceeds from the issuance of the Series A Preferred Stock decreased $170.3 million due to the issuance of the Series A Preferred Stock during September 2021 and no such preferred stock issuance in 2022.

Net proceeds from the issuance of common stock increased by $513.0 million during the year ended December 31, 2022 compared to 2021, primarily to fund the increased level of acquisitions and ongoing developments in 2022.

Net cash used related to the Revolving Credit Facility increased $128.0 million due to net repayments under the Revolving Credit Facility of $60 million during the year ended December 31, 2022 compared to net borrowings of $68.0 million during 2021.

Cash used to repay mortgage notes payable increased $23.7 million during 2022 primarily due to the repayment of a mortgage note payable with a principal balance outstanding of $23.6 million during the year ended December 31, 2022.

Net proceeds from the issuance of senior unsecured notes and unsecured term loans decreased by $103.1 million during the year ended December 31, 2022, compared to the same period in 2021. During August 2022, the Company received proceeds of $297.5 million from the issuance of the $300 million 2032 Senior Unsecured Public Notes, issued primarily to reduce amounts outstanding under the Revolving Credit Facility and fund property acquisitions and development activity.  During the year ended December 31, 2021, the company received proceeds of $640.6 million from the issuance of the $350 million 2028 Senior Unsecured Notes and the $300 million 2033 Senior Unsecured Public Notes, issued primarily to fund property acquisitions and pay off $240.0 million in unsecured term loans.

Total dividends and distributions paid to its common and preferred stockholders and non-controlling owners increased by $31.9 million during the year ended December 31, 2022, compared to the same period in 2021, due (i) to the issuance of preferred stock in September 2021; (ii) the increase in the number of common shares outstanding; and (iii) the increase in

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the annual common dividend rate, partially offset by the change from paying a quarterly dividend to paying a monthly dividend beginning in 2021. The Company distributed $7.4 million to preferred shareholders in 2022 compared to $1.5 million during 2021 as the preferred stock was issued in September 2021. In addition, the number of common shares outstanding increased in 2022 and 2021 due to the issuance of approximately 18.8 million and 11.2 million shares of common stock during 2022 and 2021, respectively.   Further, the Company’s declared dividend rate increased 7.7% to $2.805 per common share in 2022, up from $2.604 per common share in 2021.  These increases in dividends paid were partially offset due to the change from paying dividends on a quarterly basis to monthly payments in 2021. Dividends paid during the year ended December 31, 2022 included the monthly dividends declared in December 2021 through November 2022 while dividends paid during the year ended December 31, 2021 included the quarterly dividend declared in December 2020 and the monthly dividends declared in January 2021 through November 2021.

Material Cash Requirements

In conducting our business, the Company enters into contractual obligations, including those for debt and operating leases for land. Detail of these obligations as of December 31, 2022, including expected settlement periods, is contained below (presented in thousands):

In addition to items reflected in the table above, the Company has preferred stock with cumulative cash dividends, as described under Equity – Preferred Stock Offering above.

During the year ended December 31, 2022 the Company had 31 development or Partner Capital Solutions projects completed or under construction, for which 24 remain under construction as of December 31, 2022. Anticipated total costs for the 31 projects are approximately $118.5 million. These construction commitments will be funded using cash provided from operations, current capital resources on hand, and/or other sources of funding available to the Company.

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The Company’s recurring obligations under its tenant leases for maintenance, taxes, and/or insurance will also be funded

through the sources available to the Company described earlier.

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Dividends

During the fourth quarter of 2022 the Company declared monthly dividends of $0.24 per common share for October, November, and December 2022. The holder of the Operating Partnership Common Units is entitled to an equal distribution per Operating Partnership Common Unit held. The dividends and distributions payable for October and November were paid during the quarter. The December dividends and distributions were paid on January 13, 2023.

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During the fourth quarter of 2022, the Company declared a monthly dividend on the Series A Preferred Shares for October, November, and December 2022 in the amount of $0.08854 per Depositary Share. The dividends payable for October and November were paid during the quarter. The December dividend was paid on January 3, 2023.

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Recent Accounting Pronouncements

Refer to “Note 2 – Summary of Significant Accounting Policies” in the consolidated financial statements for a summary and anticipated impact of each accounting pronouncement on the Company’s financial statements.

Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires the Company’s management to use judgment in the application of accounting policies, including making estimates and assumptions.  Management bases estimates on the best information available at the time, its experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  If management’s judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting principles would have been applied, resulting in different presentations of the consolidated financial statements.  From time-to-time, the Company may re-evaluate its estimates and assumptions.  In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain.  A summary of the Company’s critical accounting policies is included below.  This summary should be read in conjunction with the more complete discussion of our accounting policies and procedures included in Note 2 to our consolidated financial statements.

Accounting for Acquisitions of Real Estate

The acquisition of property for investment purposes is typically accounted for as an asset acquisition. The Company allocates the purchase price to land, building, assumed debt, if any, and identified intangible assets and liabilities, based in each case on their relative estimated fair values and without giving rise to goodwill. In making estimates of fair values, the Company may use various sources, including data provided by independent third parties, as well as information obtained by the Company as a result of due diligence, including expected future cash flows of the property and various characteristics of the markets where the property is located. Certain estimates, including those around market land values and market rental rates, are inherently subjective. While estimates of market land values and market rental rates are based on available market data, the application of market data to the unique nature of properties acquired may require significant judgment. The use of different assumptions in the allocation of the purchase price of the acquired properties could affect the timing of recognition of the related revenue and expenses.

Impairments

We review our real estate investments for possible impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable through operations plus estimated disposition proceeds. Events or circumstances that may occur include, but are not limited to, significant changes in real estate market conditions, estimated residual values, our ability or expectation to re-lease properties that are vacant or become vacant or a change in the anticipated holding period for a property. Identification of such events may involve certain assumptions, estimates, and significant judgment.

Management determines whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the real estate, to the carrying cost of the individual asset. Impairments are measured to the extent the current book value exceeds the estimated fair value of the asset less disposition costs for any assets classified as held for sale.

The valuation of impaired assets is determined using valuation techniques including discounted cash flow analysis, analysis of recent comparable sales transactions and/or purchase offers received from third parties. The Company may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of its real estate.

The expected cash flows of a property are dependent on estimates and other factors subject to change, including (1) changes in the national, regional, and/or local economic climates and/or market conditions, (2) competition from other retail, (3)

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increases in operating costs, (4) bankruptcy and/or other changes in a tenant’s condition and (5) expected holding period. These factors could cause our expected future cash flows from a property to change, and, as a result, an impairment could be considered to have occurred. Determination of the fair value of a property for purposes of measuring impairment may involve significant judgment.

Non-GAAP Financial Measures

Funds from Operations (“FFO” or “Nareit FFO”)

FFO is defined by the National Association of Real Estate Investment Trusts, Inc. (“Nareit”) to mean net income computed in accordance with GAAP, excluding gains (or losses) from sales of real estate assets and/or changes in control, plus real estate related depreciation and amortization and any impairment charges on depreciable real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operation.

FFO should not be considered an alternative to net income as the primary indicator of the Company’s operating performance, or as an alternative to cash flow as a measure of liquidity. Further, while the Company adheres to the Nareit definition of FFO, its presentation of FFO is not necessarily comparable to similarly titled measures of other REITs due to the fact that all REITs may not use the same definition.

Core Funds from Operations (“Core FFO”)

The Company defines Core FFO as Nareit FFO with the addback of (i) noncash amortization of acquisition purchase price related to above- and below- market lease intangibles and discount on assumed mortgage debt and (ii) certain infrequently occurring items that reduce or increase net income in accordance with GAAP. Management believes that its measure of Core FFO facilitates useful comparison of performance to its peers who predominantly transact in sale-leaseback transactions and are thereby not required by GAAP to allocate purchase price to lease intangibles.  Unlike many of its peers, the Company has acquired the substantial majority of its net-leased properties through acquisitions of properties from third parties or in connection with the acquisitions of ground leases from third parties.

Core FFO should not be considered an alternative to net income as the primary indicator of the Company’s operating performance, or as an alternative to cash flow as a measure of liquidity. Further, the Company’s presentation of Core FFO is not necessarily comparable to similarly titled measures of other REITs due to the fact that all REITs may not use the same definition.

Adjusted Funds from Operations (“AFFO”)

AFFO is a non-GAAP financial measure of operating performance used by many companies in the REIT industry. AFFO further adjusts FFO and Core FFO for certain non-cash items that reduce or increase net income computed in accordance with GAAP. Management considers AFFO a useful supplemental measure of the Company’s performance, however, AFFO should not be considered an alternative to net income as an indication of its performance, or to cash flow as a measure of liquidity or ability to make distributions. The Company’s computation of AFFO may differ from the methodology for calculating AFFO used by other equity REITs, and therefore may not be comparable to such other REITs.

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The following table provides a reconciliation of net income to FFO, Core FFO, and AFFO for the years ended December 31, 2022, 2021, and 2020:

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