# MODIV INDUSTRIAL, INC. (MDV) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from MODIV INDUSTRIAL, INC.'s 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1645873/000164587323000046/none-20221231.htm Accession: 0001645873-23-000046 Filing date: 2023-03-13 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/MDV/ All MD&A years: /company/MDV/mda/ Previous year: /company/MDV/mda/fy2021/ (FY 2021) Next year: /company/MDV/mda/fy2023/ (FY 2023) ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition, results of operations and cash flows together with the consolidated financial statements and related notes included in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors. Also, see “Cautionary Note Regarding Forward-Looking Statements” preceding Part I of this Annual Report on Form 10-K and Part I, Item 1A. Risk Factors herein. Management’s discussion and analysis of financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Overview We are a Maryland corporation with issued and outstanding stock consisting of Series A Preferred Stock, publicly traded on the NYSE under the symbol “MDV.PA,” and Class C Common Stock, publicly traded on the NYSE under the symbol “MDV.” We currently own and manage single-tenant net-lease industrial, retail and office properties throughout the United States, with a focus on future acquisitions of critical industrial manufacturing properties with long-term leases to tenants that fuel the national economy and strengthen the nation's supply chains, while reducing the number of office and retail properties in our portfolio. We elected to be taxed as a REIT for federal income tax purposes beginning with our taxable year ended December 31, 2016. We believe that we have operated in conformity with the requirements for qualification as a REIT for federal income tax purposes. Through various transactions, including the Merger, we created one of the largest non-listed REITs to be raised via crowdfunding technology. Since December 31, 2019, we have been internally managed, as further described below. Driven by an investor-first focus and an experienced management team, Modiv leveraged its history as a real estate crowdfunding pioneer to create an approximate $535 million (based on estimated fair value) real estate portfolio comprised of approximately 3.2 million square feet of income-producing real estate. As of December 31, 2022, we have a portfolio of 46 commercial real estate properties 53 Table of Contents in 17 states, comprised of 27 industrial properties, including our approximate 72.7% TIC Interest in a 91,740 square foot Santa Clara, California industrial property, 12 retail properties and 7 office properties (including one held for sale) as discussed in Notes 3 and 4 to our accompanying consolidated financial statements for the year ended December 31, 2022 included in this Annual Report on Form 10-K. As of December 31, 2022, after reflecting lease extensions through the filing date of this Annual Report on Form 10-K, 48% of our tenants (based on ABR) are investment grade, our ABR was $33,667,366, all of our properties are 100% leased and our WALT was 11.9 years. Although we are not limited as to the form our investments may take, our investments in real estate will generally constitute acquiring fee title or interests in entities that own and operate real estate. We will make substantially all acquisitions of our real estate investments directly through the Operating Partnership or indirectly through limited liability companies or limited partnerships, including through other REITs, or through investments in joint ventures, partnerships, tenants-in-common, co-tenancies or other co-ownership arrangements with other owners of properties, some of which may be affiliated with us or our executive officers or directors. We are the sole general partner of, and owned an approximate 73% partnership interest in the Operating Partnership on December 31, 2022. The Operating Partnership’s limited partners include holders of several classes of units with various vesting and enhancement terms as further described in Note 12 to our accompanying consolidated financial statements for the year ended December 31, 2022 included in this Annual Report on Form 10-K. We report with the SEC as a smaller reporting company under Rule 12b-2 of the Exchange Act. Self-Management Transaction and Merger on December 31, 2019 Through December 31, 2019, we were externally managed by our former external advisor. On December 31, 2019, we acquired substantially all of the assets and assumed certain liabilities of our former external advisor and our former sponsor in exchange for Class M OP Units. As a result of such acquisition, we became self-managed and eliminated all fees for acquisitions, dispositions and management of our properties, which were previously paid to our former external advisor. On December 31, 2019, pursuant to the Merger Agreement, REIT I merged with and into Merger Sub, with Merger Sub surviving as our direct, wholly-owned subsidiary. As a result, we issued 2,680,740 shares of our Class C Common Stock to former stockholders of REIT I. On December 31, 2020, Merger Sub was merged into the Operating Partnership and ceased to exist. Common Stock Offerings and Distribution Reinvestment Plan Since our initial registered offering of common stock was declared effective by the SEC in 2016,we have raised an aggregate of $212,086,682 pursuant to: (i) non-listed offerings of common stock registered with the SEC, (ii) offerings of common stock exempt from registration pursuant to Regulation S under the Securities Act, (iii) DRP offerings of common stock registered with the SEC, (iv) the Private Offering, (v) the Reg A Offering and (vi) the Listed Offering. On December 8, 2021, we filed with the SEC a Registration Statement on Form S-11 (File No. 333-261529), and, on February 9, 2022, we filed with the SEC Amendment No. 1 to the Registration Statement on Form S-11, in connection with the Listed Offering of our Class C Common Stock, which became effective on February 10, 2021. In connection with and upon the listing on the NYSE, each share of our Class S Common Stock converted into a share of Class C Common Stock. Our Listed Offering of Class C Common Stock closed on February 15, 2022. In connection with our Listed Offering, we sold 40,000 shares of our Class C Common Stock at $25.00 per share to a major stockholder who was formerly a related party. On January 22, 2021, we filed a Registration Statement on Form S-3 (File No. 333-252321) to reflect our amended and restated DRP and register a maximum of $100,000,000 in share value of Class C Common Stock to be issued pursuant to our amended and restated DRP. We commenced offering shares of Class C Common Stock pursuant to the Registered DRP Offering on January 27, 2021. On February 15, 2022, our board of directors approved the Second Amended and Restated DRP to change the purchase price at which the Class C Common Stock is issued to stockholders who elect to participate in the DRP, and we filed a Post-Effective Amendment to the Registration Statement on Form S-3. The purpose of this change was to reflect the fact that our Class C Common Stock is now listed on the NYSE and no longer priced based on our most-recently determined estimated NAV per share. As more fully described in the Second Amended and Restated DRP, the purchase price for our Class C Common Stock under the DRP depends on whether we issue new shares to DRP participants or we or any third-party administrator obtains shares to be issued to DRP participants by purchasing them in the open market or in privately negotiated transactions. We expect to continue issuing our monthly distributions and maintain the ability for investors to reinvest their distributions under our Registered DRP Offering. 54 Table of Contents The purchase price for the Class C Common Stock issued directly by us is 97%, reflecting a 3% discount (or such other discount as may then be in effect) of the Market Price (as defined in the Second Amended and Restated DRP) of our Class C Common Stock. This discount is subject to change from time to time, in our sole discretion, but will be between 0% to 5% of the Market Price. The purchase price for the Class C Common Stock that we or any third-party administrator purchases from parties other than our Company, either in the open market or in privately negotiated transactions, will be 100% of the “average price per share” (as described in the Second Amended and Restated DRP) actually paid for such shares of Class C Common Stock, excluding any processing fees. The Second Amended and Restated DRP also reflects the $0.05 per share processing fee that will be paid by DRP participants for each share of Class C Common Stock purchased through the DRP. The Second Amended and Restated DRP was effective beginning with distributions paid in February 2022. From February 2022 through December 31, 2022, we issued 179,502 shares of Class C Common Stock under the DRP. On March 30, 2022, we filed a Registration Statement on Form S-3 (File No. 333-263985), and on May 27, 2022, we filed Amendment No. 1 to the Registration Statement on Form S-3, to issue and sell from time to time, together or separately, the following securities at an aggregate public offering price that will not exceed $200,000,000: Class C Common Stock, preferred stock, warrants, rights and units. The Form S-3, as amended, became effective on June 2, 2022 and we filed a prospectus supplement for our ATM Offering of up to $50,000,000 of our Class C Common Stock on June 6, 2022. As of December 31, 2022, no shares have been issued in connection with our ATM Offering. Preferred Stock Offering On September 14, 2021, we and the Operating Partnership entered into an underwriting agreement (the “Preferred Stock Underwriting Agreement”) with B. Riley Securities, Inc., as representative of the underwriters listed on Schedule I thereto (collectively, the “Preferred Stock Underwriters”), pursuant to which we agreed to issue and sell 1,800,000 shares of our Series A Preferred Stock in an underwritten public offering (the “Preferred Offering”) at a price per share of $25.00. In addition, we granted the Preferred Stock Underwriters a 30-day option to purchase up to an additional 200,000 shares of the Series A Preferred Stock, which the Preferred Stock Underwriters exercised in full on September 16, 2021. The issuance and sale of the shares of Series A Preferred Stock, including the issuance and sale of an additional 200,000 shares pursuant to the Preferred Stock Underwriters’ full exercise of their option to purchase additional shares, closed on September 17, 2021. The gross proceeds from the Preferred Offering were $50,000,000 and the net proceeds were $47,607,309, after deducting the underwriting discount of $1,575,000 and other offering expenses of $817,691, which included the structuring fee of $250,000 (see Note 9 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for additional information). Liquidity and Capital Resources Generally, our cash requirements for property acquisitions, debt payments and refinancings, capital expenditures and other investments will be funded by bank borrowings from financial institutions, mortgage indebtedness on our properties, assets sales and internally generated funds or offerings of shares of Class C Common Stock. Our cash requirements for operating and interest expenses and dividends on our Series A Preferred Stock and distributions on our Class C Common Stock will be funded by internally generated funds. Credit Facility On January 18, 2022, our Operating Partnership entered into a $250,000,000 Credit Agreement providing for a $100,000,000 four-year Revolver, which may be extended by up to 12 months subject to certain conditions, and a $150,000,000 five-year Term Loan with KeyBank and the other lending institutions party thereto (collectively, the “Lenders”), including KeyBank as Agent for the Lenders (in such capacity, the “Agent”), BMO Capital Markets, Truist Bank and The Huntington National Bank as Co-Syndication Agents (the “Co-Syndication Agents”) and KeyBanc Capital Markets Inc., BMO Capital Markets, Inc., Truist Securities, Inc. and The Huntington National Bank as Joint-Lead Arrangers (the “Lead Arrangers”). The Credit Facility is available for general corporate purposes, including, but not limited to, acquisitions, repayment of existing indebtedness and capital expenditures. On October 21, 2022, we exercised the accordion feature of our Credit Agreement and increased the Credit Facility from $250,000,000 to $400,000,000 as further described below. 55 Table of Contents The Credit Facility is priced on a leverage-based grid that fluctuates based on our actual leverage ratio at the end of the prior quarter. With our leverage ratio at 38% as of September 30, 2022, the spread over SOFR, including a 10-basis point credit adjustment, is 165 basis points and the interest rate on the Revolver was 5.96% as of December 31, 2022. We also pay an annual unused fee of up to 25 basis points on the Revolver, depending on the daily amount of the unused commitment, and paid total unused fees of $200,578 for the year ended December 31, 2022. On May 10, 2022, we entered into a swap agreement, effective May 31, 2022, to fix SOFR at 2.258% with respect to our original $150,000,000 Term Loan as described in Note 8 to our accompanying consolidated financial statements for the year ended December 31, 2022 included in this Annual Report on Form 10-K, which resulted in a fixed interest rate of 3.858% on the first $150,000,000 of our Term Loan based on our leverage ratio of 38%. On October 21, 2022, we exercised the accordion feature of our Credit Facility and increased the Credit Facility to $400,000,000, comprised of a $150,000,000 Revolver and a $250,000,000 Term Loan. The Credit Facility includes an updated accordion option that allows us to request additional Revolver and Term Loan lender commitments up to a total of $750,000,000 subject to customary conditions, including the receipt of new commitments from the Lenders. On December 20, 2022, the Credit Agreement was amended to allow us to draw on the additional $100,000,000 Term Loan commitment up to five times between December 20, 2022 and April 19, 2023 in exchange for a quarterly unused fee, which amounted to $6,944 during the quarter ended December 31, 2022. The maturities for our Revolver and Term Loan remain unchanged with the Revolver’s maturity in January 2026 with options to extend for a total of 12 months, and the Term Loan’s maturity in January 2027. We paid lender fees of $1,378,125 in connection with the expansion of our Credit Facility. On October 26, 2022, we entered into a swap agreement, effective November 30, 2022, to fix SOFR at 3.44% with respect to our expanded Term Loan as described in Note 8 to our accompanying consolidated financial statements for the year ended December 31, 2022 included in this Annual Report on Form 10-K, which would result in a fixed interest rate of 5.04% on the additional $100,000,000 to be borrowed under the Term Loan based on our leverage ratio of 38% as of December 31, 2022. The Credit Facility includes customary representations, warranties and covenants, including covenants regarding minimum fixed charge coverage of 1.50x, minimum tangible net worth of $208,629,727 plus 85% of net offering proceeds after January 18, 2022, and maximum consolidated leverage of 60%. We were in compliance with these covenants as of December 31, 2022. The Credit Facility is secured by a pledge of all of the Operating Partnership’s equity interests in certain of the single-purpose, property-owning entities (the ‘‘Subsidiary Guarantors’’) that are indirectly owned by us, and various cash collateral owned by the Operating Partnership and the Subsidiary Guarantors. In connection with the Credit Facility, we and each of the Subsidiary Guarantors entered into an Unconditional Guaranty of Payment and Performance in favor of the Agent, pursuant to which we and each of the Subsidiary Guarantors agreed to guarantee the full and prompt payment of the Operating Partnership’s obligations under the Credit Agreement. While the Credit Facility allows for borrowings of up to 60% of our borrowing base, we are targeting leverage of 40% or lower over the long-term once we achieve scale; however, we will consider higher leverage in the near-term if we identify attractive acquisition opportunities in advance of completing dispositions or raising additional equity. As of December 31, 2022, our leverage ratio was 38%. Credit Facility Drawdown and Repayments On January 18, 2022, we borrowed $155,775,000 from our Credit Facility consisting of $100,000,000 under the Term Loan and $55,775,000 under the Revolver. We used a portion of the proceeds from the Credit Facility to pay total commitment and arrangement fees of $2,020,000 to the Agent, the Lenders, the Lead Arrangers and Co-Syndication Agents. We used a portion of the proceeds from the Credit Facility to repay 20 property mortgages, and related interest aggregating $153,428,764, including the $36,465,449 mortgage on the KIA auto dealership property which was acquired on January 18, 2022, as discussed above, and our prior line of credit outstanding balance of $8,022,000. The 20 mortgages that were paid off were for the following 27 properties: eight Dollar Generals, Northrop Grumman, exp Maitland, Wyndham, Williams Sonoma, EMCOR, Husqvarna, AvAir, 3M, Cummins, Levins, Labcorp, GSA (MHSA), PreK Education, ITW Rippey, Solar Turbines, WSP USA (formerly Wood Group), Gap, L3Harris and Walgreens. After the 20 property mortgages were paid-off, seven property mortgages as of December 31, 2021 remained outstanding, including four property mortgages related to assets held for sale. Those four mortgages were paid-off pursuant to sales of the properties in February 2022 as discussed below under “- Sale of Real Estate Investments.” 56 Table of Contents On March 8, 2022, we prepaid $35,000,000 of the outstanding balance on the Revolver with cash on hand in order to reduce interest expense, and on April 19, 2022, we drew $44,000,000 on the Revolver to fund the acquisition of the Lindsay properties. On April 25, 2022, we drew the remaining $50,000,000 on the Term Loan for a repayment on the Revolver and we also repaid $8,000,000 on the Revolver on June 22, 2022. We borrowed and repaid $28,000,000 during the three months ended September 30, 2022 in connection with acquisitions completed in July and August 2022 and dispositions completed in August and September 2022. We used proceeds from the Sutter Health early termination fee to prepay $3,775,000 on the Revolver in December 2022 and prepaid the remaining $3,000,000 Revolver balance on January 5, 2023 with the proceeds from the December 30, 2022 sale of our Raising Cane’s property. In January 2023, we borrowed $10,000,000 under the Term Loan to fund our acquisition of the property leased to Plastic Products Company, Inc. and for general corporate purposes. As of February 28, 2023, we had availability under the Credit Facility, prior to any new properties being added to the borrowing base, of approximately $85,000,000 which can be drawn for general corporate purposes, including future acquisitions. While we intend for the Credit Facility to be our primary source of financing, we may continue to use mortgage debt financing for certain real estate investments and acquisitions. This financing may be obtained at the time an asset is acquired or an investment is made or at such later time as determined to be appropriate. In addition, debt financing may be used from time-to-time for property improvements, lease inducements, tenant improvements and other working capital needs. As of December 31, 2022, the outstanding principal balance of our mortgage notes payable on our operating properties was $44,515,009, and the outstanding principal balances of our Revolver and Term Loan were $3,000,000 and $150,000,000, respectively. As of December 31, 2022, our approximate 72.7% pro-rata share of the TIC Interest’s mortgage note payable was $9,487,515, which is not included in our consolidated balance sheets in this Annual Report on Form 10-K. We had $8,608,649 of cash and no restricted cash as of December 31, 2022, as reported in our accompanying consolidated financial statements included in this Annual Report on Form 10-K. Our cash and restricted cash, along with $150,000,000 of available capacity on our Revolver and $90,000,000 of available capacity on our Term Loan as of February 28, 2023, subject to our borrowing base covenant, along with proceeds from any future offerings of shares of Class C Common Stock, will primarily be used to invest in real estate and real estate-related investments or to re-lease and reposition our properties in accordance with our investment strategy and policies, including costs and fees associated with such investments, such as capital expenditures, tenant improvement costs and leasing costs. We also may use a portion of the proceeds from our offerings for payment of principal on our outstanding indebtedness, reserves required by financings of our real estate investments and for general corporate purposes. Sale of Real Estate Investments During the year ended December 31, 2022, we sold eight real estate properties as follows: [[GREPCENT_TABLE]] [["Property","","Location","","Disposition Date","","Property Type","","Rentable Square Feet","","Contract Sale Price","","Gain on Sale"],["Bon Secours","","Richmond, VA","","2/11/2022","","Office","","72,890","","","$","10,200,000","","","$","28,595"],["Omnicare","","Richmond, VA","","2/11/2022","","Flex","","51,800","","","8,760,000","","","1,890,624"],["Texas Health","","Dallas, TX","","2/11/2022","","Office","","38,794","","","7,040,000","","","87,480"],["Accredo","","Orlando, FL","","2/24/2022","","Office","","63,000","","","14,000,000","","","4,868,387"],["EMCOR","","Cincinnati, OH","","6/29/2022","","Office","","39,385","","","6,525,000","","","720,071"],["Williams Sonoma","","Summerlin, NV","","8/26/2022","","Office","","35,867","","","9,300,000","","","1,624,936"],["Wyndham","","Summerlin, NV","","9/16/2022","","Office","","41,390","","","12,900,000","","","2,307,093"],["Raising Cane's","","San Antonio, TX","","12/30/2022","","Retail","","3,853","","","4,313,045","","","669,185"],["Totals","","","","","","","","346,979","","","$","73,038,045","","","$","12,196,371"]] [[/GREPCENT_TABLE]] On February 11, 2022, we completed the sale of two medical office properties in Dallas, Texas and Richmond, Virginia leased to Texas Health and Bon Secours, respectively, and one flex property in Richmond, Virginia leased to Omnicare for an aggregate sales price of $26,000,000, which generated net proceeds of $11,892,305 after payment of commissions, closing costs and existing mortgages. On February 24, 2022, we completed the sale of a medical office property in Orlando, Florida leased to Accredo for a sales price of $14,000,000, which generated net proceeds of $5,012,724 after payment of commissions, closing costs and repayment of the existing mortgage. 57 Table of Contents On June 29, 2022, we completed the sale of an office property in Cincinnati, Ohio leased to EMCOR for a sales price of $6,525,000, which generated net proceeds of $6,345,642 after payment of commissions and closing costs. On August 26, 2022, we completed the sale of an office property in Summerlin, Nevada leased to Williams Sonoma for a sales price of $9,300,000, which generated net proceeds of $8,964,252 after payment of commissions and closing costs. On September 16, 2022, we completed the sale of an office property in Summerlin, Nevada leased to Wyndham for a sales price of $12,900,000, which generated net proceeds of $12,267,571 after payment of commissions and closing costs. On December 30, 2022, we completed the sale of a retail property in San Antonio, Texas leased to Raising Cane's for a sales price of $4,313,045, which generated net proceeds of $4,173,283 after payment of commissions and closing costs. Funds from Operations and Adjusted Funds from Operations In order to provide a more complete understanding of the operating performance of a REIT, the National Association of Real Estate Investment Trusts (“Nareit”) promulgated a measure known as Funds from Operations (“FFO”). FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships, joint ventures, preferred dividends and real estate impairments. Because FFO calculations adjust for such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current Nareit definition or may interpret the current Nareit definition differently than we do, making comparisons less meaningful. Additionally, we use AFFO as a non-GAAP financial measure to evaluate our operating performance. AFFO excludes non-routine and certain non-cash items such as revenues in excess of cash received, amortization of stock-based compensation, deferred rent, amortization of in-place lease valuation intangibles, deferred financing fees, gain or loss from the extinguishment of debt, unrealized gains (losses) on derivative instruments, write-offs of transaction costs and other one-time transactions. We also believe that AFFO is a recognized measure of sustainable operating performance of the REIT industry. Further, we believe AFFO is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies. Management believes that AFFO is a beneficial indicator of our ongoing portfolio performance and ability to sustain our current distribution level. More specifically, AFFO isolates the financial results of our operations. AFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings. Further, since the measure is based on historical financial information, AFFO for the period presented may not be indicative of future results or our future ability to pay our dividends. By providing FFO and AFFO, we present information that assists investors in aligning their analysis with management’s analysis of long-term operating activities. For all of these reasons, we believe the non-GAAP measures of FFO and AFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of our real estate portfolio. However, a material limitation associated with FFO and AFFO is that they are not indicative of our cash available to fund distributions since other uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating FFO and AFFO. AFFO is useful in assisting management and investors in assessing our ongoing ability to generate cash flow from operations and continue as a going concern in future operating periods. However, FFO and AFFO are not useful measures in evaluating NAV because impairments are taken into account in determining NAV but not in determining FFO and AFFO. Therefore, FFO and AFFO should not be viewed as a more prominent measure of performance than income (loss) from operations, net income (loss) or cash flows from operating activities and each should be reviewed in connection with GAAP measurements. Neither the SEC, Nareit, nor any other applicable regulatory body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate AFFO and its use as a non-GAAP performance measure. In the future, the SEC or Nareit may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure. Furthermore, as described in Note 12 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K, the conversion ratios for Class M OP Units, Class P OP Units and Class R OP Units can increase if the specified performance hurdles are achieved, which would increase the fully-diluted weighted average shares outstanding. 58 Table of Contents The following are the calculations of FFO and AFFO for the years ended December 31, 2022 and 2021: [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["","","2022","","2021"],["Net loss in accordance with GAAP","","$","(4,511,318)","","","$","(435,505)"],["Preferred stock dividends","","(3,687,500)","","","(1,065,278)"],["Net loss attributable to common stockholders and Class C OP Unit holders","","(8,198,818)","","","(1,500,783)"],["FFO adjustments:"],["Add: Depreciation and amortization","","14,929,574","","","13,710,588"],["Amortization of deferred lease incentives","","412,098","","","245,438"],["Depreciation and amortization for unconsolidated investment in a real estate property","","777,041","","","735,335"],["Impairment of real estate investment","","2,080,727","","","\u2014"],["Less: Gain on sale of real estate investments, net","","(12,196,371)","","","(6,136,588)","","(1)"],["Reversal of impairment of real estate investment","","\u2014","","","(400,999)"],["FFO attributable to common stockholders and Class C OP Unit holders","","(2,195,749)","","","6,652,991"],["AFFO adjustments:"],["Add: Amortization of corporate intangibles","","\u2014","","","1,556,348"],["Impairment of goodwill and intangible assets","","17,320,857","","","3,767,190"],["Non-recurring corporate relocation costs","","500,000","","","\u2014"],["Stock compensation","","2,401,022","","","2,744,881"],["Deferred financing costs","","1,649,929","","","369,286"],["Non-recurring loan prepayment penalties","","615,336","","","\u2014"],["Swap termination costs","","733,000","","","23,900"],["Amortization of above-market lease intangibles","","197,224","","","129,823"],["Due diligence expenses, including abandoned pursuit costs","","661,222","","","696,825"],["Less: Amortization of deferred rents","","(3,237,482)","","","(1,478,818)"],["Unrealized gains on interest rate swaps, net","","(813,750)","","","(970,039)"],["Amortization of below-market lease intangibles","","(1,202,711)","","","(1,462,797)"],["Gain on forgiveness of economic relief note payable","","\u2014","","","(517,000)"],["Other adjustments for unconsolidated investment in a real estate property","","5,251","","","(62,776)"],["AFFO","","$","16,634,149","","","$","11,449,814"],["Weighted average shares outstanding - basic","","7,487,204","","","7,544,834"],["Weighted average shares outstanding - fully diluted (2)","","10,225,850","","","8,780,131"],["FFO Per Share:"],["Basic","","$","(0.29)","","","$","0.88"],["Fully Diluted","","$","(0.29)","","","$","0.76"],["AFFO Per Share:"],["Basic","","$","2.22","","","$","1.52"],["Fully Diluted","","$","1.63","","","$","1.30"]] [[/GREPCENT_TABLE]] (1)    Straight-line rent receivable write-offs related to sale of real estate investments for the year ended December 31, 2021 amounting to $1,667,114 were reclassified from rental income to gain on sale of real estate investments, net to conform with the current year presentation (see Note 2 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for more details on such reclassification). (2)    Includes the Class M, Class P and Class R OP Units to compute the weighted average number of shares. 59 Table of Contents Distributions Historically, the sources of cash used to pay our distributions have been from net rental income received and the waiver and deferral of management fees by our former advisor through December 31, 2019. A table of distributions declared, distributions paid out, the impact on cash flows from operations and the source of distribution payments is disclosed in Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Distribution Information. We expect that our board of directors will continue to declare distributions based on a single record date as of the end of each month and to pay these distributions on a monthly basis. Distributions will be determined by our board of directors based on our financial condition and such other factors as our board of directors deems relevant. We have not established a minimum dividend or distribution level, and our charter does not require that we make dividends or distributions to our stockholders other than as necessary to meet REIT qualification standards. Cash Flow Summary The following table summarizes our cash flow activity for the years ended December 31, 2022 and 2021: [[GREPCENT_TABLE]] [["","","2022","","2021"],["Net cash provided by operating activities","","$","16,648,821","","","$","9,728,685"],["Net cash (used in) provided by investing activities","","$","(61,063,193)","","","$","21,830,288"],["Net cash (used in) provided by financing activities","","$","(5,384,499)","","","$","18,471,017"]] [[/GREPCENT_TABLE]] Cash Flows from Operating Activities The cash provided by operating activities of $16,648,821 for the year ended December 31, 2022 primarily reflects adjustments to our net loss of $4,511,318 to exclude net non-cash charges of $23,209,673 related to depreciation and amortization, impairment of goodwill, impairment of real estate property, stock compensation expense, amortization of deferred financing costs and premium, write-off of purchase deposit, amortization of deferred lease incentives, and amortization of above market lease intangibles, which were partially offset by gain on sale of real estate investments, write-off of unrealized gain on interest rate swaps, amortization of below-market lease intangibles, amortization of deferred rents and undistributed income from our unconsolidated investment in a real estate property. Cash provided by operations also included distributions from our unconsolidated investment in real estate property of $211,921. The cash provided by operations was also offset in part by cash used to fund changes in operating assets and liabilities of $2,261,455 during the year ended December 31, 2022 primarily due to increases in tenant receivables and prepaid expenses and a decrease in accounts payable, accrued and other liabilities. The cash provided by operating activities of $9,728,685 for the year ended December 31, 2021 primarily reflects adjustments to our net loss of $435,505 to exclude net non-cash charges of $12,948,386 related to depreciation and amortization, impairment of intangible assets, stock compensation expense, amortization of deferred financing incentives, amortization of above-market lease intangibles and amortization of deferred rents, which were partially offset by gain on sale of real estate investments, amortization of below-market lease intangibles, unrealized gain on interest rate swap valuation, gain on forgiveness of economic relief note payable, reversal of impairment of real estate property and undistributed income from our unconsolidated investment in a real estate property. Cash provided by operations also included distributions from our unconsolidated investment in real estate property of $337,072. The cash provided by operations was offset in part by cash used to fund changes in operating assets and liabilities of $3,121,268 during the year ended December 31, 2021 primarily due to increases in note receivable and prepaid expenses and other assets, partially offset by a decrease in tenant receivables and an increase in accounts payable, accrued and other liabilities. We continue to expect that our cash flows from operating activities will be positive in the next 12 months; however, there can be no assurance that this expectation will be realized. 60 Table of Contents Cash Flows from Investing Activities Net cash used in investing activities was $61,063,193 for the year ended December 31, 2022 and consisted primarily of the following: •$127,144,030 for acquisitions of 16 real estate properties; •$4,353,938 for capitalized costs for improvements to existing real estate properties; and •$2,148,731 for payments of lease incentives. These uses were partially offset by: •$70,662,287 of proceeds from sales of eight real estate properties; •$1,836,767 from collection of receivable for early termination of lease; and •$84,452 from a refundable purchase deposit. Net cash provided by investing activities was $21,830,288 for the year ended December 31, 2021 and consisted primarily of the following: •$37,719,998 of proceeds from sales of five real estate properties; and •$1,824,383 from collection of a note receivable from the sale of real estate property. These proceeds were partially offset by: •$15,162,305 for acquisitions of two real estate properties; •$1,356,038 for capitalized costs for improvements to existing real estate properties; •$1,000,000 for a refundable purchase deposit; and •$195,750 for additions to intangible assets. Cash Flows from Financing Activities Net cash used in financing activities was $5,384,499 for the year ended December 31, 2022 and consisted primarily of the following: •$130,496,746 of mortgage note principal payments upon entering into the Credit Facility and the sale of four real estate properties; •$5,857,849 of cash distributions paid to common stockholders; •$1,383,433 of cash distributions paid to the Class C OP Unit holder; •$3,830,903 of cash dividends paid to preferred stockholders; •$4,161,618 used for repurchases of common stock; •$3,638,229 of deferred financing cost payments; and •$1,108,221 for payments of offering costs. These uses were partially offset by: •$150,000,000 of proceeds from borrowings on our Term Loan; •$3,000,000 of net proceeds from our Revolver, more than offset by repayment of $8,022,000 on the prior credit facility with Banc of California (the “Prior Credit Facility”); and •$114,500 of net proceeds from issuance of common stock in the Listed Offering. Net cash provided by financing activities was $18,471,017 for the year ended December 31, 2021 and consisted primarily of the following: •$47,607,309 of net proceeds from issuance of preferred stock; •$4,336,086 of proceeds from issuance of common stock; •$25,436,000 of proceeds from refinancing of mortgage notes payable; •$2,022,000 of proceeds from borrowings on our prior credit facility revolver, net; and •$18,804 of refundable loan deposits made. These proceeds were partially offset by: •$36,569,537 of mortgage notes principal payments and deferred financing cost payments of $404,971 to third parties; •$19,082,962 used for repurchases of shares under our prior share repurchase programs; •$3,473,378 of cash distributions paid to common stockholders; and •$1,418,334 for offering costs. 61 Table of Contents Results of Operations As of December 31, 2022, we owned (i) 46 operating properties (including one property held for sale); (ii) one parcel of land which currently serves as an easement to one of our industrial properties; and (iii) the TIC Interest. We acquired 16 and two operating properties in 2022 and 2021, respectively. We sold eight and five operating properties in 2022 and 2021, respectively, in accordance with our strategic plan to reduce our exposure to office and retail properties and increase our WALT by acquiring primarily industrial manufacturing properties generally with lease terms of 15+ years. We expect that rental income, depreciation and amortization expense and interest expense will be higher on a year-over-year basis in 2023 due to our planned acquisitions. Our results of operations for the year ended December 31, 2022 are not indicative of those expected in future periods as we have significant unused capacity on our Credit Facility and expect to continue to acquire additional operating properties. We can provide no assurance that our plans for acquisitions, if any, will be successful in the near term. The COVID-19 pandemic's impact on the economy appears to have diminished and the general commercial real estate market appears to be recovering from COVID-19 impacts except for a continuing impact on commercial office properties due to the prevalence of employees working from home. The COVID-19 pandemic has caused and may continue to cause significant disruption to certain tenants' business operations which may impact our results of operations and cash flows in ways that remain unpredictable in the foreseeable future; for example, increased demand for work-from-home arrangements resulting from the COVID-19 pandemic may adversely impact the operations of our office properties. Additionally, a resurgence of COVID-19, including any future variants and resistance to currently available vaccines, or any future outbreak of other highly infectious or contagious diseases, could materially and adversely impact or disrupt our business operations, financial condition, results of operations, cash flows and performance. We, our tenants and operating partners are also impacted by inflation and rising interest rates. According to the U.S. Labor Department, the annual inflation rate for the U.S. was 6% and 7% for the years ended December 31, 2022 and 2021, respectively, the highest increases since June 1982. As a result, the Federal Reserve is expected to continue raising interest rates to try to rein in inflation, which may lead to a recession and will negatively impact our future results due to higher borrowing costs on any floating rate borrowing. However, as of February 28, 2023, 100% of our outstanding debt is at fixed rates as a result of the swap agreements entered into in May 2022 and October 2022. Furthermore, the prolonged Russia-Ukraine conflict, as well as further retaliatory sanctions from the U.S. and its allies to Russia, may also exacerbate the already high inflation, continue to rattle the global economies and markets and worsen the fragile global supply chain. Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021 Rental Income Rental income, including tenant reimbursements, was $46,174,267 and $37,889,831 for the years ended December 31, 2022 and 2021, respectively. Rental income during 2022 and 2021 included early termination fee revenue of $3,751,984 and $1,381,767, respectively. The 2022 early termination fee was related to an office property in Rancho Cordova, California leased to Sutter Health, which was subsequently leased to OES effective January 4, 2023, and the 2021 early termination fee was related to an industrial property in Cedar Park, Texas, leased to Dana Incorporated which was sold on July 7, 2021 (see Note 3 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for more details on such transactions). Excluding the early termination fee revenue in 2022 and 2021, rental income increased by $5,914,219, or 16%, as compared to 2021 primarily reflecting the rental income contribution from our acquisition of 16 properties during 2022, including the KIA auto dealership property in Carson, California in January 2022, and our acquisition of eight industrial properties leased to Lindsay Precast in April 2022, which contributed approximately 12.4% and 8.0% of our total rental income during 2022, respectively. Rental income from our 16 acquisitions in 2022, together with the rental income contributions of two properties acquired during the second half of 2021, was partially offset by the decrease in rental income from the sale of 13 non-core properties over the last 24 months. Our acquisitions and dispositions are detailed in Note 3 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K. Pursuant to most of our lease agreements, tenants are required to pay or reimburse all or a portion of the property operating expenses. Rental income includes tenant reimbursements of $6,596,244 and $5,807,634 in 2022 and 2021, respectively. The ABR of the operating properties owned as of December 31, 2022 was $33,667,366. 62 Table of Contents General and Administrative General and administrative expenses were $7,812,057 and $9,715,067 for the years ended December 31, 2022 and 2021, respectively. The decrease of $1,903,010, or 20%, year-over-year primarily reflects personnel reductions and the resulting decrease in compensation to employees, reduced costs for technology services following our exit from the crowdfunding business in the first quarter of 2022 and reduced costs for professional services during the current year. Stock Compensation Expense Stock compensation expense was $2,401,022 and $2,744,881 for the years December 31, 2022 and 2021, respectively. The decrease of $343,859, or 13%, as compared with the prior year primarily reflects forfeitures related to employee terminations and resignations during the second half of 2021 and the first and third quarters of 2022. Depreciation and Amortization Depreciation and amortization expenses for the years ended December 31, 2022 and 2021 were $14,929,574 and $15,266,936, respectively. The purchase price of the acquired properties was allocated to tangible assets, identifiable intangibles and assumed liabilities and is being depreciated or amortized over their estimated useful lives. The decrease of $337,362, or 2%, year-over-year primarily reflects the absence of amortization of corporate intangibles of $1,556,347 in 2021. The corporate intangibles were impaired during the fourth quarter of 2021 in connection with our decision to exit the crowdfunding business. The absence of amortization of corporate intangibles during the current year was partially offset by the net increase on depreciation expense for acquisitions in excess of dispositions compared with the prior year. Interest Expense Interest expense includes interest paid or payable to lenders on our property mortgages and Credit Facility, related amortization of deferred financing costs and unrealized gains and losses on swap valuations. Interest expense was $8,106,658 and $7,586,197 for the years ended December 31, 2022 and 2021, respectively (see Note 7 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for the detail of the components of interest expense). On January 18, 2022, we used funds from our initial borrowing from our Credit Facility to pay off 20 existing property mortgages on 27 properties, the $36,465,449 mortgage on the KIA auto dealership property which we acquired on January 18, 2022 and repayment of our Prior Credit Facility and related interest, aggregating $153,428,764. In addition, four interest rate swap agreements related to four property mortgages were terminated in connection with the prepayment of the property mortgages. The increase in interest expense of $520,461, or 7%, year-over-year was primarily due to the year-over-year decrease in gains on interest rate swaps of $821,996, partially offset by the year-over-year decrease in interest expense paid or payable to the lenders and amortization of deferred financing costs. Following the purchase of a second interest rate swap on October 26, 2022, effective November 30, 2022, we have fixed our $250,000,000 Term Loan (including the additional $100,000,000 Term Loan commitment available as a result of our exercise of the accordion feature of our Credit Facility) at a weighted average interest rate of 4.33% when our leverage ratio is no more than 40%. The weighted average interest rate on our total debt outstanding of approximately $204.5 million as of February 28, 2023 is 4.05% based on our leverage ratio of 38% as of December 31, 2022. Property Expenses Property expenses were $8,899,626 and $6,880,993 for the years ended December 31, 2022 and 2021, respectively. These expenses primarily relate to property taxes and repairs and maintenance expenses, the majority of which are reimbursed by tenants, along with write offs of legal and due diligence costs for abandoned pursuits of acquisitions. The increase of $2,018,633, or 29%, year-over-year primarily reflects increases in repairs and maintenance, property management fees and property taxes, the majority of which are reimbursed by tenants. Impairment (Reversal of Impairment) of Real Estate Investment Property Impairment of investment in real estate property of $2,080,727 for the year ended December 31, 2022 reflects an impairment charge for a property located in Rocklin, California leased to Gap through February 28, 2023. We determined that the impairment charge was required, based on efforts initiated during the fourth quarter of 2022 to sell the property and its reclassification to asset held for sale as of December 31, 2022 (see Note 3 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for additional details). Reversal of impairment of investment in real estate property of $400,999 for the year ended December 31, 2021 reflects an adjustment to reduce the impairment charge recorded in December 2020 for the property located in Bedford, Texas due to its reclassification from held for sale to held for investment and use in June 2021. 63 Table of Contents Impairment of Goodwill and Intangible Assets Impairment charges for non-property intangible assets were $17,320,857 and $3,767,190 during the years ended December 31, 2022 and 2021, respectively. The impairment of goodwill of $17,320,857 for year ended December 31, 2022 reflects the significant decline in the market value of our common stock since it began trading on the NYSE in February 2022. During the first quarter of 2022, management considered the fact that the trading price of our common stock caused our market capitalization to be below the book value of our equity as of March 31, 2022. Our stock price is materially below both our historical net asset value and the book value of our equity, reflecting the negative impacts of rising inflation and interest rates, declining office occupancy rates affecting owners of real estate properties and fears of a potential recession. We, therefore, reduced the carrying value of goodwill to zero as of March 31, 2022 (see Note 5 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for additional details). The impairment of intangible assets of $3,767,190 for the year ended December 31, 2021 relates to the unamortized balance of intangible assets used to raise equity capital through our crowdfunding activities which were abandoned when we planned our Listed Offering in the fourth quarter of 2021. Gain on Sale of Real Estate Investments, Net The gain on sale of real estate investments, net was $12,196,371 and $6,136,588 for the years ended December 31, 2022 and 2021, respectively, and relates to the sale of eight properties (six office, one flex and one retail) during the year ended December 31, 2022 and five properties (four retail and one industrial) during the year ended December 31, 2021 (see Note 3 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for more details on the gain on sale of real estate investments). Our 2022 and 2021 sales of real estate investments were primarily due to our strategic plan to reduce our exposure to office and retail properties and acquire industrial manufacturing properties with longer lease terms. Other Income (Expense), Net Interest income was $21,910 and $21,328 for the years ended December 31, 2022 and 2021, respectively. Income from unconsolidated investment in a real estate property was $278,002 and $276,042 for the years ended December 31, 2022 and 2021, respectively. This represents our approximate 72.7% TIC Interest in the Santa Clara, California property's results of operations for the years ended December 31, 2022 and 2021, respectively. Gain on forgiveness of economic relief note payable of $517,000 for the year ended December 31, 2021 reflects the forgiveness in February 2021 of our economic relief note payable of $517,000 obtained in April 2020 under the terms of the Paycheck Protection Program of the Small Business Administration. There was no gain on forgiveness of economic relief note payable for the year ended December 31, 2022. Loss on early extinguishment of debt of $1,725,318 for the year ended December 31, 2022 reflects non-cash charges of $1,164,998 for deferred financing costs and prepayment penalties of $615,336 upon repayment of 20 mortgages on 27 properties, full repayment of our Prior Credit Facility and mortgage repayments related to four asset sales, as well as $733,000 of swap termination fees related to the four mortgage refinancings which were offset by the related write-off of unrealized swap valuation losses of $788,016 (see Notes 7 and 8 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for more details). There was no loss on early extinguishment of debt for the year ended December 31, 2021. Other income of $93,971 and $283,971 for the years ended December 31, 2022 and 2021, respectively, primarily reflects our monthly management fee from the entities that own the TIC Interest property which is equal to 0.1% of the total investment value of the property. The total management fee was $263,971 for each of the years ended December 31, 2022 and 2021, of which our portion of expense relating to the TIC Interest was $191,933 for each year and is reflected as a component of income from unconsolidated investment in a real estate property in our accompanying consolidated statements of operations included in this Annual Report on Form 10-K. 64 Table of Contents Quarterly Data Our quarterly operating results have fluctuated significantly in the past and will likely continue to do so in the future as a result of ongoing property acquisitions and dispositions and various other factors as more fully described in Part I, Item 1A. Risk Factors herein. The following table sets forth certain unaudited quarterly historical financial data for each of the eight quarters in the two years ended December 31, 2022. This unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere herein and, in our opinion, includes all adjustments necessary for a fair statement of the selected quarterly information. This information should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The operating results for any quarter shown are not necessarily indicative of results for any future period. [[GREPCENT_TABLE]] [["","","","","Net (Loss) Income Attributable to Common Stockholders","","Net (Loss) Income Per Share Attributable to Common Stockholders","","Gains on Dispositions of Real Estate (1)","","AFFO Attributable to Common Stockholders and Class C OP Unit Holder (1)","","AFFO Per Share"],["","","Revenues (1)","","","Basic","","Diluted","","","","Basic","","Fully Diluted"],["2022"],["Quarter Ended: (2)"],["March 31, 2022","","$","10,174,340","","","$","(11,067,010)","","","$","(1.47)","","","$","(1.47)","","","$","6,875,086","","","$","2,971,663","","","$","0.39","","","$","0.29"],["June 30, 2022","","$","10,676,148","","","$","1,249,255","","","$","0.17","","","$","0.14","","","$","720,071","","","$","3,594,747","","","$","0.48","","","$","0.35"],["September 30, 2022","","$","10,951,673","","","$","3,000,352","","","$","0.40","","","$","0.35","","","$","3,932,029","","","$","3,127,692","","","$","0.42","","","$","0.31"],["December 31, 2022","","$","14,372,106","","","$","(158,632)","","","$","(0.02)","","","$","(0.02)","","","$","669,185","","","$","6,940,047","","","$","0.93","","","$","0.68"],["2021"],["Quarter Ended: (3)"],["March 31, 2021","","$","9,025,993","","","$","(903,648)","","","$","(0.12)","","","$","(0.12)","","","$","238,519","","","$","2,219,856","","","$","0.29","","","$","0.25"],["June 30, 2021","","$","9,107,008","","","$","(1,001,843)","","","$","(0.13)","","","$","(0.13)","","","$","\u2014","","","$","3,037,996","","","$","0.40","","","$","0.34"],["September 30, 2021","","$","10,925,296","","","$","3,505,052","","","$","0.47","","","$","0.40","","","$","3,559,165","","","$","3,812,513","","","$","0.51","","","$","0.44"],["December 31, 2021","","$","8,831,534","","","$","(3,100,344)","","","$","(0.41)","","","$","(0.41)","","","$","2,338,904","","","$","2,379,449","","","$","0.32","","","$","0.27"]] [[/GREPCENT_TABLE]] (1)    During the fourth quarter of 2022, management determined that straight-line rents receivable write-offs associated with real estate investments previously sold should be reclassified as a component of the related gain on sale of the real estate investments rather than as an offset to rental income as previously presented in our statements of operations. Accordingly, our statements of operations reflect an increase in rental income and a corresponding reduction in the gain on sale of real estate investments for the first three quarters of 2022 and the first, third and fourth quarters of 2021 as follows: first quarter of 2022, $525,691; second quarter of 2022, $282,030; and third quarter of 2022, $739,255; and first quarter of 2021, $51,123; third quarter of 2021, $683,606; and fourth quarter of 2021, $932,385. The reclassifications did not affect net income (loss) or net income (loss) per share in the unaudited quarterly condensed consolidated statements of operations (see Note 2 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for more details on such reclassification). (2)    The first quarter of 2022 includes the impact of the goodwill impairment charge of $17,320,857, non-recurring loan prepayment penalties of $615,336 and swap termination costs of $733,000. The fourth quarter of 2022 includes revenue from early termination fee of $3,751,984, partially offset by impairment of real estate investment property of $2,080,727. (3)    The first quarter of 2021 includes the impact of a gain of $517,000 on forgiveness of economic relief note payable loan. The second quarter of 2021 includes an impairment credit of $400,999 on the reclassification of a real estate investment to held for investment from held for sale in the second quarter of 2021. The third quarter of 2021 includes an early termination fee of $1,381,767. The fourth quarter of 2021 includes the impact of intangible assets impairment charge of $3,767,190. 65 Table of Contents Organizational and Offering Costs Organizational and offering costs include all costs incurred in connection with the offerings prior to the Listed Offering, including investor relations' payroll costs and other costs incurred in connection with the offerings of our stock, including, but not limited to legal fees, federal and state filing fees and other costs. Through November 24, 2021, the termination date of the Reg A Offering, we had recorded cumulative organizational and offering costs of $8,298,499, including $5,429,105 paid to our former sponsor or affiliates through December 31, 2019. In connection with our Listed Offering of Class C Common Stock, we incurred organizational and offering costs in the aggregate of $885,500 in the fourth quarter of 2021 and the first quarter of 2022. We also incurred additional organizational and offering costs of $1,108,221 during the year ended December 31, 2022 related to our Registration Statement on Form S-3 (File No. 333-263985) that we filed on March 30, 2022, and Amendment No. 1 to the Registration Statement on Form S-3 that we filed on May 27, 2022, to issue and sell from time to time, together or separately, the following securities at an aggregate public offering price that will not exceed $200,000,000: Class C Common Stock, preferred stock, warrants, rights and units. The Form S-3, as amended, became effective on June 2, 2022 and we filed a prospectus supplement for our $50,000,000 ATM Offering on June 6, 2022. As of December 31, 2022, no shares were issued in connection with our ATM Offering. Properties Portfolio Information Our wholly-owned investments in real estate properties as of December 31, 2022 and 2021, including one and four properties held for sale as of the years ended December 31, 2022 and 2021, respectively, and the 91,740 square foot industrial property underlying the TIC Interest for all balance sheet dates presented were as follows: [[GREPCENT_TABLE]] [["","December 31,"],["","2022","","2021"],["Number of properties:","(1)","","(2)"],["Industrial (3)","27","","","12"],["Retail","12","","","12"],["Office (3)","7","","","14"],["Total operating properties","46","","","38"],["Parcel of land","1","","","1"],["Total properties","47","","","39"],["Leasable square feet:"],["Industrial (3)","2,541,792","","","1,514,876"],["Retail","230,176","","","161,406"],["Office (3)","401,291","","","800,036"],["Total leasable square feet","3,173,259","","","2,476,318"]] [[/GREPCENT_TABLE]] (1)    Includes one office property held for sale as of December 31, 2022, which is in escrow and scheduled to be sold by the end of March 2023. (2)    Includes four healthcare related properties held for sale as of December 31, 2021, which consisted of three office properties and one flex property. These held for sale properties were sold in February 2022. (3)One property was reclassified on December 31, 2022 to industrial from office to reflect the lessee's change in use since a majority of the square footage of the property is being used as laboratory space. We are a smaller reporting entity and operate in an evolving environment. 66 Table of Contents Acquisitions of Real Estate Investments We acquired 16 and two properties during the years ended December 31, 2022 and 2021, respectively, as follows: [[GREPCENT_TABLE]] [["Property and Location","","Property Type","","Area (Square Feet)","","Lease Terms (Years)","","Annual Rent Increase","","Acquisition Price","","Initial Cap Rate"],["2022"],["KIA/Trophy of Carson, Carson, CA (1)","","Retail","","72,623","","","25","","","2.0","%","","$","69,275,000","","","5.7","%"],["Kalera, Saint Paul, MN","","Industrial","","78,857","","","20","","","2.5","%","","8,079,000","","","7.0","%"],["Lindsay Precast, eight properties acquired in Colorado (3), Ohio (2), North Carolina, South Carolina and Florida","","Industrial","","618,195","","","25","","","2.0","%","","56,150,000","","","6.7","%"],["Producto, two properties acquired in Endicott and Jamestown, NY","","Industrial","","72,373","","","20","","","2.0","%","","5,343,862","","","7.2","%"],["Valtir, four properties acquired in Centerville, UT, Orangeburg, SC, Fort Worth, TX and Lima, OH","","Industrial","","293,612","","","20","","(2)","2.3","%","","23,375,000","","","7.7","%"],["","","","","1,135,660","","","","","","","$","162,222,862"],["2021"],["Raising Cane\u2019s, San Antonio, TX","","Retail","","3,853","","","7","","","2.0","%","","$","3,607,424","","","6.3","%"],["Arrow Tru-Line, Archbold, OH","","Industrial","","206,155","","","20","","","2.0","%","","11,460,000","","","6.7","%"],["","","","","210,008","","","","","","","$","15,067,424"]] [[/GREPCENT_TABLE]] (1)    The KIA property was acquired in an ‘‘UPREIT’’ transaction wherein the seller received 1,312,382 Class C OP Units for approximately 47% of the property value and we repaid a $36,465,449 existing mortgage, including accrued interest, on the property. (2)    The South Carolina and Ohio properties have a 25-year master lease and the Texas and Utah properties have a 15-year master lease. In evaluating the above properties as potential acquisitions, including the determination of an appropriate purchase price to be paid for the properties, we considered a variety of factors, including the condition and financial performance of the properties, the terms of the existing leases and the creditworthiness of the tenants, property location, visibility and access, age of the properties, physical condition and curb appeal, neighboring property uses, local market conditions, including vacancy rates, area demographics, including trade area population and average household income and neighborhood growth patterns and economic conditions. 67 Table of Contents Sales of Real Estate Investments We completed the sale of eight and five non-core properties during the years ended December 31, 2022 and 2021, respectively, as follows: [[GREPCENT_TABLE]] [["Property","","Location","","Disposition Date","","Property Type","","Rentable Square Feet","","Contract Sales Price","","Net Proceeds (1)"],["2022"],["Bon Secours (2)","","Richmond, VA","","2/11/2022","","Office","","72,890","","","$","10,200,000","","","$","\u2014"],["Omnicare (2)","","Richmond, VA","","2/11/2022","","Flex","","51,800","","","8,760,000","","","\u2014"],["Texas Health (2)","","Dallas, TX","","2/11/2022","","Office","","38,794","","","7,040,000","","","11,892,305","","(3)"],["Accredo (2)","","Orlando, FL","","2/24/2022","","Office","","63,000","","","14,000,000","","","5,012,724"],["EMCOR","","Cincinnati, OH","","6/29/2022","","Office","","39,385","","","6,525,000","","","6,345,642"],["Williams Sonoma","","Summerlin, NV","","8/26/2022","","Office","","35,867","","","9,300,000","","","8,964,252"],["Wyndham","","Summerlin, NV","","9/16/2022","","Office","","41,390","","","12,900,000","","","12,267,571"],["Raising Cane's","","San Antonio, TX","","12/30/2022","","Retail","","3,853","","","4,313,045","","","4,173,283"],["Totals","","","","","","","","346,979","","","$","73,038,045","","","$","48,655,777"],["2021"],["Chevron","","Roseville, CA","","1/7/2021","","Retail","","3,300","","","$","4,050,000","","","$","3,914,909"],["EcoThrift","","Sacramento, CA","","1/29/2021","","Retail","","38,536","","","5,375,300","","","2,684,225"],["Chevron","","San Jose, CA","","2/12/2021","","Retail","","1,060","","","4,288,888","","","4,054,327"],["Dana","","Cedar Park, TX","","7/7/2021","","Industrial","","45,465","","","10,000,000","","","4,975,334"],["Harley Davidson","","Bedford, TX","","12/21/2021","","Retail","","70,960","","","15,270,000","","","8,344,708"],["Totals","","","","","","","","159,321","","","$","38,984,188","","","$","23,973,503"]] [[/GREPCENT_TABLE]] (1)    Net of commissions, closing costs paid and repayment of any outstanding mortgages. (2)    Classified as held for sale as of December 31, 2021. (3)    Net proceeds from the combined sale of the Bon Secours, Omnicare and Texas Health properties. Extension of Leases Effective January 12, 2022, we extended the lease terms of our Cummins office property located in Nashville, Tennessee from March 1, 2023 to February 28, 2024 with a 2% increase in annual rent commencing March 1, 2023. Cummins accepted the extension of the lease terms and possession of the property on an "AS-IS" basis. We also granted to Cummins an option to extend the lease term for an additional five years commencing March 1, 2024 and paid a leasing commission of $30,000 in connection with this extension. Effective January 26, 2022, we extended the lease term of our ITW Rippey industrial property located in El Dorado Hills, California from August 1, 2022 to July 31, 2029 with a 6% increase in annual rent commencing August 1, 2022 and 3% annual escalations thereafter. We also agreed to provide a tenant improvements allowance of $481,250 in connection with this extension and granted ITW Rippey an option to extend the lease term for an additional five years commencing August 1, 2029. On July 15, 2022, we agreed to allow ITW Rippey to utilize its tenant improvements allowance for any sums due under the lease. Effective March 4, 2022, we extended the lease term of our Williams Sonoma office property located in Summerlin, Nevada from October 31, 2022 to October 31, 2025 with a 4% increase in annual rent commencing November 1, 2022 and 2.7% annual escalations thereafter. We also agreed to provide the tenant with one month of free rent, an inducement payment of $100,000 and tenant improvements allowance of $166,450 and paid a leasing commission of $90,383 in connection with this extension. The property leased to Williams Sonoma was sold on August 26, 2022. On January 23, 2023, we executed a lease extension for the office property leased to Solar Turbines in San Diego, California for an additional two years through July 31, 2025 with a 14.0% increase in rent effective August 1, 2023 and a 3.0% increase in rent effective August 1, 2024. This is the third lease extension executed by Solar Turbines, which has occupied our property located in San Diego, California since 2008. We are continuing to explore potential lease extensions for certain of our other properties. 68 Table of Contents Other than as discussed below, we do not have other plans to incur any significant costs to renovate, improve or develop our properties. We believe that our properties are adequately insured. Pursuant to lease agreements, as of December 31, 2022 and 2021, we had obligations to pay $1,789,027 and $189,136, respectively, for on-site and tenant improvements to be incurred by tenants. We expect that the related improvements will be completed during the 2023 calendar year and will be funded from cash on hand, operating cash flow or borrowings under our Credit Facility. In addition, we have identified approximately $1,181,000 of roof and HVAC replacement, elevator upgrades and sealing and parking lot repairs/restriping that are expected to be completed in the next 12 months. Approximately $217,000 of these improvements are expected to be recoverable from the tenant through operating expense reimbursements. We will initially pay for the improvements, and the recoveries will be billed over an extended period of time according to the terms of the leases. The remaining costs of approximately $964,000 are not recoverable from tenants. These improvements will be funded from cash on hand, operating cash flows, or borrowings under our Credit Facility. More information on our properties and investments can be found in Part I, Item 2. Properties of this Annual Report on Form 10-K. Critical Accounting Policies The discussion below is regarding the accounting policies that management believes are or will be critical to our operations. We consider these policies critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our consolidated financial statements. Additionally, other companies may have utilized different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. Noncontrolling Interest in Consolidated Entities We account for the noncontrolling interests in our Operating Partnership in accordance with the related accounting guidance. Due to our control of the Operating Partnership through our general partnership interest therein and the limited rights of the limited partners, the Operating Partnership and its wholly-owned subsidiaries are consolidated with us, and the limited partner interests not held by us are reflected as noncontrolling interests in the accompanying consolidated balance sheets and statements of equity. Other than the noncontrolling interests related to an “UPREIT” transaction, all other noncontrolling interests currently represent non-voting, non-distribution accruing interests with no allocation of profits or losses, but have various conversion rights to obtain future rights to distributions and allocation of profits and losses. Revenue Recognition We account for revenue in accordance with FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), which includes revenue generated by sales of real estate, other operating income and tenant reimbursements for substantial services earned at our properties. Such revenues are recognized when the services are provided and the performance obligations are satisfied. Tenant reimbursements, consisting of amounts due from tenants for common area maintenance, property taxes and other recoverable costs, are recognized in rental income subsequent to the adoption of Topic 842, as discussed below, in the period the recoverable costs are incurred. Tenant reimbursements, for which we pay the associated costs directly to third-party vendors and is reimbursed by the tenants, are recognized and recorded on a gross basis. We account for leases in accordance with FASB ASU No. 2016-02, Leases (Topic 842) and the related FASB ASU Nos. 2018-10, 2018-11, 2018-20 and 2019-01, which provide practical expedients, technical corrections and improvements for certain aspects of ASU 2016-02 (collectively “Topic 842”). Topic 842 established a single comprehensive model for entities to use in accounting for leases. Topic 842 applies to all entities that enter into leases. Lessees are required to report assets and liabilities that arise from leases. Lessor accounting has largely remained unchanged; however, certain refinements are made to conform with revenue recognition guidance, specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. Topic 842 impacts our accounting for leases primarily as a lessor. Topic 842 also impacts our accounting as a lessee; however, such impact is not considered material. As a lessor, our leases with tenants generally provide for the lease of real estate properties, as well as common area maintenance, property taxes and other recoverable costs. To reflect recognition as one lease component, rental income and tenant reimbursements and other lease related property income that meet the requirements of the practical expedient provided by ASU No. 2018-11 have been combined under rental income in our consolidated statements of operations. 69 Table of Contents We recognize rental income from tenants under operating leases on a straight-line basis over the noncancelable term of the lease when collectability of such amounts is reasonably assured. Recognition of rental income on a straight-line basis includes the effects of rental abatements, lease incentives and fixed and determinable increases in lease payments over the lease term. If the lease provides for tenant improvements, our management determines whether the tenant improvements, for accounting purposes, are owned by the tenant or by us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that the tenant can take in the form of cash or a credit against its rent) that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to: •whether the lease stipulates how a tenant improvement allowance may be spent; •whether the amount of a tenant improvement allowance is in excess of market rates; •whether the tenant or landlord retains legal title to the improvements at the end of the lease term; •whether the tenant improvements are unique to the tenant or general-purpose in nature; and •whether the tenant improvements are expected to have any residual value at the end of the lease. Tenant reimbursements of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period the expenses are incurred and presented gross if we are the primary obligor and, with respect to purchasing goods and services from third-party suppliers, has discretion in selecting the supplier and bears the associated credit risk. In instances where the operating lease agreement has an early termination option, the termination penalty is based on a predetermined termination fee or based on the unamortized tenant improvements and leasing commissions. We evaluate the collectability of rents and other receivables on a regular basis based on factors including, among others, payment history, credit rating, the asset type, and current economic conditions. If our evaluation of these factors indicates we may not recover the full value of the receivable, we provide an allowance against the portion of the receivable that we estimate may not be recovered. This analysis requires us to determine whether there are factors indicating a receivable may not be fully collectible and to estimate the amount of the receivable that may not be collected. Bad Debts and Allowances for Tenant and Deferred Rent Receivables Our determination of the adequacy of our allowances for tenant receivables includes a binary assessment of whether or not the amounts due under a tenant’s lease agreement are probable of collection. For such amounts that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For such amounts that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination. In addition, for tenant and deferred rent receivables deemed probable of collection, we also may record an allowance under other authoritative GAAP depending upon our evaluation of the individual receivables, specific credit enhancements, current economic conditions, and other relevant factors. Such allowances are recorded as increases or decreases through rental income in our consolidated statements of operations. With respect to tenants in bankruptcy, management makes estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, we will record a bad debt allowance for the tenant’s receivable balance and generally will not recognize subsequent rental revenue until either cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments. Gain or Loss on Sale of Real Estate Investments We recognize gain or loss on sale of real estate property when we have executed a contract for sale of the property, transferred controlling financial interest in the property to the buyer and determined that it is probable that we will collect substantially all of the consideration for the property. When properties are sold, operating results of the properties remain in continuing operations, and any associated gain or loss from the disposition is included in gain or loss on sale of real estate investments in our accompanying consolidated statements of operations included in this Annual Report on Form 10-K. 70 Table of Contents Income Taxes We have elected to be taxed as a REIT for U.S. federal income tax purposes under Section 856 through 860 of the Internal Revenue Code. We expect to operate in a manner that will allow us to continue to qualify as a REIT for U.S. federal income tax purposes. To qualify as a REIT, we must meet certain organizational and operational requirements, including meeting various tests regarding the nature of our assets and our income, the ownership of our outstanding stock and distribution of at least 90% of our annual REIT taxable income to our stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, we generally will not be subject to U.S. federal income tax to the extent we distribute qualifying dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Fair Value of Financial Instruments Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy, which is based on three levels of inputs, the first two of which are considered observable and the last unobservable, that may be used to measure fair value, is as follows: Level 1: quoted prices in active markets for identical assets or liabilities; Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The fair value for certain financial instruments is derived using valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of our financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. We evaluate several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of financial instrument for which it is practicable to estimate the fair value: Cash and cash equivalents; restricted cash; receivable from early termination of lease; tenant receivables; prepaid expenses and other assets; accounts payable, accrued and other liabilities: These balances approximate their fair values due to the short maturities of these items. Derivative instruments: Our derivative instruments are presented at fair value on the accompanying consolidated balance sheets. The valuation of these instruments is determined using a third-party's proprietary model that utilizes observable inputs. As such, we classify these inputs as Level 2 inputs. The proprietary model uses the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and volatility. The fair values of interest rate swaps are estimated using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit risks to the contracts, are incorporated in the fair values to account for potential nonperformance risk. Goodwill: The fair value measurements of goodwill is considered Level 3 nonrecurring fair value measurements. For goodwill, fair value measurement involves the determination of fair value of a reporting unit. Credit facilities: The fair value of our credit facilities approximates their carrying values as their interest rates and other terms are comparable to those available in the market place for similar credit facilities. 71 Table of Contents Mortgage notes payable: The fair value of our mortgage notes payable is estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, we measure fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. We classify these inputs as Level 3 inputs. Related party transactions: We have concluded that it is not practical to determine the estimated fair value of related party transactions. Disclosure rules for fair value measurements require that for financial instruments for which it is not practicable to estimate fair value, information pertinent to those instruments be disclosed. Further information as to these financial instruments with related parties is included in Note 10 to our accompanying consolidated financial statements in this Annual Report on Form 10-K. Real Estate Investments Real Estate Acquisition Valuation We record acquisitions that meet the definition of a business as a business combination. If the acquisition does not meet the definition of a business, we record the acquisition as an asset acquisition. Under both methods, all assets acquired and liabilities assumed are measured based on their acquisition-date fair values. Transaction costs that are related to a business combination are charged to expense as incurred. Transaction costs that are related to an asset acquisition are capitalized as incurred. We assess the acquisition date fair values of all tangible assets, identifiable intangibles, and assumed liabilities using methods similar to those used by independent appraisers, generally utilizing a discounted cash flow analysis that applies appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors, including historical operating results, known and anticipated trends, and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it were vacant. We record above-market and below-market in-place lease values for acquired properties based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of above-market in-place leases plus any extended term for any leases with below-market renewal options. We amortize any recorded above-market or below-market lease values as a reduction or increase, respectively, to rental income over the remaining non-cancelable terms of the respective lease, including any below-market renewal periods. We estimate the value of tenant origination and absorption costs by considering the estimated carrying costs during hypothetical expected lease-up periods, considering current market conditions. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease up periods. We amortize the value of tenant origination and absorption costs to depreciation and amortization expense over the remaining non-cancelable term of the respective lease. Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require us to make significant assumptions to estimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate assumptions would result in an incorrect valuation of our acquired tangible assets, identifiable intangibles and assumed liabilities, which would impact the amount of our net income (loss). 72 Table of Contents Depreciation and Amortization Real estate costs related to the acquisition and improvement of properties are capitalized and depreciated or amortized over the expected useful life of the asset on a straight-line basis. Repair and maintenance costs include all costs that do not extend the useful life of the real estate asset and are expensed as incurred. Significant replacements and betterments are capitalized. We anticipate the estimated useful lives of our assets by class to be generally as follows: [[GREPCENT_TABLE]] [[".","Buildings","10-48 years"],[".","Site improvements","Shorter of 15 years or remaining lease term"],[".","Tenant improvements","Shorter of 15 years or remaining lease term"],[".","Industrial equipment","20 years"],[".","Tenant origination and absorption costs, and above-/below-market lease intangibles","Remaining lease term"]] [[/GREPCENT_TABLE]] Impairment of Investment in Real Estate Properties We monitor events and changes in circumstances that could indicate that the carrying amounts of real estate properties may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, management assesses whether the carrying value of the real estate properties will be recovered through the future undiscounted operating cash flows expected from the use of and eventual disposition of the property. If, based on the analysis, we do not believe that we will be able to recover the carrying value of the real estate properties, we will record an impairment charge to the extent the carrying value exceeds the estimated fair value of the real estate properties. Leasing Costs We account for leasing costs under Topic 842. Initial direct costs would include only those costs that are incremental to the lease arrangement and would not have been incurred if the lease had not been obtained. We charge to expense internal leasing costs and third-party legal leasing costs as incurred. These expenses are included in general and administrative expense and property expenses, respectively, in our consolidated statements of operations. Real Estate Investments Held for Sale We consider a real estate investment to be “held for sale” when the following criteria are met: (i) management commits to a plan to sell the property, (ii) the property is available for sale immediately, (iii) the property is actively being marketed for sale at a price that is reasonable in relation to its current fair value, (iv) the sale of the property within one year is considered probable and (v) significant changes to the plan to sell are not expected. Real estate that is held for sale and its related assets are classified as “real estate investments held for sale, net” and “assets related to real estate investments held for sale,” respectively, in the accompanying consolidated balance sheets. Mortgage notes payable and other liabilities related to real estate investments held for sale are classified as “mortgage notes payable related to real estate investments held for sale, net” and “liabilities related to real estate investments held for sale,” respectively, in the accompanying consolidated balance sheets. Real estate investments classified as held for sale are no longer depreciated and are reported at the lower of their carrying value or their estimated fair value less estimated costs to sell. Operating results of properties that were classified as held for sale in the ordinary course of business are included in continuing operations in our accompanying consolidated statements of operations. Unconsolidated Investment We account for investments in an entity over which we have the ability to exercise significant influence under the equity method of accounting. Under the equity method of accounting, an investment is initially recognized at cost and is subsequently adjusted to reflect our share of earnings or losses of the investee. The investment is also increased for additional amounts invested and decreased for any distributions received from the investee. Equity method investment is reviewed for impairment whenever events or circumstances indicate that the carrying amount of the investment might not be recoverable. If an equity method investment is determined to be other-than-temporarily impaired, the investment is reduced to fair value and an impairment charge is recorded as a reduction to earnings. 73 Table of Contents Goodwill We record goodwill when the purchase price of a business combination exceeds the estimated fair value of net identified tangible and intangible assets acquired. We evaluate goodwill and other intangible assets for possible impairment in accordance with ASC 350, Intangibles–Goodwill and Other, on an annual basis, or more frequently when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recognized. In assessing goodwill impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that the fair value of a reporting unit is less than its carrying amount. Our qualitative assessment of the recoverability of goodwill considers various macro-economic, industry-specific and company-specific factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of our financial performance; or (iv) a sustained decrease in our market capitalization below its net book value. If, after assessing the totality of events or circumstances, we determine it is unlikely that the fair value of such reporting unit is less than its carrying amount, then a quantitative analysis is unnecessary. However, if we concluded otherwise, or if we elect to bypass the qualitative analysis, then it is required that we perform a quantitative analysis that compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, a goodwill impairment loss is recognized for the lesser of: (a) the amount that the carrying amount of a reporting unit exceeds its fair value; or (b) the amount of the goodwill allocated to that reporting unit. Derivative Instruments and Hedging Activities We enter into derivative instruments for risk management purposes to hedge our exposure to cash flow variability caused by changing interest rates on our variable rate debt. We do not enter into derivatives for speculative purposes. We record derivative instruments at fair value on our consolidated balance sheets. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. If the derivative instrument meets the hedge accounting criteria, the change in the fair value of a derivative instrument may be designated as a cash flow hedge where the unrealized holding gain or loss on the interest rate swap is presented in our consolidated statements of comprehensive income (loss) and accumulated other comprehensive income in our balance sheets. If the derivative instrument does not meet the hedge accounting criteria, the change in the fair value of the derivative is recorded as a gain or loss on the interest rate swap and included in interest expense in our consolidated statements of operations. We enter into interest rate swaps as a fixed rate payer to mitigate our exposure to rising interest rates on our variable rate term loan. The value of interest rate swaps is primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of the fixed rate payer position and decrease the value of the variable rate payer position. As the remaining life of the interest rate swap decreases, the value of both positions will generally move towards zero. We may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or we elect not to apply hedge accounting. Restricted Stock Units and Restricted Stock Unit Awards Historically, the fair values of the Operating Partnership's units or restricted stock unit awards issued or granted by us were based on the estimated NAV per share (unaudited) of our common stock on the date of issuance or grant, adjusted for an illiquidity discount due to the illiquid nature of the underlying equity prior to the listing of our Class C Common Stock on the NYSE. The fair value of future grants of the Operating Partnership's units or restricted stock unit awards will be determined based on the NYSE's market closing price of our Class C Common Stock on the date of grant. Operating Partnership units issued as purchase consideration in connection with the Self-Management Transaction and UPREIT Transaction (each defined and discussed in Note 12 to our accompanying consolidated financial statements in this Annual Report on Form 10-K) are recorded in equity under noncontrolling interest in the Operating Partnership in our accompanying consolidated balance sheets and statements of equity in this Annual Report on Form 10-K. For units granted to our employees that are not included in the purchase consideration, the fair value of the award is amortized using the straight-line method over the requisite service period of the award, which is generally the vesting period. We have elected to record forfeitures as they occur. 74 Table of Contents We determine the accounting classification of equity instruments (e.g., restricted stock units) that are issued as purchase consideration or part of the purchase consideration in a business combination, as either liability or equity, by first assessing whether the equity instruments meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“ASC 480-10”), and then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“ASC 815-40”). Under ASC 480-10, equity instruments are classified as liabilities if the equity instruments are mandatorily redeemable, obligate the issuer to settle the equity instruments or the underlying shares by paying cash or other assets, or must or may require an unconditional obligation that must be settled by issuing a variable number of shares. If equity instruments do not meet liability classification under ASC 480-10, we assess the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the equity instruments do not require liability classification under ASC 815-40, in order to conclude equity classification, we assess whether the equity instruments are indexed to our common stock and whether the equity instruments are classified as equity under ASC 815-40 or other applicable GAAP guidance. After all relevant assessments are made, we conclude whether the equity instruments are classified as liability or equity. Liability classified equity instruments are accounted for at fair value both on the date of issuance and on subsequent accounting period ending dates, with all changes in fair value after the issuance date recorded in the statements of operations as a gain or loss. Equity classified equity instruments are accounted for at fair value on the issuance date with no changes in fair value recognized after the issuance date. Recent Accounting Pronouncements See Note 2 to our accompanying consolidated financial statements in this Annual Report on Form 10-K. Off-Balance Sheet Arrangements As of December 31, 2022, we had no off-balance sheet arrangements that had or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources. Recent Market Conditions There are continuing uncertainties in the market in which we operate related to supply chain disruptions, inflation and increases in interest rates, along with negative impacts associated with the ongoing Russian war against Ukraine and sanctions which have been implemented by the United States and other countries against Russia. Volatility in stock and bond markets, particularly the rise in yields on U.S. Treasury securities during 2022, may negatively impact our operating results. In addition, although the impacts of the COVID-19 pandemic on the economy appear to have diminished and the general commercial real estate market appears to be recovering from such impacts, the COVID-19 pandemic has resulted in significant disruptions in utilization of office properties and uncertainty over how tenants of office properties will respond when their leases are scheduled to expire. Possible future declines in rental rates and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows from investment properties. Excluding the property formerly leased to Gap which is in escrow and scheduled to be sold by the end of March 2023, we have two leases (one industrial and one office) scheduled to expire in the next 12 months, which comprise an aggregate of 163,230 leasable square feet and represent approximately 5.1% of ABR as of December 31, 2022. As tenants, particularly in office properties, reevaluate their use of such properties in light of the impacts of the COVID-19 pandemic, including their ability to have workers succeed in working at home, they may determine not to renew these leases or to seek rent or other concessions as a condition of renewing their leases. Potential future declines in economic conditions could negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values in our real estate portfolio, which could have the following negative effects on us: the values of our investments in commercial properties could decrease below the amounts paid for such investments; and/or revenues from our properties could decrease due to fewer tenants and/or lower rental rates, making it more difficult for us to make distributions or meet our debt service obligations. However, we successfully negotiated lease extensions for four properties during 2022 and January 2023. 75 Table of Contents The debt market remains sensitive to the macro environment, such as inflation, Federal Reserve policy, the prolonged impacts of the COVID-19 pandemic, market sentiment or regulatory factors affecting the banking and commercial mortgage-backed securities industries. In January 2022, we refinanced all but four of our properties (including the TIC Interest) with proceeds from our Credit Facility which includes floating rates based on SOFR and our leverage ratio as described above. The mortgage on our Rancho Cordova, California property does not mature until March 9, 2024 and the other three mortgages do not mature until after September 2027. All four of these mortgages are at fixed rates. As a result of the interest rate swap agreements entered into during 2022, 100% of our indebtedness as of February 28, 2023 holds a fixed interest rate. The weighted average interest rate on the total debt outstanding of $204.5 million as of February 28, 2023 was 4.05% based on our 38% leverage ratio as of December 31, 2022. Our Revolver does not mature until January 18, 2026 and can be extended for an additional 12 months thereafter, and our Term Loan does not mature until January 18, 2027. On October 21, 2022, our Credit Facility was increased to $400 million and is now comprised of a $150 million Revolver and a $250 million Term Loan. Our Credit Facility includes an updated accordion option that allows us to request additional Revolver and Term Loan lender commitments up to a total of $750 million. Any future uncertainties in the capital markets may cause difficulty in refinancing debt obligations prior to maturity at terms as favorable as the terms of existing indebtedness. If we are not able to refinance our indebtedness on attractive terms at the various maturity dates, we may be forced to dispose of some of our assets. Market conditions can change quickly, potentially negatively impacting the value of real estate investments.