NETSTREIT Corp. (NTST) FY 2022 MD&A

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

The following discussion and analysis of our financial condition and results of operations should be read together with the “Business” section as well as the consolidated financial statements and related notes in Part II, Item 8 in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategies for our business, includes forward-looking statements that involve risks and uncertainties. You should read “Item 1A. Risk Factors” and the “Forward-Looking Statements” section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by these forward-looking statements. Also refer to “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s previously filed Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 24, 2022, for additional discussion of our financial condition and results of operations, including a comparison of our results of operations for the year ended December 31, 2021 and the year ended December 31, 2020, which is incorporated herein by reference.

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Business Overview

We are an internally managed real estate company that acquires, owns and manages a diversified portfolio of single-tenant, retail commercial real estate subject to long-term net leases with high credit quality tenants across the United States. As of December 31, 2022, our portfolio consisted of 427 single-tenant retail net leased properties that were diversified by tenant, industry and geography, including 80 different tenants, across 25 retail sectors in 43 states. We focus on tenants in industries where a physical location is critical to the generation of sales and profits, with a focus on necessity goods and essential services in the retail sector, including home improvement, auto parts, drug stores and pharmacies, general retail, grocers, convenience stores, discount stores, and quick-service restaurants, all of which we refer to as defensive retail industries. As of December 31, 2022, our portfolio was 100% occupied and generated ABR of $99.2 million with a weighted average remaining lease term (“WALT”) of 9.5 years, which we believe provides us with a strong stable source of recurring cash flow from our portfolio. Approximately 63% of our ABR is from investment grade credit rated tenants and an additional 17% of our ABR is derived from tenants with an investment grade profile.

2022 Debt Refinancing Transaction

On August 11, 2022, we entered into a credit agreement (the “New Credit Agreement”) related to our sustainability-linked senior unsecured credit facility consisting of (i) a $200.0 million senior unsecured term loan (the “2028 Term Loan”) and (ii) a $400.0 million senior unsecured revolving credit facility (the “New Revolver” and together with the 2028 Term Loan, the “New Credit Facility”). The New Credit Facility may be increased by $400.0 million in the aggregate.

The New Revolver refinanced and upsized our existing $250.0 million senior unsecured revolving credit facility (“Prior Revolver”) pursuant to the credit agreement, dated as of December 23, 2019, governing such facility (the “Prior Credit Agreement”).

We used the proceeds from the borrowings made on the closing date to repay in full our Prior Revolver. The remaining and future proceeds of the loans under the New Credit Facility will be used by us and our subsidiaries for general corporate purposes, including acquisitions. Our $175.0 million senior unsecured term loan (“2024 Term Loan”) under the Prior Credit Agreement, which matures in December 2024, remained outstanding upon the closing of the New Credit Facility.

The 2028 Term Loan matures on February 11, 2028 and the New Revolver matures on August 11, 2026, subject to extension of up to one year. Borrowings under the New Credit Facility are repayable at our option in whole or in part without premium or penalty. Borrowings under the New Revolver may be repaid and reborrowed from time to time prior to the maturity date.

January 2022 Follow-On Offering

On January 13, 2022, we completed a registered public offering of 10,350,000 shares of our common stock at a public offering price of $22.25 per share. In connection with the offering, we entered into forward sale agreements for 10,350,000 shares of our common stock. As of September 29, 2022, we had fully physically settled the forward sale agreements (by the delivery of shares of common stock) throughout 2022 at a price of $22.25 per share in accordance with the forward sale agreements. We received net proceeds from the settlement of the forward sale agreements of $215.5 million, net of underwriting discounts and offering costs of $14.8 million.

August 2022 Follow-On Offering

On August 8, 2022, we completed a registered public offering of 10,350,000 shares of common stock at a public offering price of $20.20 per share. In connection with the offering, we entered into forward sale agreements for 10,350,000 shares of common stock. We did not initially receive any proceeds from the sales of shares of common stock by the forward purchasers upon registration of the offering. We may physically settle the forward sale agreements (by the delivery of shares of common stock) and receive proceeds from the sale of those shares upon one or more forward settlement dates, which shall occur no later than August 3, 2023. We may, at our election, cash settle or net share settle all or a portion of our obligations under a forward sale agreement if we conclude it is in our best interest to do so over the prescribed offering period. If we elect to cash settle a forward sale agreement, we may not receive any proceeds and may owe cash to the relevant forward counterparty in certain circumstances.

On December 30, 2022, we settled 2,973,944 shares of common stock at a price of $20.20 per share in connection with the forward sale agreements. We received net proceeds from the settlement of $56.7 million, net of underwriting discounts and offering costs of $3.4 million. As of December 31, 2022, 7,376,056 shares remained unsettled under the forward sale agreements.

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ATM Program

On September 1, 2021, we entered into a $250.0 million at-the-market equity program (the “ATM Program”) through which, from time to time, we may sell shares of its common stock in registered transactions. During 2022, we issued 276,060 shares of common stock at a weighted average price of $21.02 per share in connection with the ATM Program for net proceeds of approximately $5.5 million, net of sales commissions and offering costs of $0.3 million. In aggregate, we have issued 4,128,496 shares of common stock at a weighted average price of $23.21 per share in connection with the ATM Program for net proceeds of approximately $94.5 million, net of sales commissions and offering costs of $1.3 million. We have $154.2 million remaining gross proceeds available for future issuances of shares of our common stock under the ATM Program.

Results of Operations

Overall

We continued to grow our assets held for investment during 2022 by increasing our property portfolio from 328 properties as of December 31, 2021 to 430 properties as of the end of December 31, 2022. This includes five real estate development projects owned by the Company and two properties fully collateralized by investments in mortgage loans receivable. This growth was financed through the settlement of shares of common stock through our forward sale agreements in an amount of $272.2 million, the issuance of common stock under the ATM Program in an amount of $5.5 million and net borrowings of $185.0 million on our revolving credit facilities during 2022.

Acquisitions

During 2022, we acquired 105 properties for a total purchase price of $424.8 million, inclusive of $4.2 million of capitalized acquisition costs.

The acquisitions were all accounted for as asset acquisitions. These properties are located in 29 states with a WALT of approximately 10.6 years. The underwritten weighted-average capitalization rate on our year to date acquisitions was approximately 6.6%.

Development

During 2022, we invested $22.0 million in our property developments, including the acquisition of two new build-to-suit projects with an initial purchase price of $1.8 million. In addition, we completed development on six projects and reclassified approximately $23.1 million from property under development to land, building, and improvements in the accompanying consolidated balance sheets. The remaining five developments are expected to be substantially completed with rent commencing at various points throughout 2023 and the first quarter of 2024. The purchase price, including acquisitions costs, and subsequent development are included in property under development in the accompanying consolidated balance sheets as of December 31, 2022. The underwritten weighted-average capitalization rate on our year to date completed developments was approximately 6.7%.

Dispositions

During 2022, we sold seven properties for a total sales price, net of disposal costs, of $25.5 million, recognizing a gain of $4.1 million.

Investment in Mortgage Loans Receivable

On January 26, 2022, we executed a fully collateralized $40.3 million loan receivable with a stated interest rate of 6.0%. The scheduled maturity date is July 26, 2023, however we have the right, subject to certain terms and conditions, to purchase a portion of the underlying collateralized property. The loan receivable is collateralized by real estate that is leased by three separate investment-grade tenants. The funds provided under the loan, in addition to loan origination costs of $0.1 million, are included in loans receivable, net in the accompanying consolidated balance sheets as of December 31, 2022.

On June 30, 2022, we executed a fully collateralized $6.0 million loan receivable with a stated interest rate of 6.5%. The scheduled maturity date is June 30, 2023, however the Company has the right, subject to certain terms and conditions, to purchase the underlying collateralized properties. The loan receivable is collateralized by real estate that is leased by two separate tenants, one of which is an investment grade profile tenant. The funds provided under the loan, in addition to loan

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origination costs of less than $0.1 million, are included in loans receivable, net in the accompanying consolidated balance sheets as of December 31, 2022.

Economic and Financial Environment

The average inflation rate for the twelve months ended December 31, 2022 was 6.5% which is a near 40-year high. While the Federal Reserve has been continuing to raise interest rates in an effort to lower inflation, the pace at which it may continue to do so is unclear leading to uncertainties in the financing market and a volatile economy.

In the commercial real estate market, property prices generally continue to fluctuate which may impact our investment capitalization rates and operating costs. Likewise, during certain periods, including the current market, the credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate and credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly.

Year Ended December 31, 2022 Compared with the Year Ended December 31, 2021

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

Revenue. Revenue for the year ended December 31, 2022 increased by $37.2 million to $96.3 million from $59.1 million for the year ended December 31, 2021. This is primarily due to an increase in the real estate portfolio from 318 operating properties as of January 1, 2021 to 423 operating properties as of December 31, 2022. The increase includes an increase in cash rental receipts of $28.4 million, combined with net increases of property expense reimbursements of $5.5 million, of which $2.5 million, $2.4 million, and $0.6 million was related to estimated tax reimbursements, estimated common area maintenance reimbursements, and estimated insurance reimbursements, respectively. Additionally, the increase includes a $0.6 million increase related to straight-line rental revenue, an increase of $0.6 million related to amortization of above- and below-market lease related intangible assets, offset by a decrease of $0.4 million related to amortization of lease incentives. Lastly, $2.3 million relates to an increase of interest income on mortgage loans receivable.

Total Operating Expenses. Total expenses increased by $27.1 million to $82.8 million for the year ended December 31, 2022 as compared to $55.7 million for the year ended December 31, 2021. The increase in operating expenses is primarily attributed to the increase in the number of operating properties, with the most significant increases being depreciation and amortization expense, property-specific reimbursable and non-reimbursable expenses, stock-based compensation, payroll and severance costs, and other general and administrative expenses associated with our growth, offset by a decrease in provisions for impairment. Total operating expenses include the following:

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•Property Expenses. Property expenses increased $5.9 million to $11.7 million for the year ended December 31, 2022 from $5.8 million for the year ended December 31, 2021. The increase is primarily attributed to the increase in the real estate portfolio from 318 to 423 operating properties, including combined net increases of reimbursable property expenses of $4.6 million, of which $2.5 million, $1.5 million, and $0.6 million was related to reimbursable property taxes, reimbursable common area maintenance costs and reimbursable insurance costs, respectively. Additionally, the increase includes combined net increases of non-reimbursable property expenses of $1.0 million, of which $0.6 million was related to common area maintenance costs.

•General and Administrative Expenses. General and administrative expenses increased $4.3 million to $19.1 million for the year ended December 31, 2022 from $14.8 million for the year ended December 31, 2021. The increase is primarily due to a net increase in stock-based compensation expense of $1.1 million, which includes $0.7 million of stock-based compensation expense associated with the accelerated vesting of certain restricted stock units held by the former Chief Financial Officer, offset by a decrease of $0.7 million of stock-based compensation expense due to forfeiture of certain restricted stock units held by the former Chief Financial Officer upon his resignation. Additionally, the increase includes an increase of $0.9 million related to payroll expenses associated with increased headcount, an increase of $0.8 million associated with severance paid upon resignation of the former Chief Financial Officer, an increase of $0.4 million of corporate office rent, and a combined net increase of $1.5 million associated with other general expenses which include professional, legal, and consulting services, travel, recruiting, and other costs, offset by a $0.3 million reduction in bonus expense. While our general and administrative expenses will continue to rise in some measure as our portfolio grows, we expect that such expenses as a percentage of our portfolio will decrease over time due to efficiencies and economies of scale.

•Depreciation and Amortization. Depreciation and amortization expense increased by $19.3 million to $50.1 million for the year ended December 31, 2022 from $30.8 million for the year ended December 31, 2021. The increase in depreciation and amortization is proportionate to the increase in the size of the portfolio over the comparable period with associated increases in building depreciation expense of $8.5 million, in-place lease amortization expense of $6.5 million, building improvements depreciation expense of $3.6 million, leasehold improvement depreciation expense of $0.5 million, and other corporate assets depreciation expense of $0.2 million.

•Provisions for impairment. For the year ended December 31, 2022, we recorded a provision for impairment of $1.1 million on one property which was also sold during the year. For the year ended December 31, 2021, we recorded provisions for impairment of $3.5 million on three properties, all of which were previously classified as held-for-sale and sold before December 31, 2021. These impairments and subsequent disposals relate to our plan of strategically identifying properties that can be re-leased or disposed of in an effort to improve returns and manage risk exposure.

•Transaction costs. Transaction costs increased by $0.1 million to $0.8 million for the year ended December 31, 2022 from $0.7 million for the year ended December 31, 2021, which primarily relates to increases in costs incurred for abandoned acquisitions.

Interest Expense. Interest expense increased by $5.5 million to $9.2 million for the year ended December 31, 2022 from $3.7 million for the year ended December 31, 2021. Notwithstanding the rising interest rates, an increase of $1.8 million is attributed to the increase in the average balances outstanding under the Prior Revolver, an increase of $1.1 million and $3.0 million is attributed to interest incurred under the New Revolver and 2028 Term Loan, respectively, as a result of the New Credit Agreement, an increase of $0.2 million is attributed to deferred financing cost amortization as a result of the New Credit Facility and an increase of $0.1 million is attributed to interest incurred under the mortgage note payable. This is offset by $0.4 million less of facility fees incurred for unused capacity and $0.3 million of increased capitalized interest on our property developments.

Gain on sales of real estate, net. Net gain on sales of real estate increased by $1.1 million to $4.1 million for the year ended December 31, 2022 from $3.0 million for the year ended December 31, 2021. The table below summarizes the properties sold for the periods indicated (in thousands):

Other income, net. The change in other income, net is primarily related to the $0.4 million loss recorded in 2021 as a result of property damage sustained from Hurricane Ida, which was offset by insurance proceeds received of $0.8 million, all of which occurred in the prior year. Additionally, approximately $0.1 million of property damages were recorded in the current year.

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Income tax expense. Income tax expense increased by $0.3 million for year ended December 31, 2022. The increase relates to provisions for federal and state income taxes on the financial results of NETSTREIT Management TRS, LLC (“NETSTREIT TRS”).

Net Income. Net income increased $5.0 million to $8.2 million for the year ended December 31, 2022 from $3.2 million for the year ended December 31, 2021. Net income increased primarily due to the growth in the size of our real estate investment portfolio, which generated additional rental revenues, including interest income associated with our mortgage loans receivable, in addition to decreases in provisions for impairment, offset by the impact of increases in depreciation and amortization expenses, increases in interest expense, and increases in general and administrative expenses, as set forth above.

Liquidity and Capital Resources

Our primary capital requirements are to fund property acquisitions and required interest payments, as well as working capital needs, operating expenses and capital expenditures. Our capital resources primarily consist of cash from operations, sales of equity securities and borrowings under our 2024 Term Loan, 2028 Term Loan and New Revolver. As of December 31, 2022, we had $175.0 million outstanding principal amount of the 2024 Term Loan, $200.0 million outstanding principal amount of the 2028 Term Loan, and $113.0 million of borrowings outstanding under our New Revolver. Additionally, as of December 31, 2022, we had 7,376,056 shares that were unsettled under open forward equity contracts. We believe that the availability of proceeds from future issuances of shares of our common stock under the ATM Program and the physical settlement of forward sales of our common stock, coupled with our cash flows from operations and available borrowing capacity under the New Revolver, will be adequate to support our ongoing operations and to fund our debt service requirements, capital expenditures and working capital for at least the next 12 months. We anticipate funding our long-term capital needs through cash provided from operations, borrowings under our New Revolver and issuances of common stock, including settlement of existing forward sales agreements.

Contractual Obligations and Commitments

As of December 31, 2022, our contractual debt obligations primarily include the maturity of our 2024 Term Loan with the scheduled principal payment due on December 23, 2024, the maturity of our 2028 Term Loan with the scheduled principal payment due on February 11, 2028, and repayment of borrowings on our New Revolver with a maturity of August 11, 2026. During the year ended December 31, 2022, we borrowed $515.0 million on our revolving credit facilities at a weighted average interest rate of 2.59%, of which $32.0 million was borrowed from the New Revolver to fully pay down the Prior Revolver, with remaining borrowings used to fund specifically identified property acquisitions. We also repaid $466.0 million on our revolving credit facilities, of which $200.0 million was used from the proceeds received in connection with the 2028 Term Loan.

The following table provides information with respect to our debt obligations and other commitments as of December 31, 2022 (in thousands):

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(1) Effective September 28, 2020, we entered into four interest rate hedges to fix the base interest rate (one-month LIBOR) on our 2024 Term Loan. Accordingly, the projected interest rate obligations for the variable rate 2024 Term Loan are based on the hedged fixed rate of 0.21% compared to the variable 2024 Term Loan one-month LIBOR rate as of December 31, 2022 of 4.12%, plus the applicable margin of 1.15% based on the $175.0 million 2024 Term Loan outstanding through the maturity date of December 23, 2024.

(2) We are subject to a facility fee of 0.15% on our New Revolver.

(3) Effective August 11, 2022, we entered into three interest rate hedges to fix the base interest rate (one-month SOFR) on our 2028 Term Loan. Accordingly, the projected interest rate obligations for the variable rate 2028 Term Loan are based on the hedged fixed rate of 2.63% compared to the variable 2028 Term Loan one-month SOFR rate as of December 31, 2022 of 4.12%, plus a SOFR adjustment of 0.10% and applicable margin of 1.15% based on the $200.0 million 2028 Term Loan outstanding through the maturity date of February 11, 2028.

In August 2021, we entered into a lease agreement on a new corporate office space, which is classified as an operating lease. We began operating out of the new office in February 2022. The lease has an initial noncancellable term of 10.3 years that expires on July 31, 2032 and is renewable at our option for two additional periods of five years. Future minimum base rental payments under the lease are outlined in “Note 3 – Leases.” Annual rent expense, excluding operating expenses, is approximately $0.5 million during the initial term.

Additionally, in the normal course of business, we enter into various types of commitments to purchase real estate properties or fund development projects. These commitments are generally subject to our customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated or receives an option to purchase the properties. As of December 31, 2022, we had commitments to fund properties under development totaling $10.2 million, all of which is expected to be funded over the next 12 months.

Credit Facilities

On August 11, 2022, we entered into a sustainability-linked senior unsecured credit facility consisting of (i) our $200.0 million 2028 Term Loan and (ii) our $400.0 million New Revolver. The New Credit Facility may be increased by $400.0 million in the aggregate.

The New Revolver refinanced and increased the available borrowing capacity under our $250.0 million Prior Revolver pursuant to the Prior Credit Agreement.

We used the proceeds from the borrowings made on the closing date of the New Credit Facility to repay the Prior Revolver. Remaining and future borrowings under the New Revolver will be used for general corporate purposes of the Company and our subsidiaries, including acquisitions. Our $175.0 million 2024 Term Loan under the Prior Credit Agreement, which matures in December 2024, remained outstanding upon the closing of the New Credit Facility.

The 2028 Term Loan matures on February 11, 2028 and the New Revolver matures on August 11, 2026, subject to extension of up to one year. Borrowings under the New Credit Facility are repayable at our option in whole or in part without premium or penalty. Borrowings under the New Revolver may be repaid and reborrowed from time to time prior to the maturity date.

Prior to the date we obtain an investment grade rating, interest rates are based on our consolidated total leverage ratio, and are determined by (A) in the case of the 2028 Term Loan either (i) SOFR, plus a SOFR adjustment of 0.10%, plus a margin ranging from 1.15% to 1.60%, based on our consolidated total leverage ratio, or (ii) a Base Rate (as defined in the New Credit Agreement), plus a margin ranging from 0.15% to 0.60%, based on our consolidated total leverage ratio and (B) in the case of the New Revolver either (i) SOFR, plus a SOFR adjustment of 0.10%, plus a margin ranging from 1.00% to 1.45%, based on our consolidated total leverage ratio, or (ii) a Base Rate (as defined in the New Credit Agreement), plus a margin ranging from 0.00% to 0.45%, based on our consolidated total leverage ratio.

After the date we obtain an investment grade rating, interest rates are based on our investment grade rating, and are determined by (A) in the case of the 2028 Term Loan either (i) SOFR, plus a SOFR adjustment of 0.10%, plus a margin ranging from 0.80% to 1.60%, based on our investment grade rating, or (ii) a Base Rate (as defined in the New Credit Agreement), plus a margin ranging from 0.00% to 0.60%, based on our investment grade rating and (B) in the case of the New Revolver either (i) SOFR, plus a SOFR adjustment of 0.10%, plus a margin ranging from 0.725% to 1.40%, based on our investment grade rating, or (ii) a Base Rate (as defined in the New Credit Agreement), plus a margin ranging from 0.00% to 0.40%, based on our investment grade rating.

Additionally, we will incur a facility fee based on the total commitment amount of $400.0 million under the New Revolver. Prior to the date we obtain an investment grade rating, the applicable facility fee will range from 0.15% to 0.30% based on our consolidated total leverage ratio. After the date we obtain an investment grade rating, the applicable facility fee will range from 0.125% to 0.30% based on our investment grade rating.

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The New Credit Facility also contains a sustainability-linked pricing component pursuant to which we will receive interest rate reductions up to 0.025% based on its performance against a sustainability performance target focused on the portion of our annualized base rent attributable to tenants with commitments or quantifiable targets for reduced greenhouse gas emission in accordance with the standards of the Science Based Targets initiative (“SBTi”).

We have also fully hedged the 2028 Term Loan with an all-in interest rate of 3.88%. Interest is payable monthly or at the end of the applicable interest period in arrears on any outstanding borrowings. The interest rate hedge is further described in “Note 7 – Derivative Financial Instruments.”

In December 2019, we entered into the Prior Credit Agreement for a senior credit facility consisting of the Prior Revolver and the 2024 Term Loan (collectively, the “Prior Credit Facility”).

The 2024 Term Loan matures on December 23, 2024 and the Prior Revolver was set to mature on December 23, 2023, subject to extension up to one year, prior to the Company using the proceeds from the New Credit Facility to repay the Prior Revolver in full. Interest rates under the Prior Credit Facility are based on our consolidated total leverage ratio, and are determined for the 2024 Term Loan by either (i) LIBOR, plus a margin ranging from 1.15% to 1.60%, based on our consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Prior Credit Facility), plus a margin ranging from 0.15% to 0.60%, based on our consolidated total leverage ratio. Interest is payable monthly or at the end of the applicable interest period in arrears on any outstanding borrowings.

Effective September 28, 2020, the Company entered into an interest rate derivative contract to fix the base interest rate (one-month LIBOR) on our 2024 Term Loan. The total interest rate includes the fixed base interest rate of 0.21% plus a leverage-based margin of 1.15%. The interest rate hedge is further described in “Note 7 - Derivative Financial Instruments.”

During the third quarter of 2022, we executed an amendment to the Prior Credit Agreement that governs the 2024 Term Loan, which conformed financial covenants and event of default materiality thresholds to align with those under the New Credit Facility and added a carve-out to the derivatives contracts negative covenant to permit forward sale transactions.

In January 2023, we executed an amendment to the Prior Credit Agreement that replaced the interest rate benchmark from LIBOR to SOFR. Additionally, on January 30, 2023 and effective through the maturity date of December 31, 2024, we converted our four existing LIBOR swap agreements associated with the 2024 Term Loan into four new SOFR swaps that convert the SOFR variable rate to a fixed rate of 0.12%. See also “Note 14 – Subsequent Events – LIBOR to SOFR Transition.”

As of December 31, 2022 and December 31, 2021, we did not have any off-balance sheet arrangements that have had or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures.

Historical Cash Flow Information

Year Ended December 31, 2022 Compared with the Year Ended December 31, 2021

Cash Flows Provided By Operating Activities. Net cash provided by operating activities increased by $19.1 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was largely attributed to the increase in the size of the Company’s real estate investment portfolio with an increase in rental receipts of $28.4 million, offset primarily by increases in operating and general and administrative expenses paid associated with our larger portfolio.

Cash Flows Used In Investing Activities. Net cash used in investing activities increased by $38.3 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily due to investments in mortgage loans receivable of $46.5 million, increases in real estate development and improvements of $2.5 million, and $5.6 million fewer proceeds received in connection with the sale of real estate. The increase is offset by $16.5 million less spent on the acquisition of real estate.

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Cash Flows Provided By Financing Activities. Net cash provided by financing activities increased by $167.1 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily attributed to proceeds received upon execution of the New Credit Agreement, which included $200.0 million from the 2028 Term Loan and initial proceeds of $32.0 million from the New Revolver, all of which were used to fully pay down the Prior Revolver. The increase is further attributed to incremental net borrowings of $185.0 million under the revolving credit facilities. The increase is offset by $5.4 million less of net proceeds received from the issuance of common stock (as further described in “Note 9 – Shareholders’ Equity, Partners’ Capital and Preferred Equity” in the Company’s consolidated financial statements), $8.9 million more of dividends and distributions paid in 2022 than the prior year, and $3.8 million of deferred financing costs paid in relation to the New Credit Facility.

Income Taxes

The Company elected to be treated and qualify as a REIT for U.S. federal income tax purposes beginning with its short taxable year ended December 31, 2019. To qualify as a REIT, the Company must meet certain organizational, income, asset and distribution tests. Accordingly, the Company will generally not be subject to corporate U.S. federal or state income tax to the extent that it makes qualifying distributions of all of its taxable income to its stockholders and provided it satisfies on a continuing basis, through actual investment and operating results, the REIT requirements, including certain asset, income, distribution and share ownership tests. The Company intends to make sufficient distributions during 2022 to receive a full dividends paid deduction.

We maintain a taxable REIT subsidiary (“TRS”) which may be subject to U.S. federal, state, and local income taxes on its taxable income. In general, our TRS may perform services for tenants of the Company, hold assets that the Company cannot hold directly and may engage in any real estate or non-real estate-related business.

During the years ended 2022 and 2021, the Company recognized franchise and other state and local tax expenses, which are included in general and administrative and recognized state and federal income tax expense, which is included in income tax expense in the accompanying consolidated statements of operations and comprehensive income.

Recent Accounting Pronouncements

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

Critical Accounting Policies and Estimates

Our accounting policies have been established to conform with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. This summary should be read in conjunction with the more complete discussion of our accounting policies and procedures included in “Note 2 - Summary of Significant Accounting Policies” of our consolidated financial statements.

Purchase Price Allocation of Acquired Properties

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

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Transaction costs related to acquisitions that qualify as asset acquisitions are capitalized as part of the cost basis of the acquired assets, while transaction costs for acquisitions that are deemed to be acquisitions of a business are expensed as incurred.

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

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

Impairment of Long-Lived Assets

Fair value measurement of an asset group occurs when events or changes in circumstances related to an asset indicate that the carrying amount of the asset group is no longer recoverable. Examples of events or changed circumstances may include, but are not limited to, significant changes in real estate market conditions, estimated residual values, our ability or expectation to re-lease properties that are vacant or become vacant or a reduction in the expected holding period of a property. If indicators are present, we will prepare a projection of the undiscounted future cash flows of the property, excluding interest charges, and determine if the carrying amount of the asset group is recoverable. When a carrying amount is not recoverable, an impairment loss is recognized to the extent that the carrying amount of the asset group exceeds its fair market value. We estimate fair value using data such as operating income, estimated capitalization rates or multiples, leasing prospects, local market information, and with regard to assets held for sale, based on the estimated or negotiated selling price, less estimated costs of disposal.

Non-GAAP Financial Measures

Our reported results are presented in accordance with GAAP. We also disclose the following non-GAAP financial measures: Funds From Operations (“FFO”), Core FFO, Adjusted FFO (“AFFO”), earnings before interest expense, income tax expense, and depreciation and amortization (“EBITDA”), EBITDA adjusted to exclude gains (or losses) from the sales of depreciable property and real estate impairment losses (“EBITDAre”), EBITDAre further adjusted to exclude straight-line rent, non-cash compensation expense, non-recurring severance and related charges, and gain on insurance proceeds (“Adjusted EBITDAre”), net operating income (“NOI”) and cash net operating income (“Cash NOI”). We believe these non-GAAP financial measures are industry measures used by analysts and investors to compare the operating performance of REITs.

FFO, Core FFO and AFFO

The National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a widely accepted non-GAAP financial measure of operating performance known as FFO. Our FFO is net income in accordance with GAAP, excluding gains (or losses) resulting from dispositions of properties, plus depreciation and amortization and impairment charges on depreciable real property.

Core FFO is a non-GAAP financial measure defined as FFO adjusted to remove the effect of unusual and non-recurring items that are not expected to impact our operating performance or operations on an ongoing basis. These include non-recurring severance and related charges and gain on insurance proceeds.

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AFFO is a non-GAAP financial measure defined as Core FFO adjusted for GAAP net income related to non-cash revenues and expenses, such as straight-line rent, amortization of above- and below-market lease-related intangibles, amortization of lease incentives, capitalized interest expense, non-cash compensation expense, and amortization of deferred financing and amortization of loan origination costs.

Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. In fact, real estate values historically have risen or fallen with market conditions. FFO is intended to be a standard supplemental measure of operating performance that excludes historical cost depreciation and valuation adjustments from net income. We consider FFO to be useful in evaluating potential property acquisitions and measuring operating performance.

We further consider FFO, Core FFO and AFFO to be useful in determining funds available for payment of distributions. FFO, Core FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. You should not consider FFO, Core FFO and AFFO to be alternatives to net income as a reliable measure of our operating performance nor should you consider FFO, Core FFO and AFFO to be alternatives to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity.

FFO, Core FFO and AFFO do not measure whether cash flow is sufficient to fund our cash needs, including principal amortization, capital improvements and distributions to stockholders. FFO, Core FFO and AFFO do not represent cash flows from operating, investing or financing activities as defined by GAAP. Further, FFO, Core FFO and AFFO as disclosed by other REITs might not be comparable to our calculations of FFO, Core FFO and AFFO.

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

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EBITDA, EBITDAre and Adjusted EBITDAre

We compute EBITDA as earnings before interest expense, income tax expense, and depreciation and amortization. In 2017, NAREIT issued a white paper recommending that companies that report EBITDA also report EBITDAre. We compute EBITDAre in accordance with the definition adopted by NAREIT. NAREIT defines EBITDAre as EBITDA (as defined above) excluding gains (or losses) from the sales of depreciable property and impairment charges on depreciable real property.

Adjusted EBITDAre is a non-GAAP financial measure defined as EBITDAre further adjusted to exclude straight-line rent, non-cash compensation expense, non-recurring severance and related charges, and gain on insurance proceeds.

We present EBITDA, EBITDAre and Adjusted EBITDAre as they are measures commonly used in our industry. We believe that these measures are useful to investors and analysts because they provide supplemental information concerning our operating performance, exclusive of certain non-cash items and other costs. We use EBITDA, EBITDAre and Adjusted EBITDAre as measures of our operating performance and not as measures of liquidity.

EBITDA, EBITDAre and Adjusted EBITDAre do not include all items of revenue and expense included in net income, they do not represent cash generated from operating activities and they are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures. Additionally, our computation of EBITDA, EBITDAre and Adjusted EBITDAre may differ from the methodology for calculating these metrics used by other equity REITs and, therefore, may not be comparable to similarly titled measures reported by other equity REITs.

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

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NOI and Cash NOI

NOI and Cash NOI are non-GAAP financial measures which we use to assess our operating results. We compute NOI as net income (computed in accordance with GAAP), excluding general and administrative expenses, interest expense (or income), income tax expense, transaction costs, depreciation and amortization, gains (or losses) on sales of depreciable property, real estate impairment losses, and other income (or expense). We further adjust NOI for non-cash revenue components of straight-line rent and amortization of lease intangibles and lease incentives to derive Cash NOI. We believe NOI and Cash NOI provide useful and relevant information because they reflect only those income and expense items that are incurred at the property level and present such items on an unlevered basis.

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

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