# NETSTREIT Corp. (NTST) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from NETSTREIT Corp.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1798100/000179810024000011/ntst-20231231.htm
Accession: 0001798100-24-000011
Filing date: 2024-02-14
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/NTST/
All MD&A years: /company/NTST/mda/
Previous year: /company/NTST/mda/fy2022/ (FY 2022)
Next year: /company/NTST/mda/fy2024/ (FY 2024)

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, 2022 filed with the SEC on February 23, 2023, 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, 2022 and the year ended December 31, 2021, which is incorporated herein by reference.

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Business Overview

We are an internally managed real estate company that acquires, owns, invests in 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, 2023, we owned or had investments in 598 single-tenant retail net leased properties that were diversified by tenant, industry and geography, including 85 different tenants, across 26 retail sectors in 45 states. This excludes 24 property developments where rent has yet to commence. We focus on tenants in industries where a physical location is critical to the generation of sales and profits, with a focus on necessity goods and essential services in the retail sector, including home improvement, auto parts, drug stores and pharmacies, general retail, grocers, convenience stores, discount stores, and quick-service restaurants, all of which we refer to as defensive retail industries. As of December 31, 2023, our investments generated ABR1 of $131.9 million. Approximately 71% of our ABR is from investment grade2 credit rated tenants and an additional 14% of our ABR is derived from tenants with an investment grade profile3. Exclusive of mortgage loans receivable, our portfolio was 100% occupied with a weighted average remaining lease term (“WALT”) of 9.5 years, which we believe provides us with a strong stable source of recurring cash flow from our portfolio.

ATM Program

On October 25, 2023, we entered into a $300.0 million at-the-market equity program (the “2023 ATM Program”) through which, from time to time, we may sell shares of our common stock in registered transactions. From October 25, 2023 through December 31, 2023, we sold 4,478,539 shares of our common stock at a weighted average price of $17.27 per share, from which we received net proceeds of $76.5 million. As of December 31, 2023, we had $222.7 million in remaining gross proceeds available for future issuances of shares of our common stock under the 2023 ATM Program.

Effective October 24, 2023, in connection with the establishment of the 2023 ATM Program, we terminated our prior $250.0 million at-the-market equity program (the “2021 ATM Program”). As a result of such termination, we will not offer or sell any additional shares of common stock under the 2021 ATM Program. We have entered into a forward confirmation with respect to 5,983,711 shares of common stock under the 2021 ATM Program that remains unsettled. We may physically settle this forward confirmation (by the delivery of shares of common stock) and receive proceeds from the sale of those shares on one or more forward settlement dates, which shall occur no later than September 13, 2024.

The following table details information related to activity under the 2021 ATM Program and the 2023 ATM Program for the year ended December 31, 2023 (in thousands, except share and per share data):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2023(1)"],["Shares of common stock issued","","7,662,341"],["Weighted average price per share","","$","17.22"],["Gross proceeds","","$","131,911"],["Sales commissions and offering costs","","$","1,638"],["Net proceeds","","$","130,274"]]
[[/GREPCENT_TABLE]]

(1) Includes 1,516,289 shares of common stock partially physically settled at a price of $16.49 per share under the forward confirmation with respect to the 2021 ATM Program. 5,983,711 shares remain unsettled under the forward confirmation as of December 31, 2023.

2027 Term Loan

In December 2019, we entered into an agreement governing a $175.0 million senior unsecured term loan that was scheduled to mature in December 2024 (the “2024 Term Loan”). On June 15, 2023, we amended and restated the agreement governing the 2024 Term Loan to provide for a $175.0 million senior unsecured term loan with a maturity date of January 15, 2026 that is subject to a one year extension option at our election (subject to certain conditions) (the “2027 Term Loan”). The 2027 Term Loan is repayable at our option in whole or in part without premium or penalty. The Company has fully hedged the 2027 Term Loan.

1 Annualized base rent (“ABR”) is annualized base rent as of December 31, 2023, for all leases that commenced, and annualized cash interest on mortgage loans receivable in place as of that date.

2 We define “investment grade” tenants as tenants, or tenants that are subsidiaries of a parent entity, with a credit rating of BBB- (S&P/Fitch), Baa3 (Moody's) or NAIC2 (National Association of Insurance Commissioners) or higher.

3 We define “investment grade profile” tenants as tenants with metrics of more than $1.0 billion in annual sales and a debt to adjusted EBITDA ratio of less than 2.0x but do not carry a published rating from S&P, Moody’s or NAIC.

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2029 Term Loan

On July 3, 2023, we entered into an agreement (the “2029 Term Loan Agreement”) related to a $250.0 million sustainability-linked senior unsecured term loan (the “2029 Term Loan”) which may, subject to the terms of the 2029 Term Loan Agreement, be increased to an amount of up to $400.0 million at our request. The 2029 Term Loan contains a 12-month delayed draw feature and $150.0 million was drawn on July 3, 2023. The 2029 Term Loan is prepayable at our option in whole or in part without premium or penalty. The 2029 Term Loan matures on July 3, 2026, subject to extension options at our election on two occasions, by one year and, on one occasion, by six months (subject to certain conditions).

We have hedged the entire $250.0 million of the 2029 Term Loan at an all-in fixed interest rate of 4.99%, through January 2029, which consists of the fixed rate SOFR swap of 3.74%, plus a credit spread adjustment of 0.10% and, at current leverage levels, a borrowing spread of 1.15%. Interest is payable monthly or at the end of the applicable interest period in arrears on any outstanding borrowings. See further discussion of our debt, interest rate, and interest rate hedges included in “Note 6 - Debt.”

Results of Operations

Overall

We continued to grow our assets held for investment during the year ended December 31, 2023 through the acquisition of properties, property developments, and investment 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 $141.1 million, the issuance of common stock under the 2023 ATM Program and the 2021 ATM Program in an amount of $76.5 million and $53.7 million, respectively, the execution of the 2029 Term Loan Agreement and receipt of proceeds of $150.0 million under the 2029 Term Loan, net borrowings on our $400.0 million senior unsecured revolving credit facility (the “Revolver”), and cash flows from operations during the year ended December 31, 2023.

Acquisitions

During 2023, we acquired 103 properties for a total purchase price of $345.1 million, inclusive of $3.5 million of capitalized acquisition costs. The acquisitions were all accounted for as asset acquisitions. These properties are located in 25 states with a WALT of approximately 10.4 years. The underwritten weighted-average capitalization rate on our year to date acquisitions was approximately 6.9%.

Development

As of December 31, 2023, we had 18 property developments under construction. During 2023, we invested $81.0 million in our property developments, including the land acquisition of 40 new developments with a combined initial purchase price of $27.3 million. During the year, we completed development on 27 projects and reclassified approximately $68.6 million from property under development to land, building, and improvements in the accompanying consolidated balance sheets. The remaining 18 developments are expected to be substantially completed with rent commencing at various points throughout 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, 2023.

Dispositions

During 2023, we sold 19 properties for a total sales price, net of disposal costs, of $40.3 million, recognizing a net gain of $1.2 million.

Investment in Mortgage Loans Receivable

During the year ended December 31, 2023, we invested $72.3 million, in fully collateralized mortgage loans receivable with stated interest rates ranging from 6.89% to 10.25%. The mortgage loans receivable are collateralized by real estate, primarily leased by investment grade credit rated tenants. The funds provided under the loans, in addition to discount and loan origination costs of $0.1 million and $0.1 million, respectively, are included in mortgage loans receivable, net in the accompanying consolidated balance sheets as of December 31, 2023. See “Note 4 - Real Estate Investments” for further discussion on our mortgage loans receivable portfolio.

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Economic and Financial Environment

The annual inflation rate for the twelve months ended December 31, 2023 was 3.4% as compared to 6.5% for the prior year. While the Federal Reserve had been raising interest rates in an effort to lower inflation throughout 2022 and the first half of 2023, there continues to be uncertainty entering into 2024 as to whether rates will be kept steady or potentially cut, 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, 2023 Compared with the Year Ended December 31, 2022

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","2022"],["Revenues"],["Rental revenue (including reimbursable)","","$","123,967","","","$","93,934"],["Interest income on loans receivable","","7,388","","","2,345"],["Other revenue","","550","","","\u2014"],["Total revenues","","131,905","","","96,279"],["Operating expenses"],["Property","","16,413","","","11,695"],["General and administrative","","20,176","","","19,053"],["Depreciation and amortization","","63,677","","","50,075"],["Provisions for impairment","","7,083","","","1,114"],["Transaction costs","","456","","","839"],["Total operating expenses","","107,805","","","82,776"],["Other income (expense)"],["Interest expense, net","","(19,058)","","","(9,181)"],["Gain on sales of real estate, net","","1,175","","","4,148"],["Loss on debt extinguishment","","(128)","","","\u2014"],["Other income, net","","752","","","131"],["Total other income (expense), net","","(17,259)","","","(4,902)"],["Net income before income taxes","","6,841","","","8,601"],["Income tax benefit (expense)","","49","","","(396)"],["Net income","","$","6,890","","","$","8,205"]]
[[/GREPCENT_TABLE]]

Revenue. Revenue for the year ended December 31, 2023 increased by $35.6 million to $131.9 million from $96.3 million for the year ended December 31, 2022, which is attributed to an increase in the number of our operating leases and properties securing our mortgage loans. The increase includes additional cash rental receipts of $27.7 million, combined with net increases of property expense reimbursements of $4.4 million, an increase of $5.0 million related to interest income on mortgage loans receivable, and an increase of $0.6 million in other revenue related to the receipt of legal settlement proceeds associated with a lease termination. The increase in revenue is offset by a $0.5 million decrease in straight-line rental revenue, $0.8 million decrease related to prior year recoveries, a $0.4 million increase in reserves for uncollectible amounts, and a $0.2 million decrease in lease incentive adjustments.

Total Operating Expenses. Total expenses increased by $25.0 million to $107.8 million for the year ended December 31, 2023 as compared to $82.8 million for the year ended December 31, 2022. The increase is primarily attributed to an increase in the number of operating properties, with the most significant increases being depreciation and amortization expense, provisions for impairment, property-specific reimbursable expenses, and payroll costs. Total operating expenses include the following:

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•Property Expenses. Property expenses increased $4.7 million to $16.4 million for the year ended December 31, 2023 from $11.7 million for the year ended December 31, 2022. The increase is primarily attributed to an increase in the number of operating properties, including combined net increases of reimbursable property expenses of $4.4 million, of which $2.8 million, $1.3 million, and $0.3 million were related to reimbursable property taxes, reimbursable common area maintenance costs, and reimbursable insurance costs, respectively. Non-reimbursable property expenses increased by approximately $0.2 million.

•General and Administrative Expenses. General and administrative expenses increased $1.1 million to $20.2 million for the year ended December 31, 2023 from $19.1 million for the year ended December 31, 2022. The increase is primarily due to increased bonus expenses of $1.3 million, payroll expenses of $0.7 million, and corporate office lease expenses of $0.2 million. This is offset by decreased executive severance and transition costs of $0.6 million, corporate insurance of $0.4 million and accounting service and consulting fees of $0.3 million. While our general and administrative expenses will continue to rise in some measure as our portfolio grows, we expect that such expenses as a percentage of our portfolio will decrease over time due to efficiencies and economies of scale.

•Depreciation and Amortization. Depreciation and amortization expense increased by $13.6 million to $63.7 million for the year ended December 31, 2023 from $50.1 million for the year ended December 31, 2022. 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 $7.7 million, in-place lease amortization expense of $3.3 million, building improvements depreciation expense of $2.6 million, and leasehold improvements depreciation expense of $0.3 million. This is offset by a decrease in assembled workforce amortization expense of $0.3 million.

•Provisions for impairment. For the year ended December 31, 2023, we recorded provisions for impairment of $7.1 million on 22 properties, the majority of which were either previously classified as held-for-sale, newly classified as held-for-sale or disposed of during the year ended December 31, 2023. Two of the properties are held for investment as of the year ended December 31, 2023, but were approved for sale subsequent to year-end. For the year ended December 31, 2022, we recorded a provision for impairment of $1.1 million on one property. For the year ended December 31, 2023, we sold four properties that were impaired. These disposals relate to management’s continuous assessment of the Company’s portfolio in an effort to improve returns and manage risk exposure.

•Transaction costs. Transaction costs decreased by $0.3 million to $0.5 million for the year ended December 31, 2023 from $0.8 million for the year ended December 31, 2022, which primarily relates to a decrease in costs incurred for abandoned acquisitions.

Interest Expense. Interest expense increased by $9.9 million to $19.1 million for the year ended December 31, 2023 from $9.2 million for the year ended December 31, 2022. The increase is primarily attributed to an increase of $4.5 million of interest incurred under the 2028 Term Loan, an increase of $4.4 million of interest incurred under the 2029 Term Loan, a net increase of $2.1 million under the Revolver as a result of higher interest rates, offset by a decrease in average borrowings outstanding during the respective periods, and an increase of $0.3 million of interest incurred under the mortgage note payable. Additional increases of $1.0 million and $0.4 million are attributed to increased loan fee amortization and increased facility fees, respectively. This is offset by $2.1 million in amortization of deferred gains on interest rate swaps and $0.6 million of increased capitalized interest on our property developments.

Gain on sales of real estate, net. Net gain on sales of real estate decreased by $2.9 million to $1.2 million for the year ended December 31, 2023 from $4.1 million for the year ended December 31, 2022. The table below summarizes the properties sold for the periods indicated (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["Number of properties sold","19","","","7"],["Sales price, net of disposal costs","$","40,259","","","$","25,515"],["Gain on sales of real estate, net","$","1,175","","","$","4,148"]]
[[/GREPCENT_TABLE]]

Other income, net. Other income increased by $0.7 million for the year ended December 31, 2023. The increase relates to $0.7 million of interest income earned on the Company’s cash, cash equivalents and restricted cash balances as presented in the consolidated balance sheets.

Income tax (benefit) expense. Income tax expense decreased by $0.4 million to an income tax benefit of less than $0.1 million for the year ended December 31, 2023. The decrease relates to lower provisions for federal and state income taxes on the financial results of our TRS, including certain losses on sales of real estate in 2023.

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Net Income. Net income decreased $1.3 million to $6.9 million for the year ended December 31, 2023 from $8.2 million for the year ended December 31, 2022. Net income decreased primarily due to increases in interest expense, depreciation and amortization expenses, provisions for impairment, bonus and payroll expense, as well as a decrease in net gains on sales of real estate, as set forth above. This is offset primarily by increases in rental revenues due to the growth in the size of our real estate investment portfolio, including interest income associated with our mortgage loans receivable.

Liquidity and Capital Resources

Our primary capital requirements are to fund property acquisitions and developments, fund investments in mortgage loans receivable and required interest payments, and fund working capital needs, operating expenses, and capital expenditures. Our capital resources primarily consist of cash from operations, sales of equity securities and available borrowing facilities. As of December 31, 2023, we had $175.0 million outstanding principal amount under the senior unsecured term loan (the “2027 Term Loan”), $200.0 million outstanding principal amount under the 2028 Term Loan, $150.0 million outstanding principal amount under the 2029 Term Loan, and $80.0 million of borrowings outstanding under our Revolver. Additionally, as of December 31, 2023, we had $99.6 million and $300.0 million of remaining gross proceeds available for future issuances of shares of our common stock under the 2021 ATM Program and 2023 ATM Programs, respectively, inclusive of 5,983,711 shares remaining unsettled under the outstanding forward confirmation under the 2021 ATM Program.

We believe that the availability of proceeds from future issuances of shares of our common stock under the 2023 ATM Program or subsequent at-the-market sale programs, coupled with our cash flows from operations and available borrowing capacity under the Revolver and 2029 Term Loan, will be adequate to support our ongoing operations and to fund our debt service requirements, capital expenditures and working capital requirements for at least the next 12 months. We anticipate funding our long-term capital needs through cash provided from operations, borrowings under our Revolver, 2029 Term Loan and issuances of common stock.

Contractual Obligations and Commitments

As of December 31, 2023, our contractual debt obligations primarily include the maturity of our 2027 Term Loan with the scheduled principal payment due on January 15, 2026, the maturity of our 2028 Term Loan with the scheduled principal payment due on February 11, 2028, the maturity of our 2029 Term Loan with the scheduled principal payment due on July 3, 2026, and repayment of borrowings on our Revolver with a maturity of August 11, 2026. During the year ended December 31, 2023, we borrowed $361.0 million at a weighted average interest rate of 5.92% and also repaid $394.0 million on our revolving credit facilities.

The following table provides information with respect to our commitments as of December 31, 2023 (in thousands):

[[GREPCENT_TABLE]]
[["","","Payment Due by Period"],["","","Total","","2024","","2025 - 2026","","2027 - 2028","","Thereafter"],["Contractual Obligations"],["2027 Term Loan \u2013 Principal","","$","175,000","","$","\u2014","","$","175,000","","$","\u2014","","$","\u2014"],["2027 Term Loan \u2013 Variable interest (1)","","12,135","","5,492","","6,643","","\u2014","","\u2014"],["Revolver \u2013 Borrowings","","80,000","","\u2014","","80,000","","\u2014","","\u2014"],["Revolver \u2013 Variable interest","","13,556","","5,192","","8,364","","\u2014","","\u2014"],["Facility Fee (2)","","1,567","","600","","967","","\u2014","","\u2014"],["2028 Term Loan \u2013 Principal","","200,000","","\u2014","","\u2014","","200,000","","\u2014"],["2028 Term Loan \u2013 Variable interest (3)","","31,932","","7,760","","15,521","","8,651","","\u2014"],["2029 Term Loan \u2013 Principal","","150,000","","\u2014","","150,000","","\u2014"],["2029 Term Loan \u2013 Variable interest (4)","","18,358","","7,331","","11,027","","\u2014"],["Mortgage Note \u2013 Principal","","8,361","","162","","348","","7,851","","\u2014"],["Mortgage Note \u2013 Interest","","1,423","","375","","726","","322","","\u2014"],["Property developments under contract","","35,690","","35,690","","\u2014","","\u2014","","\u2014"],["Additional principal under mortgage notes receivable","","13,737","","13,737","","\u2014","","\u2014","","\u2014"],["Tenant Improvement Allowances","","4,089","","4,089","","\u2014","","\u2014","","\u2014"],["Corporate office lease obligations","","5,888","","617","","1,289","","1,359","","2,623"],["Total","","$","751,736","","$","81,045","","$","449,885","","$","218,183","","$","2,623"]]
[[/GREPCENT_TABLE]]

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(1) We entered into five interest rate hedges to fix the base interest rate (daily SOFR) on our 2027 Term Loan. The hedged fixed rate reset effective November 27, 2023 to 1.87% and December 23, 2024 to 2.40%. Accordingly, the projected interest rate obligations for the variable rate 2027 Term Loan are based on the hedged fixed rate of 1.87% through December 23, 2024, and 2.40% thereafter, compared to the variable 2027 Term Loan daily SOFR rate as of December 31, 2023 of 5.31%, plus a SOFR adjustment of 0.10% and applicable margin of 1.15% based on the $175.0 million 2027 Term Loan outstanding through the contractual maturity date of January 15, 2026.

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

(3) 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, 2023 of 5.34%, 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.

(4) We entered into four interest rate hedges to fix the base interest rate (daily SOFR) on our 2029 Term Loan. Accordingly, the projected interest rate obligations for the variable rate 2029 Term Loan are based on the hedged fixed rate of 3.64% compared to the variable 2029 Term Loan daily SOFR rate as of December 31, 2023 of 5.32%, plus a SOFR adjustment of 0.10% and applicable margin of 1.15% based on the $150.0 million of the 2029 Term Loan outstanding through the contractual maturity date of July 3, 2026.

In August 2021, we entered into a lease agreement on a new corporate office space, which is classified as an operating lease. We began operating out of the new office in February 2022. The lease has a remaining noncancellable term of 8.6 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, fund development projects, or extend funds under mortgage notes receivable. These commitments are generally subject to our customary due diligence process and, accordingly, a number of specific conditions must be met before we are obligated to purchase or extend funding. As of December 31, 2023, we had commitments to fund properties under development and extend funds under mortgage notes receivable totaling $35.7 million and $13.7 million, respectively, all of which is expected to be funded over the next 12 months.

Debt

See discussion of our debt and interest rate hedges included in “Note 6 - Debt” and “Note 7 - Derivative Financial Instruments” of our consolidated financial statements, included in Part II, Item 8 of this Annual Report on Form 10-K.

Historical Cash Flow Information

Year Ended December 31, 2023 Compared with the Year Ended December 31, 2022

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands)","2023","","2022"],["Net cash provided by (used in):"],["Operating activities","$","80,155","","","$","50,647"],["Investing activities","(451,953)","","","(468,361)"],["Financing activities","331,184","","","480,654"]]
[[/GREPCENT_TABLE]]

Cash Flows Provided By Operating Activities. Net cash provided by operating activities increased by $29.6 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was largely attributed to the increase in the size of our real estate investment portfolio with an increase in rental receipts of $27.7 million and an increase in mortgage loan receivable interest of $5.0 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 decreased by $16.4 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily due to a decrease in cash spent on acquisitions of real estate of $84.3 million, offset by increases in cash spent on real estate development and improvements of $56.4 million and cash spent on investments in mortgage loans receivable of $25.9 million. The remaining decrease is primarily related to proceeds from the sale of real estate, which increased $13.0 million compared to the prior period, and principal collections on mortgage loans receivable, which increased $1.5 million compared to the prior period.

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Cash Flows Provided By Financing Activities. Net cash provided by financing activities decreased by $149.5 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily attributed to a reduction in net borrowings of $82.0 million under our revolving credit facilities, a reduction in term loan proceeds of $50.0 million, an increase in payments of common stock dividends of $12.2 million, a decrease of proceeds from issuances of common stock in connection with our ATM Program of $6.3 million, and a decrease in proceeds under property development incentives of $0.8 million during the year ended December 31, 2023. The decrease was offset by decreases in the repurchase of common stock for tax withholding obligations, deferred financing costs and deferred offering costs of $0.8 million, $0.5 million, and $0.3 million, respectively, during the year ended December 31, 2023.

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 expects the distributions made during 2023 are sufficient 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 2023 and 2022, we recognized franchise and other state and local tax expenses in general and administrative and federal income tax in income tax benefit (expense) in the accompanying consolidated statements of operations and comprehensive income (loss).

Recent Accounting Pronouncements

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

Critical Accounting Policies and Estimates

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

Purchase Price Allocation of Acquired Properties

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

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

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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 further adjusted to exclude gains (or losses) from the sales of depreciable property and real estate impairment losses (“EBITDAre”), Adjusted EBITDAre, Annualized Adjusted EBITDAre, Net Debt, Adjusted Net Debt, property-level net operating income (“Property-Level NOI”), property-level cash net operating income (“Property-Level Cash NOI”), property-level cash net operating income estimated run rate (“Property-Level Cash NOI Estimated Run Rate”), and total property-level cash net operating income estimated run rate (“Total Property-Level Cash NOI Estimated Run Rate”), all of which are detailed below. We believe these non-GAAP financial measures are industry measures used by analysts and investors to compare the operating performance of REITs.

FFO, Core FFO and AFFO

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

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

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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 and earned development interest, non-cash interest expense, non-cash compensation expense, amortization of deferred financing costs, amortization of above/below-market assumed debt, and amortization of loan origination costs.

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

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

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

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["Net income","$","6,890","","","$","8,205"],["Depreciation and amortization of real estate","63,379","","","49,498"],["Provisions for impairment","7,083","","","1,114"],["Gain on sales of real estate, net","(1,175)","","","(4,148)"],["FFO","76,177","","","54,669"],["Adjustments:"],["Non-recurring executive transition costs, severance and related charges","362","","","848"],["Loss on debt extinguishment and other related costs","223","","","\u2014"],["Gain on insurance proceeds","(78)","","","(126)"],["Core FFO","76,684","","","55,391"],["Adjustments:"],["Straight-line rent adjustments","(1,163)","","","(1,286)"],["Amortization of deferred financing costs","1,730","","","862"],["Amortization of above/below-market assumed debt","114","","","29"],["Amortization of loan origination costs","163","","","88"],["Amortization of lease-related intangibles","(611)","","","(889)"],["Earned development interest","515","","","\u2014"],["Capitalized interest expense","(1,060)","","","(452)"],["Non-cash interest expense","(2,124)","","","\u2014"],["Non-cash compensation expense","4,822","","","4,774"],["AFFO","$","79,070","","","$","58,517"]]
[[/GREPCENT_TABLE]]

EBITDA, EBITDAre, Adjusted EBITDAre and Annualized Adjusted EBITDAre

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

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

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

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

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["Net income","$","6,890","","","$","8,205"],["Depreciation and amortization of real estate","63,379","","","49,498"],["Amortization of lease-related intangibles","(611)","","","(889)"],["Non-real estate depreciation and amortization","298","","","577"],["Interest expense, net","19,058","","","9,181"],["Income tax (benefit) expense","(49)","","","396"],["Amortization of loan origination costs","163","","","88"],["EBITDA","89,128","","","67,056"],["Adjustments:"],["Provisions for impairment","7,083","","","1,114"],["Gain on sales of real estate, net","(1,175)","","","(4,148)"],["EBITDAre","$","95,036","","","$","64,022"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","Three Months Ended December 31, 2023"],["Net income","$","1,962"],["Depreciation and amortization of real estate","17,000"],["Amortization of lease-related intangibles","(93)"],["Non-real estate depreciation and amortization","78"],["Interest expense, net","5,646"],["Income tax expense","10"],["Amortization of loan origination costs","80"],["EBITDA","24,683"],["Adjustments:"],["Provisions for impairment","2,709"],["Gain on sales of real estate, net","(506)"],["EBITDAre","26,886"],["Adjustments:"],["Straight-line rent adjustments","(456)"],["Non-recurring executive transition costs, severance and related charges","86"],["Gain on insurance proceeds","(31)"],["Non-cash compensation expense","1,264"],["Adjustment for construction in process (1)","719"],["Adjustment for intraquarter investment activities (2)","820"],["Adjusted EBITDAre","$","29,288"],["Annualized Adjusted EBITDAre (3)","$","117,152"],["Adjusted Net Debt / Annualized Adjusted EBITDAre","4.1"]]
[[/GREPCENT_TABLE]]

(1) Adjustment reflects the estimated cash yield on developments in process as of December 31, 2023.

(2) Adjustment assumes all re-leasing activity, investments in and dispositions of real estate, including developments and interest earning loan activity completed during the year ended December 31, 2023 had occurred on January 1, 2023.

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

Net Debt and Adjusted Net Debt

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

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

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

[[GREPCENT_TABLE]]
[["","As of"],["","December 31, 2023"],["Principal amount of total debt","$","613,361"],["Less: Cash, cash equivalents and restricted cash","(29,929)"],["Net Debt","583,432"],["Less: Net value of unsettled forward equity (1)","(98,594)"],["Adjusted Net Debt","$","484,838"]]
[[/GREPCENT_TABLE]]

(1) There were 5,983,711 unsettled shares under forward equity contracts under the ATM Program as of December 31, 2023 at the available net settlement price of $16.48.

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Property-Level NOI, Property-Level Cash NOI, Property-Level Cash NOI - Estimated Run Rate, and Total Cash NOI - Estimated Run Rate

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

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

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["Net income","$","6,890","","","$","8,205"],["General and administrative","20,176","","","19,053"],["Depreciation and amortization","63,677","","","50,075"],["Provisions for impairment","7,083","","","1,114"],["Transaction costs","456","","","839"],["Interest expense, net","19,058","","","9,181"],["Gain on sales of real estate, net","(1,175)","","","(4,148)"],["Income tax (benefit) expense","(49)","","","396"],["Loss on debt extinguishment","128","","","\u2014"],["Interest income on mortgage loans receivable","(7,388)","","","(2,345)"],["Lease termination fees","(550)","","","\u2014"],["Other income, net","(752)","","","(131)"],["Property-Level NOI","107,554","","","82,239"],["Straight-line rent adjustments","(1,163)","","","(1,286)"],["Amortization of lease-related intangibles","(611)","","","(889)"],["Property-Level Cash NOI","$","105,780","","","$","80,064"]]
[[/GREPCENT_TABLE]]

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The following table sets forth a reconciliation of Property-Level NOI, Property-Level Cash NOI, Property-Level Cash NOI - Estimated Run Rate, and Total Cash NOI - Estimated Run Rate for the period presented (in thousands):

[[GREPCENT_TABLE]]
[["","Three Months Ended December 31, 2023"],["Net income","$","1,962"],["General and administrative","4,876"],["Depreciation and amortization","17,078"],["Provisions for impairment","2,709"],["Transaction costs","189"],["Interest expense, net","5,646"],["Gain on sales of real estate, net","(506)"],["Gain on forfeited earnest money deposit","\u2014"],["Income tax expense","10"],["Loss on debt extinguishment","\u2014"],["Interest income on mortgage loans receivable","(2,243)"],["Lease termination fees","\u2014"],["Other income, net","(166)"],["Property-Level NOI","29,555"],["Straight-line rent adjustments","(456)"],["Amortization of lease-related intangibles","(93)"],["Property-Level Cash NOI","$","29,006"],["Adjustment for intraquarter acquisitions, dispositions and completed development (1)","705"],["Property-Level Cash NOI Estimated Run Rate","$","29,711"],["Interest income on mortgage loans receivable","2,243"],["Adjustments for intraquarter mortgage loan activity (2)","115"],["Total Cash NOI - Estimated Run Rate","$","32,069"]]
[[/GREPCENT_TABLE]]

(1) Adjustment assumes all re-leasing activity, investments in and dispositions of real estate, including developments completed during the year ended December 31, 2023 had occurred on January 1, 2023.

(2) Adjustment assumes all loan activity completed during the year ended December 31, 2023 had occurred on January 1, 2023.