# Sila Realty Trust, Inc. (SILA) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Sila Realty Trust, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1567925/000156792523000009/cik0001567925-20221231.htm
Accession: 0001567925-23-000009
Filing date: 2023-03-16
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/SILA/
All MD&A years: /company/SILA/mda/
Previous year: /company/SILA/mda/fy2021/ (FY 2021)
Next year: /company/SILA/mda/fy2023/ (FY 2023)

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 in conjunction with our consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this Annual Report on Form 10-K. The discussion contains forward looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly under “Risk Factors” and “Forward-Looking Statements.” All forward-looking statements in this document are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements.

This section of the Annual Report on Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. A discussion of the changes in our financial condition and results of operations for the years ended December 31, 2021, and 2020 may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal years ended December 31, 2021 and December 31, 2020.

Overview

We invest in high-quality properties leased to tenants capitalizing on critical and structural economic growth drivers. We are primarily focused on investing in strategic healthcare assets across the continuum of care, with emphasis on lower cost patient settings, which, we believe, typically generate predictable, durable and growing income streams. We may also make other real estate-related investments, which may include equity or debt interests in other real estate entities.

We formerly invested in data center properties. During 2021, our board of directors, or the Board, made a determination to sell our data center properties. On May 19, 2021, we and certain of our wholly-owned subsidiaries entered into the PSA for the sale of up to 29 data center properties owned by us. The Board's determination to sell the data center properties, as well as the execution of the PSA, represented a strategic shift that had a major effect on our results and operations for the periods presented. On July 22, 2021, we completed the sale of our data center segment, comprised of approximately 3,298,000 rentable square feet, for an aggregate sale price of $1,320,000,000, and generated net proceeds of approximately $1,295,367,000. As of December 31, 2021 and subsequent, we have no assets or liabilities related to the data center segment. The operations of the data center segment have been classified as income from discontinued operations on the consolidated statements of comprehensive income for the years ended December 31, 2021 and 2020.

As of December 31, 2022, we owned 132 real estate properties and two undeveloped land parcels.

We raised the equity capital for our real estate investments through our Offerings from May 2014 through November 2018, and we have offered shares pursuant to the DRIP Offerings since November 2017. As of December 31, 2022, we had accepted investors’ subscriptions for and issued approximately 157,508,000 shares of Class A, Class I, Class T and Class T2 common stock in our Offerings, resulting in receipt of gross proceeds of approximately $1,520,086,000, before share repurchases of approximately $135,701,000, selling commissions and dealer manager fees of approximately $96,734,000 and other offering costs of approximately $27,631,000.

Critical Accounting Estimates

The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. Changes in these estimates and assumptions could have a significant effect on the financial statements. From time to time, we evaluate our estimates based on historical experience and various assumptions that we believe are reasonable under the circumstances. Although our actual results historically have not deviated materially from those determined using estimates, our results of operations or financial condition could differ materially from these estimates under different assumptions or conditions.

We consider our critical accounting estimates to be those used in the determination of the reported amounts and disclosure related to the impairment of long-lived assets.

We review our real estate assets on an asset group basis for impairment. Typically, an individual property constitutes an asset group. We identify an asset group based on the lowest level of identifiable cash flows. In the impairment analysis we must determine whether there are indicators of impairment. For operating properties, these indicators could include a tenant being delinquent or not paying rent, a reduction in our estimated hold period, a significant decline in a property’s leasing percentage, a current period operating loss or negative cash flows combined with a history of losses at the property, a significant decline in lease rates for that property or others in the property’s market, a significant change in the market value of the property, or an adverse change in the financial condition of significant tenants.

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If we determine that an asset has indicators of impairment, we then determine whether the undiscounted cash flows associated with the asset group exceed the carrying amount of the asset group. In calculating the undiscounted net cash flows of an asset group, we use considerable judgement to estimate several inputs. We estimate future rental rates, future capital expenditures, future operating expenses, and market capitalization rates for residual values, among other things. In addition, if there are alternative strategies for the future use of the asset, we assess the probability of each alternative strategy and perform a probability-weighted undiscounted cash flow analysis to assess the recoverability of the asset group. If the carrying value of the asset group exceeds the estimated undiscounted cash flows, an impairment loss is recognized equal to the excess of carrying value over the estimated fair value of the asset group.

In determining the fair value of an asset group, we exercise considerable judgment on several factors. We may determine fair value by using a direct capitalization method, a discounted cash flow method or by utilizing comparable sales information. The direct capitalization method is based on a capitalization rate applied to the underlying asset group's most recent stabilized trailing twelve-month net operating income at the measurement date. The discounted cash flow method is based on estimated future cash flow projections utilizing discount rates, terminal capitalization rates, and planned capital expenditures. We use judgment to determine an appropriate discount rate to apply to the cash flows in the discounted cash flow calculation. We also use judgment in analyzing comparable market information because no two real estate assets are identical in location and price.

The estimates and judgments used in the impairment process are highly subjective and susceptible to frequent change. Significant increases or decreases in any of these inputs, particularly with regards to cash flow projections and discount and capitalization rates, would result in a significantly lower or higher fair value measurement of the real estate assets being assessed. Additionally, changes in economic and operating conditions, including changes in the financial condition of our tenants, and changes to our intent and ability to hold the related asset, that occur after our impairment assessment could impact the assumptions used in that assessment and could result in future charges to earnings if assumptions regarding those investments differ from actual results.

Real Estate Acquisitions and Dispositions in 2022

•We purchased seven healthcare properties, in five separate transactions, comprising approximately 244,000 rentable square feet for an aggregate purchase price of approximately $157,194,000. In addition, we placed one healthcare property into service.

•We sold one land parcel that formerly contained a healthcare property for an aggregate sale price of $24,000,000 and generated net proceeds of $22,701,000.

Factors That May Influence Results of Operations

We are not aware at this time of any material trends or uncertainties, other than national economic conditions and those discussed below and in Part I. Item 1A. “Risk Factors” of this Annual Report on Form 10-K, affecting our real estate properties, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operation of our properties.

Rental Revenue

The amount of rental revenue generated by our properties depends principally on our ability to maintain the occupancy rates of leased space and to lease available space at existing rental rates. Negative trends in one or more of these factors could adversely affect our rental revenue in future periods. We continually monitor our tenants' ability to meet their lease obligations to pay us rent to determine if any adjustments should be reflected currently. During the year ended December 31, 2022, certain tenants experienced a deterioration in their ability to pay rent in accordance with the contractual terms of their leases. As a result, we ceased recognizing rent on a straight-line basis and have only recorded rent for these tenants to the extent we have received cash. In addition, we wrote off $2,434,000 of previously recorded straight line rent receivable, during the year ended December 31, 2022, as a reduction in rental revenue, because the amounts were determined to be uncollectible. As of December 31, 2022, our real estate properties were 99.5% leased.

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Results of Operations

The results of operations discussed below reflect the operations of our healthcare portfolio since the data centers segment is presented as discontinued operations on the consolidated statements of comprehensive income for all years presented.

Our results of operations are influenced by the timing of acquisitions and the performance of our real estate properties. The following table shows the property statistics of our real estate properties as of December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2022","","2021"],["Number of real estate properties (1)","132","","","125"],["Leased square feet","5,508,000","","","5,219,000"],["Weighted average percentage of rentable square feet leased","99.5","%","","99.5","%"]]
[[/GREPCENT_TABLE]]

(1)As of December 31, 2022, we owned 132 real estate properties and two undeveloped land parcels. As of December 31, 2021, we owned 125 real estate properties and two undeveloped land parcels.

The following table summarizes our real estate activity for the years ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2022","","2021"],["Real estate properties acquired","","","","","7","","","4"],["Real estate properties disposed","","","","","\u2014","","(1)","2"],["Aggregate purchase price of real estate properties acquired (2)","","","","","$","157,194,000","","","$","69,951,000"],["Net book value of real estate properties disposed","","","","","$","\u2014","","(1)","$","12,553,000"],["Leased square feet of real estate property additions","","","","","284,000","","","247,000"]]
[[/GREPCENT_TABLE]]

(1)During the year ended December 31, 2022, we disposed of one land parcel that formerly contained a healthcare property.

(2)Includes capitalized acquisition costs associated with transactions determined to be asset acquisitions.

Same Store Properties

This section describes and compares our results of operations for the years ended December 31, 2022 and 2021. We generate substantially all of our revenue from property operations. In order to evaluate our overall portfolio, management analyzes the results of our same store properties. We define "same store properties" as properties that were owned and operated for the entirety of both calendar periods being compared and exclude properties under development, re-development, or classified as held for sale.

By evaluating the results of our same store properties, management is able to monitor the operations of our existing properties for comparable periods to measure the performance of our current portfolio and readily observe the expected effects of our new acquisitions and dispositions on net (loss) income.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

The following table represents the breakdown of total rental revenue for the year ended December 31, 2022 compared to the comparable period in 2021 (amounts in thousands).

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","$ Change","","% Change"],["Same store rental revenue","$","155,323","","","$","157,438","","","$","(2,115)","","","(1.3)","%"],["Same store tenant reimbursements","9,436","","","8,848","","","588","","","6.6","%"],["Non-same store rental revenue","13,727","","","5,649","","","8,078","","","143.0","%"],["Non-same store tenant reimbursements","1,495","","","802","","","693","","","86.4","%"],["Other operating income","5","","","101","","","(96)","","","(95.0)","%"],["Total rental revenue","$","179,986","","","$","172,838","","","$","7,148","","","4.1","%"]]
[[/GREPCENT_TABLE]]

•Same store rental revenue decreased primarily due to a $2.4 million write-off of previously recorded straight-line rent related to tenants, partially offset by base rental increases of $1.0 million for leases indexed to CPI.

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•Non-same store rental revenue increased due to an increase of $8.7 million from the acquisition of properties and an increase of $1.4 million from the placement of development properties in service since January 1, 2021, partially offset by a decrease in non-same store rental revenue due to a decrease of $0.9 million related to the sale of properties since January 1, 2021, and a decrease of $1.1 million attributable to deferred rent from a property under renovation.

•There were no significant changes in same store tenant reimbursements, non-same store tenant reimbursements and other operating income.

Changes in our expenses are summarized in the following table (amounts in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","$ Change","","% Change"],["Same store rental expenses","$","15,627","","","$","15,216","","","$","411","","","2.7","%"],["Non-same store rental expenses","2,323","","","2,496","","","(173)","","","(6.9)","%"],["General and administrative expenses","22,079","","","21,388","","","691","","","3.2","%"],["Depreciation and amortization","77,199","","","70,259","","","6,940","","","9.9","%"],["Impairment losses","47,424","","","27,837","","","19,587","","","70.4","%"],["Total expenses","$","164,652","","","$","137,196","","","$","27,456","","","20.0","%"],["Gain on real estate dispositions","$","460","","","$","89","","","$","371","","","416.9","%"]]
[[/GREPCENT_TABLE]]

•There were no significant changes in same store rental expenses.

•Non-same store rental expenses decreased due to a decrease of $1.7 million related to the sale of properties since January 1, 2021, which were vacant prior to sale, thus requiring us to incur incrementally more expenses in 2021, partially offset by an increase of $1.6 million related to the acquisition of properties and placement of development properties in service.

•General and administrative expenses increased primarily due to an increase in stock-based compensation of $1.5 million and an increase of $0.8 million in severance payments attributable to our former chief accounting officer, partially offset by a decrease of $1.3 million in transfer agent expenses attributable to changing our transfer agent in August 2021.

•Depreciation and amortization increased primarily due to an increase of $4.3 million from the acquisition of properties, an increase of $0.7 million from the placement of development properties in service since January 1, 2021, and impairments of in-place lease intangibles in the amount of approximately $4.3 million, partially offset by a decrease of $2.4 million from the sale of properties.

•Impairment losses were recorded in the aggregate amount of $47.4 million related to several properties during the year ended December 31, 2022. Impairment losses were recorded in the aggregate amount of $27.8 million related to several properties during the year ended December 31, 2021. The impaired properties for the year ended December 31, 2021 have all been subsequently sold.

Changes in interest and other expense, net, are summarized in the following table (amounts in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","$ Change","","% Change"],["Interest and other expense, net:"],["Interest on notes payable","$","\u2014","","","$","4,162","","","$","(4,162)","","","(100.0)","%"],["Interest on credit facility","24,077","","","33,463","","","(9,386)","","","(28.0)","%"],["Other income, net","(305)","","","(3,110)","","","2,805","","","(90.2)","%"],["Total interest and other expense, net","$","23,772","","","$","34,515","","","$","(10,743)","","","(31.1)","%"]]
[[/GREPCENT_TABLE]]

•Interest on notes payable decreased due to the repayment of all of our notes payable related to healthcare properties on July 22, 2021, with proceeds from the Data Center Sale.

•Interest on credit facility decreased $6.7 million primarily due to a reduction in the weighted average outstanding principal balance on our credit facility of $212.0 million, which was paid in 2021 with the proceeds from the Data Center Sale and a decrease of $0.9 million due to a reduction in the weighted average interest rate as a result of entering into the Unsecured Credit Facility (as defined below). In addition, interest on credit facility includes $3.4 million and $5.0 million in loss on extinguishment of debt for the years ended December 31, 2022 and 2021, respectively.

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•Other income, net, primarily consisted of $0.2 million in lease termination settlement income from a former tenant at a disposed property for the year ended December 31, 2022. Other expense, net, primarily consisted of $1.1 million in interest income from notes receivable and $2.6 million in income from a transaction services agreement for the year ended December 31, 2021.

Liquidity and Capital Resources

Our principal uses of funds are for acquisitions of real estate and real estate-related investments, capital expenditures, operating expenses, distributions to, and share repurchases from, stockholders and principal and interest payments on any current and future indebtedness. While interest rates on variable rate debt have increased and we expect will continue to increase globally, we believe our exposure is limited at this time due to our hedging strategy, which has effectively fixed 83% of our outstanding debt as of December 31, 2022, allowing us to reasonably project our liquidity needs. Generally, cash for these items is generated from operations of our current and future investments. Our sources of funds are primarily operating cash flows, funds equal to amounts reinvested in the DRIP, our credit facility and other potential borrowings.

When we acquire a property, we prepare a capital plan that contemplates the estimated capital needs of that investment. In addition to operating expenses, capital needs may also include, for example, costs of refurbishment, tenant improvements or other major capital expenditures. The capital plan also sets forth the anticipated sources of the necessary capital, which may include a line of credit, operating cash generated by the investment, additional equity investments from us, and when necessary, capital reserves. The capital plan for each investment will be adjusted through ongoing, regular reviews of our portfolio or, as necessary, to respond to unanticipated additional capital needs.

Short-term Liquidity and Capital Resources

For at least the next twelve months, we expect our principal demands for funds will be for operating expenses, including our general and administrative expenses, as well as the acquisition of real estate and real estate-related investments and funding of capital improvements and tenant improvements, distributions to and repurchases from stockholders, and interest payments on our credit facility. We expect to meet our short-term liquidity requirements through net cash flows provided by operations, funds equal to amounts reinvested in the DRIP and borrowings on our credit facility and potential other borrowings.

We believe we will have sufficient liquidity available to meet our obligations in a timely manner, under both normal and stressed conditions, for the next twelve months.

Long-term Liquidity and Capital Resources

Beyond the next twelve months, we expect our principal demands for funds will be for costs to acquire additional real estate properties, interest and principal payments on our credit facility, long-term capital investment demands for our real estate properties and our distributions necessary to maintain our REIT status.

We currently expect to meet our long-term liquidity requirements through proceeds from cash flows from operations and borrowings on our credit facility and potential other borrowings.

We expect to pay distributions to our stockholders from cash flows from operations; however, we have used, and may continue to use, other sources to fund distributions, as necessary, such as funds equal to amounts reinvested in the DRIP. To the extent cash flows from operations are lower due to lower-than-expected returns on the properties held or the disposition of properties, distributions paid to stockholders may be lower. We currently expect that substantially all net cash flows from our operations will be used to fund acquisitions, certain capital expenditures identified at acquisition, ongoing capital expenditures, interest and principal payments on outstanding debt and distributions to our stockholders.

Material Cash Requirements

In addition to the cash we need to conduct our normal business operations, we expect to require approximately $22,878,000 in cash over the next twelve months, of which $20,203,000 will be required for the payment of estimated interest on our outstanding debt (calculated based on our effective interest rates as of December 31, 2022) and $2,675,000 related to our various obligations as lessee. We cannot provide assurances, however, that actual expenditures will not exceed these estimates.

As of December 31, 2022, we had approximately $12,917,000 in cash and cash equivalents. For the year ended December 31, 2022, we paid capital expenditures of $8,440,000 that primarily related to the completion of a development property, which was placed into service during the period, and re-developing another real estate property.

As of December 31, 2022, we had material obligations beyond 12 months in the amount of approximately $758,114,000, inclusive of $639,748,000 related to principal and estimated interest payments on our outstanding debt (calculated based on our effective interest rates as of December 31, 2022) and $118,366,000 related to our various obligations as lessee.

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One of our principal liquidity needs is the payment of principal and interest on outstanding indebtedness. As of December 31, 2022, we had $583,000,000 of principal outstanding under our Unsecured Credit Facility. We are required by the terms of certain loan documents to meet certain covenants, such as financial ratios and reporting requirements. As of December 31, 2022, we were in compliance with all such covenants and requirements on our Unsecured Credit Facility (as defined below).

As of December 31, 2022, the aggregate notional amount under our derivative instruments was $485,000,000. We have agreements with each derivative counterparty that contain cross-default provisions; if we default on our indebtedness, then we could also be declared in default on our derivative obligations, resulting in an acceleration of payment of any net amounts due under our derivative contracts. As of December 31, 2022, we were in compliance with all such cross-default provisions.

Debt Service Requirements

Credit Facility

As of December 31, 2022, the maximum commitments available under the Revolving Credit Agreement, were $500,000,000, which may be increased, subject to lender approval, through incremental term loans and/or revolving loan commitments in an aggregate amount not to exceed $1,000,000,000. The maturity date for the Revolving Credit Agreement is February 15, 2026, which, at our election, may be extended for a period of six-months on no more than two occasions, subject to certain conditions, including the payment of an extension fee. The Revolving Credit Agreement was entered into on February 15, 2022, to replace our prior $500,000,000 revolving line of credit, which had a maturity date of April 27, 2022, with an option to extend for one twelve-month period. We did not exercise the option to extend. Upon closing of the Revolving Credit Agreement, we extinguished all commitments associated with the prior revolving line of credit. As of December 31, 2022, the Revolving Credit Agreement had an aggregate outstanding principal balance of $8,000,000.

As of December 31, 2022, the maximum commitments available under the 2024 Term Loan Agreement, were $300,000,000, which may be increased, subject to lender approval, to an aggregate amount not to exceed $600,000,000. The 2024 Term Loan Agreement has a maturity date of December 31, 2024, and, at our election, may be extended for a period of six-months on no more than two occasions, subject to the satisfaction of certain conditions, including the payment of an extension fee. The 2024 Term Loan Agreement was entered into simultaneously with the Revolving Credit Agreement’s execution, on February 15, 2022, to replace our prior term loan, which was paid off in its entirety upon closing of the Revolving Credit Agreement and the 2024 Term Loan Agreement. As of December 31, 2022, the 2024 Term Loan Agreement had an aggregate outstanding principal balance of $300,000,000.

As of December 31, 2022, the maximum commitments available under the 2028 Term Loan Agreement, were $275,000,000, of which $205,000,000 was drawn at closing to pay down our Revolving Credit Agreement in its entirety. The remainder of the commitments were available for three months following the closing date, or the Availability Period, and were available in no more than three subsequent draws with a minimum of $20,000,000 per draw, or the remaining commitments available. After the Availability Period, the undrawn portion was no longer available. If the committed amount was not fully drawn within 60 days of closing, we were required to pay a fee to the lenders, calculated as 0.25% per annum on the average daily amount of the undrawn portion, payable quarterly in arrears, until the earlier of (i) the date when the commitments have been funded in full, or (ii) August 17, 2022. The 2028 Term Loan Agreement may be increased, subject to lender approval, to an aggregate amount not to exceed $500,000,000 and has a maturity date of January 31, 2028. The 2028 Term Loan Agreement is pari passu with our Revolving Credit Agreement and 2024 Term Loan Agreement. On July 12, 2022 and July 20, 2022, we drew $50,000,000 and $20,000,000, respectively, on the 2028 Term Loan Agreement. As of July 20, 2022, the 2028 Term Loan Agreement commitments were fully funded. As of December 31, 2022, the 2028 Term Loan Agreement had an aggregate outstanding principal balance of $275,000,000.

The Unsecured Credit Facility has aggregate commitments available of $1,075,000,000, as of December 31, 2022. Generally, the proceeds of loans made under our Unsecured Credit Facility may be used for acquisition of real estate investments, funding of tenant improvements and leasing commissions with respect to real estate, repayment of indebtedness, funding of capital expenditures with respect to real estate, and general corporate and working capital purposes.

During the year ended December 31, 2022, we drew $70,000,000 on the Revolving Credit Agreement to fund acquisitions and we repaid $57,000,000 on the Revolving Credit Agreement, with proceeds from dispositions and cash flows from operations.

As of December 31, 2022, we had a total pool availability under our Unsecured Credit Facility of $1,075,000,000 and an aggregate outstanding principal balance of $583,000,000; therefore, $492,000,000 was available to be drawn under our Unsecured Credit Facility. We were in compliance with all the financial covenant requirements as of December 31, 2022.

Financing

For these purposes, the fair value of each asset is equal to the purchase price paid for the asset or, if the asset was appraised subsequent to the date of purchase, then the fair value is equal to the value reported in the most recent independent

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appraisal of the asset. Our policies do not limit the amount we may borrow with respect to any individual investment. As of December 31, 2022, our borrowings were approximately 24.3% of the fair value of our real estate-related investments.

Cash Flows

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands)","2022","","2021","","Change","","% Change"],["Net cash provided by operating activities","$","121,675","","","$","136,942","","","$","(15,267)","","","(11.1)","%"],["Net cash (used in) provided by investing activities","$","(142,812)","","","$","1,226,842","","","$","(1,369,654)","","","(111.6)","%"],["Net cash provided by (used in) financing activities","$","1,340","","","$","(1,398,813)","","","$","1,400,153","","","(100.1)","%"]]
[[/GREPCENT_TABLE]]

Cash flows from discontinued operations are not separately disclosed on the consolidated statements of cash flows for the years ended December 31, 2021 and 2020.

Operating Activities

•Net cash provided by operating activities decreased primarily due to us owning fewer properties subsequent to the Data Center Sale on July 22, 2021, partially offset by an increase in rental revenues resulting from the acquisition of properties and placement of development properties in service since January 1, 2021 coupled with a decrease in interest paid as a result of entering into the Unsecured Credit Facility and the pay-off of all our notes payable on July 22, 2021, in connection with the Data Center Sale.

Investing Activities

•Net cash used in investing activities for the year ended December 31, 2022, was due to the purchase of real estate properties and payment of capital expenditures primarily related to the completion of a development property, which was placed into service during the period, and re-developing another real estate property, partially offset by proceeds from the sale of a property. Net cash provided by investing activities for the year ended December 31, 2021, was primarily due to the Data Center Sale and the collection of a note receivable, partially offset by the purchase of real estate properties, payment of capital expenditures related to a data center property and three healthcare properties and consideration paid for the Internalization Transaction.

Financing Activities

•Net cash provided by financing activities for the year ended December 31, 2022, was due to proceeds from our credit facility, partially offset by payments on our credit facility, payments of deferred financing costs as a result of entering into the 2024 Term Loan Agreement and Revolving Credit Agreement on February 15, 2022 and the 2028 Term Loan Agreement on May 17, 2022, repurchases of our common stock under our share repurchase program, distributions to our common stockholders and payment of offering costs on issuance of common stock. Net cash used in financing activities for the year ended December 31, 2021, was due to payments on notes payable and debt extinguishment as a result of the Data Center Sale, payments on our credit facility primarily with proceeds from the Data Center Sale, payments of deferred financing costs, repurchases of our common stock under our share repurchase program, distributions to our common stockholders, including a special cash distribution, and payment of offering costs on issuance of common stock, partially offset by proceeds from our credit facility.

Distributions to Stockholders

We have paid, and may continue to pay, distributions from sources other than from our cash flows from operations. For the year ended December 31, 2022, our cash flows provided by operations of approximately $121,675,000 covered 100% of our ordinary distributions paid (total ordinary distributions were approximately $90,144,000, of which $65,310,000 was cash and $24,834,000 was reinvested in shares of our common stock pursuant to the DRIP) during such period. For the year ended December 31, 2021, our cash flows provided by operations of approximately $136,942,000 covered 100% of our distributions paid (total ordinary distributions were approximately $100,748,000, of which $73,164,000 was cash and $27,584,000 was reinvested in shares of our common stock pursuant to the DRIP) during such period. Additionally, the Board declared a special cash distribution of $1.75 per share of Class A, Class I, Class T and Class T2 common stock. The special cash distribution was funded with the proceeds from the sale of the data center properties on July 22, 2021. The special cash distribution was paid on July 30, 2021 to stockholders of record at the close of business on July 26, 2021, in the aggregate amount of approximately $392,685,000.

We do not currently have any limits on the sources of funding distribution payments to our stockholders. We may pay distributions from any source, such as the sale of assets, the sale of additional securities, and offering proceeds and we do not

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currently have any limits on the amounts we may pay from such sources. Funding distributions from the sale of additional securities could dilute a stockholder's interest in us if we sell shares of our common stock to third party investors. Funding distributions to our stockholders will result in us having less funds available for acquiring properties or real estate-related investments. Our inability to acquire additional properties or real estate-related investments may have a negative effect on our ability to generate sufficient cash flows from operations to pay distributions. As a result, the return investors may realize on their investment may be reduced and investors who invest in us before we generate significant cash flows may realize a lower rate of return than later investors. Payment of distributions from any of the above-mentioned sources could restrict our ability to generate sufficient cash flows from operations, affect our profitability and/or affect the distributions payable upon a liquidity event, any or all of which may have an adverse effect on an investment in us.

For federal income tax purposes, distributions to common stockholders are characterized as ordinary dividends, capital gain distributions, or nontaxable distributions. To the extent that we make a distribution in excess of our current or accumulated earnings and profits, such excess will be a nontaxable return of capital, reducing the tax basis in each U.S. stockholder’s shares. Further, the amount of distributions in excess of a U.S. stockholder’s tax basis in such shares will be taxable as a realized gain.

The following table shows the sources of distributions paid during the years ended December 31, 2022 and 2021 (amounts in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["Character of Distributions (1):","","2022","","2021"],["Ordinary dividends","","40.94","%","","27.91","%"],["Capital gain distributions","","\u2014","%","","\u2014","%"],["Nontaxable distributions","","59.06","%","","72.09","%"],["Total","","100.00","%","","100.00","%"],["","","Year Ended December 31,"],["Character of Special Distribution (1):","","2022","","2021"],["Ordinary dividends","","\u2014","%","","12.39","%"],["Capital gain distributions","","\u2014","%","","86.66","%"],["Nontaxable distributions","","\u2014","%","","0.95","%"],["Total","","\u2014","%","","100.00","%"]]
[[/GREPCENT_TABLE]]

(1)Attributable to Class A shares, Class I shares, Class T shares and Class T2 shares of common stock.

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The amount of distributions payable to our stockholders is determined by the Board and is dependent on a number of factors, including our funds available for distribution, financial condition, lenders' restrictions and limitations, capital expenditure requirements, corporate law restrictions and the annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended. The Board must authorize each distribution and may, in the future, authorize lower amounts of distributions or not authorize additional distributions and, therefore, distribution payments are not guaranteed. Additionally, our organizational documents permit us to pay distributions from unlimited amounts of any source, and we may use sources other than operating cash flows to fund distributions, including funds equal to amounts reinvested in the DRIP, which may reduce the amount of capital we ultimately invest in properties or other permitted investments. We have funded distributions with operating cash flows from our properties and funds equal to amounts reinvested in the DRIP. To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders.

The following table shows the sources of distributions paid during the years ended December 31, 2022 and 2021 (amounts in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021"],["Distributions paid in cash - common stockholders","$","65,310","","","","","$","465,849","","(1)"],["Distributions reinvested (shares issued)","24,834","","","","","27,584"],["Total distributions","$","90,144","","","","","$","493,433"],["Source of distributions:"],["Cash flows provided by operations","$","65,310","","","72","%","(2)","$","73,164","","","15","%","(2)"],["Offering proceeds from issuance of common stock pursuant to the DRIP","24,834","","","28","%","(2)","27,584","","","5","%","(2)"],["Proceeds from real estate disposals","\u2014","","","\u2014","%","","392,685","","","80","%","(2)"],["Total sources","$","90,144","","","100","%","","$","493,433","","","100","%"]]
[[/GREPCENT_TABLE]]

(1)Includes a special cash distribution declared by the Board of $1.75 per share of Class A, Class I, Class T and Class T2 common stock. The special cash distribution was funded with the proceeds from the Data Center Sale on July 22, 2021. The special cash distribution was paid on July 30, 2021, to stockholders of record at the close of business on July 26, 2021, in the aggregate amount of approximately $392,685,000.

(2)Percentages were calculated by dividing the respective source amount by the total sources of distributions.

Total distributions declared but not paid on Class A shares, Class I shares and Class T shares as of December 31, 2022, were approximately $7,719,000 for common stockholders. These distributions were paid on January 6, 2023.

Share Repurchase Program

Our SRP allows for repurchases of shares of our common stock when certain criteria are met. Under the SRP, we can only repurchase shares due to death or involuntary exigent circumstances, subject in each case to the terms and limitations of the SRP, including, but not limited to, quarterly share limitations, an annual 5.0% share limitation and DRIP funding limitations. See Part II, Item 5. "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" for more information on the SRP.

During the year ended December 31, 2022, we repurchased 1,123,183 Class A shares, Class I shares and Class T shares of common stock (981,772 Class A shares, 31,666 Class I shares and 109,745 Class T shares), for an aggregate purchase price of approximately $9,217,000 (an average of $8.21 per share). During the year ended December 31, 2021, we repurchased 1,133,901 Class A shares, Class I shares and Class T shares of common stock (1,055,054 Class A shares, 11,836 Class I shares and 67,011 Class T shares), for an aggregate purchase price of approximately $9,528,000 (an average of $8.40 per share).

Commitments and Contingencies

For a discussion of our commitments and contingencies, see Note 17—"Commitments and Contingencies" to the consolidated financial statements that are a part of this Annual Report on Form 10-K.

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Non-GAAP Financial Measures

In the real estate industry, analysts and investors employ certain non-GAAP supplemental financial measures in order to facilitate meaningful comparisons between periods and among peer companies. We believe that these measures are useful to investors to consider because they may assist them to better understand and measure the performance of our business over time and against similar companies. We use the following non-GAAP financial measures: Funds From Operations, or FFO, Core Funds From Operations, or Core FFO, and Adjusted Funds From Operations, or AFFO.

Net (Loss) Income and FFO, Core FFO and AFFO

A description of FFO, Core FFO, and AFFO and reconciliations of these non-GAAP measures to net (loss) income, the most directly comparable GAAP measure, are provided below.

The National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated the FFO measure, which we believe is an appropriate additional measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net (loss) income as determined under GAAP.

We define FFO, consistent with NAREIT’s definition, as net (loss) income (calculated in accordance with GAAP), excluding gains (or losses) from sales of real estate assets and impairments of real estate assets, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis. To date, we do not have any investments in unconsolidated partnerships or joint ventures.

We, along with many of our peers in the real estate industry, consider FFO to be an appropriate supplemental measure of a REIT’s operating performance, because it is based on a net income (loss) analysis of real estate portfolio performance that excludes non-cash items such as real estate depreciation and amortization and real estate impairments, which we believe provides a useful understanding of our performance to the investors and to our management, and when compared to year over year, FFO reflects the impact on our operations from trends in occupancy.

We calculate Core FFO by adjusting FFO to remove the effect of items that are not expected to impact our operating performance on an ongoing basis and consider it to be a useful supplemental measure because it provides investors with additional information to understand our sustainable performance. These include severance arrangements, write offs of previously recorded straight-line rents, amortization of above- and below-market leases (including ground leases) and loss on extinguishment of debt.

We calculate AFFO by adjusting Core FFO for the following items included in the determination of GAAP net (loss) income: deferred rent, current period straight-line rent, discount amortization related to the deferred liability in connection with the Internalization Transaction, amortization of deferred financing costs and stock-based compensation.

Presentation of this information is intended to assist management and investors in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO, Core FFO and AFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO, Core FFO and AFFO are not necessarily indicative of cash flows available to fund cash needs and should not be considered as an alternative to net (loss) income as an indication of our performance, as an indication of our liquidity, or indicative of funds available for our cash needs, including our ability to make distributions to our stockholders. FFO, Core FFO and AFFO may be useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods. All of our non-GAAP financial measures should be reviewed in conjunction with other measurements as an indication of our performance. The method used to evaluate the value and performance of real estate under GAAP should be considered as a more relevant measure of operating performance and considered more prominent than the non-GAAP financial measures presented here.

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Reconciliation of Net (Loss) Income to FFO, Core FFO and AFFO

The following table presents a reconciliation of net (loss) income attributable to common stockholders, which is the most directly comparable GAAP financial measure, to FFO, Core FFO and AFFO for the years ended December 31, 2022 and 2021 (amounts in thousands):

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2022","","2021"],["Net (loss) income attributable to common stockholders","","","","","$","(7,978)","","","$","402,660"],["Adjustments:"],["Depreciation and amortization","","","","","77,099","","","81,999"],["Gain on real estate disposition from continuing operations","","","","","(460)","","","(89)"],["Gain on real estate dispositions from discontinued operations","","","","","\u2014","","","(395,801)"],["Impairment losses","","","","","47,424","","","27,837"],["FFO","","","","","$","116,085","","","$","116,606"],["Adjustments:"],["Severance arrangements","","","","","889","","","56"],["Write off of straight-line rent related to prior periods","","","","","2,434","","","70"],["Amortization of above (below) market lease intangibles, including ground leases","","","","","1,044","","","(434)"],["Loss on extinguishment of debt","","","","","3,367","","","28,751"],["Core FFO","","","","","$","123,819","","","$","145,049"],["Adjustments:"],["Deferred rent","","","","","1,535","","","\u2014"],["Straight-line rental income","","","","","(9,695)","","","(15,665)"],["Amortization of discount of deferred liability","","","","","\u2014","","","272"],["Amortization of deferred financing costs","","","","","1,679","","","3,425"],["Stock-based compensation","","","","","4,180","","","2,379"],["AFFO","","","","","$","121,518","","","$","135,460"]]
[[/GREPCENT_TABLE]]