10-Q 1 ntst-20220331.htm 10-Q ntst-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 001-39443
NETSTREIT Corp.
(Exact name of registrant as specified in its charter)

Maryland84-3356606
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)
2021 McKinney Avenue
Suite 1150
Dallas, Texas
75201
(Address of principal executive offices)(Zip Code)
(972) 200-7100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common stock, par value $0.01 per shareNTSTThe New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes No ☒

The number of shares of the issuer’s common stock, par value $0.01, outstanding as of April 26, 2022 was 47,921,988.




NETSTREIT CORP. AND SUBSIDIARIES
TABLE OF CONTENTS

Page







PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

NETSTREIT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)

March 31, 2022December 31, 2021
Assets
Real estate, at cost:
Land$313,366 $299,935 
Buildings and improvements693,279 626,457 
Total real estate, at cost1,006,645 926,392 
Less accumulated depreciation(37,394)(30,669)
Property under development18,246 17,896 
Real estate held for investment, net987,497 913,619 
Assets held for sale7,748 2,096 
Mortgage loan receivable, net40,413  
Cash, cash equivalents and restricted cash4,687 7,603 
Lease intangible assets, net128,856 124,772 
Other assets, net30,528 20,351 
Total assets$1,199,729 $1,068,441 
Liabilities and equity
Liabilities:
Term loan, net$174,386 $174,330 
Revolving credit facility120,000 64,000 
Lease intangible liabilities, net24,015 23,316 
Liabilities related to assets held for sale115  
Accounts payable, accrued expenses and other liabilities16,166 16,980 
Total liabilities334,682 278,626 
Commitments and contingencies
Equity:
Stockholders’ equity
Common stock, $0.01 par value, 400,000,000 shares authorized; 47,921,988 and 44,223,050 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively
479 442 
Additional paid-in capital886,351 809,724 
Distributions in excess of retained earnings(42,193)(35,119)
Accumulated other comprehensive income10,258 4,123 
Total stockholders’ equity854,895 779,170 
Noncontrolling interests10,152 10,645 
Total equity865,047 789,815 
Total liabilities and equity$1,199,729 $1,068,441 


The accompanying notes are an integral part of these condensed consolidated financial statements.
3

NETSTREIT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except share and per share data)
(Unaudited)

Three Months Ended
March 31,
20222021
Revenues
Rental revenue (including reimbursable)$20,921 $11,932 
Interest income on mortgage loan receivable411  
Total revenues21,332 11,932 
Operating expenses
Property2,932 950 
General and administrative4,190 3,137 
Depreciation and amortization10,980 5,929 
Provisions for impairment 69 
Transaction costs165 151 
Total operating expenses18,267 10,236 
Other income (expense)
Interest expense, net(1,169)(905)
Gain on sales of real estate, net161  
Total other income (expense), net(1,008)(905)
Net income before income tax expense2,057 791 
Income tax expense(91)(50)
Net income1,966 741 
Net income attributable to noncontrolling interests24 40 
Net income attributable to common stockholders$1,942 $701 
Amounts available to common stockholders per common share:
Basic$0.04 $0.02 
Diluted$0.04 $0.02 
Weighted average common shares:
Basic44,415,807 28,348,975 
Diluted45,600,810 30,052,940 
Other comprehensive income:
Net income$1,966 $741 
Change in value on derivatives, net6,211 2,323 
Total comprehensive income8,177 3,064 
Comprehensive income attributable to noncontrolling interests100 164 
Comprehensive income attributable to common stockholders$8,077 $2,900 


The accompanying notes are an integral part of these condensed consolidated financial statements.
4


NETSTREIT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except share data)
(Unaudited)

Common stock
SharesPar ValueAdditional
Paid-in Capital
Distributions in Excess of Retained EarningsAccumulated Other Comprehensive IncomeTotal Stockholders’ EquityNoncontrolling InterestsTotal Equity
Balance at December 31, 202144,223,050 $442 $809,724 $(35,119)$4,123 $779,170 $10,645 $789,815 
Issuance of common stock in public offering, net of issuance costs3,604,736 36 75,461 — — 75,497 — 75,497 
OP Units converted to common stock25,629 — 484 — — 484 (484) 
Dividends and distributions declared on common stock and OP units— — — (8,888)— (8,888)(109)(8,997)
Dividends declared on restricted stock, net— — — (128)— (128)— (128)
Vesting of restricted stock units85,224 1 (1)— — — —  
Repurchase of common stock for tax withholding obligations(16,651)— (362)— — (362)— (362)
Stock-based compensation, net— — 1,045 — 1,045 — 1,045 
Other comprehensive income— — — — 6,135 6,135 76 6,211 
Net income— — — 1,942 — 1,942 24 1,966 
Balance at March 31, 202247,921,988 $479 $886,351 $(42,193)$10,258 $854,895 $10,152 $865,047 

Common stock
SharesPar ValueAdditional
Paid-in Capital
Distributions in Excess of Retained EarningsAccumulated Other Comprehensive IncomeTotal Stockholders’ EquityNoncontrolling InterestsTotal Equity
Balance at December 31, 202028,203,545 $282 $501,045 $(7,464)$235 $494,098 $33,975 $528,073 
OP Units converted to common stock253,344 3 4,920 — — 4,923 (4,923) 
Dividends and distributions declared on common stock and OP units— — — (5,687)— (5,687)(307)(5,994)
Dividends declared on restricted stock— — — (132)— (132)— (132)
Vesting of restricted stock units15,190 — — — — — — — 
Repurchase of common stock for tax withholding obligations(4,962)— (90)— — (90)— (90)
Stock-based compensation— — 557 — 557 — 557 
Other comprehensive income— — — — 2,199 2,199 124 2,323 
Net income— — — 701 — 701 40 741 
Balance at March 31, 202128,467,117 $285 $506,432 $(12,582)$2,434 $496,569 $28,909 $525,478 


The accompanying notes are an integral part of these condensed consolidated financial statements.
5

NETSTREIT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended
March 31,
20222021
Cash flows from operating activities
Net income$1,966 $741 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization10,980 5,929 
Amortization of deferred financing costs157 157 
Noncash revenue adjustments(807)(430)
Stock-based compensation expense1,045 557 
Gain on sales of real estate, net(161) 
Provisions for impairment 69 
Changes in assets and liabilities, net of assets acquired and liabilities assumed:
Other assets, net(1,484)(1,109)
Accounts payable, accrued expenses and other liabilities(2,742)(1,644)
Net cash provided by operating activities8,954 4,270 
Cash flows from investing activities
Acquisitions of real estate(89,973)(88,225)
Real estate development and improvements(4,378)(1,346)
Investment in mortgage loan receivable(40,426) 
Earnest money deposits(630)(451)
Purchase of computer equipment and other corporate assets(595) 
Proceeds from sale of real estate2,294  
Net cash used in investing activities(133,708)(90,022)
Cash flows from financing activities
Issuance of common stock in public offerings, net75,497  
Payment of common stock dividends(8,888)(5,687)
Payment of OP unit distributions(109)(307)
Payment of restricted stock dividends(106)(5)
Proceeds under revolving credit facility128,000 13,000 
Repayments under revolving credit facility(72,000) 
Proceeds under property development incentives375  
Repurchase of common stock for tax withholding obligations(363)(90)
Deferred offering costs(568)(86)
Net cash provided by financing activities121,838 6,825 
Net change in cash, cash equivalents and restricted cash(2,916)(78,927)
Cash, cash equivalents and restricted cash at beginning of the period7,603 92,643 
Cash, cash equivalents and restricted cash at end of the period$4,687 $13,716 
Supplemental disclosures of cash flow information:
Cash paid for interest$1,108 $758 
Supplemental disclosures of non-cash investing and financing activities:
Dividends declared and unpaid on restricted stock$128 $132 
Cash flow hedge change in fair value$6,211 $2,323 
Accrued capital expenditures and real estate development and improvement costs$1,418 $ 


The accompanying notes are an integral part of these condensed consolidated financial statements.
6

NETSTREIT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1 – Organization and Description of Business

NETSTREIT Corp. (“Company”) was incorporated on October 11, 2019 as a Maryland corporation and commenced operations on December 23, 2019. The Company conducts its operations through NETSTREIT, L.P., a Delaware limited partnership (the “Operating Partnership”). NETSTREIT GP, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company, is the sole general partner of the Operating Partnership.

The Company elected to be treated and to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with its short taxable year ended December 31, 2019. Additionally, the Operating Partnership formed NETSTREIT Management TRS, LLC (“NETSTREIT TRS”), which together with the Company jointly elected to be treated as a taxable REIT subsidiary under Section 856(a) of the Internal Revenue Code of 1986, as amended, (the “Code”) for U.S. federal income tax purposes.
The Company is structured as an umbrella partnership real estate investment trust (commonly referred to as an “UPREIT”) and is an internally managed real estate company that acquires, owns and manages a diversified portfolio of single-tenant, retail commercial real estate leased on a long-term basis to high credit quality tenants across the United States. As of March 31, 2022, the Company owned or had investments in 363 properties, located in 42 states.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and the rules and regulations of the U.S. Securities and Exchange Commission (SEC). The accompanying condensed consolidated financial statements include the accounts of the Company and subsidiaries in which the Company has a controlling financial interest. All intercompany accounts and transactions have been eliminated in consolidation and the Company’s net income is reduced by the portion of net income attributable to noncontrolling interests.

Interim Unaudited Financial Information

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited interim condensed consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements, and should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto on the Annual Report on Form 10-K as of and for the year ended December 31, 2021, which provide a more complete understanding of the Company’s accounting policies, financial position, operating results, business properties, and other matters. In the opinion of management, all adjustments of a normal recurring nature necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2022 and 2021 are not necessarily indicative of the results for the full year.

Noncontrolling Interests

The Company presents noncontrolling interests, which represent limited partnership units in the operating partnership (the “OP Units”) not owned by the Company, as a component of permanent equity, separate from the Company's stockholders’ equity. Noncontrolling interests were created as part of an asset acquisition and recognized at fair value as of the date of the transaction. Effective with the Company’s initial public offering, each limited partner of the Operating Partnership has the right to require the Operating Partnership to redeem part or all of its OP Units for cash, based upon the value of an equivalent number of shares of the Company’s common stock at the time of the redemption, or, at the Company’s election, shares of the Company’s common stock on a one-for-one basis, subject to certain adjustments and the restrictions on ownership and transfer of the Company’s common stock. The election to pay cash or issue common stock is solely within the control of the Company to satisfy a noncontrolling interest holder's redemption request.

7

Net income of the Operating Partnership is allocated to its noncontrolling interests based on the noncontrolling interests’ ownership percentages in the Operating Partnership throughout the period. Ownership percentage is calculated by dividing the number of OP Units held by the noncontrolling interests by the total OP Units outstanding.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s most significant assumptions and estimates relate to the useful lives of real estate assets, lease accounting, real estate impairment assessments, and allocation of fair value of purchase consideration. These estimates are based on historical experience and other assumptions which management believes are reasonable under the circumstances. The Company evaluates its estimates on an ongoing basis and makes revisions to these estimates and related disclosures as experience develops or new information becomes known. Further, the uncertainty over the ultimate impact COVID-19 will have on the global economy and the Company’s business makes any estimates and assumptions as of March 31, 2022 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results could differ from those estimates.

Risk and Uncertainties

COVID-19

The ongoing COVID-19 pandemic, and the measures taken to limit its spread have negatively impacted the economy across many industries, including industries in which our tenants operate. The impacts may continue and/or increase in severity as the duration of the pandemic lengthens. The Company continues to monitor the global outbreak of COVID-19 and to take steps to mitigate the potential risks to us posed by the pandemic, including the identification and spread of variants. However, the Company’s operations and cash flows during the years presented in the consolidated financial statements were not materially impacted by COVID-19.

Real Estate Held for Investment

Real estate is recorded and stated at cost less any provision for impairment. At acquisition date, the purchase price of an acquired property is allocated to tangible and identifiable intangible assets or liabilities based on their relative fair values. For properties developed by the Company, all direct and indirect costs related to planning, development and construction, including interest, real estate taxes and other miscellaneous costs incurred during the construction period, are capitalized for financial reporting purposes and recorded as property under development until construction has been completed.

The Company evaluates 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.

The Company allocates 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.


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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. The Company estimates 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 the Company’s 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, the Company utilizes a number of sources, including real estate valuations prepared by an independent valuation firm. The Company also considers 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, the Company considers 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. Based on these inputs for measuring and allocating the fair value of real estate acquisitions, the Company utilizes both observable market data (categorized as level 2 on the three-level valuation hierarchy of Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement), and unobservable inputs that reflect the Company’s own internal assumptions (categorized as level 3 under ASC Topic 820).

Depreciation and Amortization

Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets:

Buildings
1335 years
Building improvements
15 years
Tenant improvements
Shorter of the term of the related lease or useful life
Acquired in-place leases or leasing commissions
Remaining terms of the respective leases
Assembled workforce
3 years
Computer equipment and other corporate assets
35 years

Total depreciation and amortization expense was $11.0 million and $5.9 million during the three months ended March 31, 2022 and 2021, respectively.

Depreciation expense on real estate held for investment and computer equipment and other corporate assets was $7.3 million and $4.1 million during the three months ended March 31, 2022 and 2021, respectively.

Amortization expense on acquired in-place lease and assembled workforce intangible assets, and leasing commission costs were $3.6 million and $1.8 million during the three months ended March 31, 2022 and 2021, respectively.
Repairs and maintenance are charged to property operating expense as incurred; major renewals and betterments that extend the useful life or improve the operating capacity of the asset are capitalized. Upon the sale or disposition of a property, the asset and the related accumulated depreciation are removed from the condensed consolidated balance sheets with the difference between the proceeds received, net of sales costs, and the carrying value of the asset group recorded as a gain or loss on sale, subject to impairment considerations.


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Assets Held for Sale

Properties classified as held for sale, including the related intangibles, on the condensed consolidated balance sheets include only those properties available for immediate sale in their present condition, which are actively being marketed, and for which management believes that it is probable that a sale of the property will be completed within one year. Properties held for sale are carried at the lower of cost or fair value, less estimated selling costs. No depreciation expense or amortization expense is recognized on properties held for sale and the related intangible assets or liabilities once they have been classified as such. Only disposals representing a strategic shift in operations are presented as discontinued operations. Accordingly, we have not reclassified results of operations for properties disposed during the interim period ended March 31, 2022 or held for sale as discontinued operations, as these events are a normal part of the Company’s operations and do not represent strategic shifts in the Company’s operations. As of March 31, 2022 and December 31, 2021, there was one property classified as held for sale.

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 is no longer recoverable. An example of an event or changed circumstance is a reduction in the expected holding period of a property. If indicators are present, the Company 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. The Company estimates 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. Based on these unobservable inputs, the Company determined that its valuations of impaired real estate and intangible assets fall within Level 3 of the fair value hierarchy under ASC Topic 820.

The following table summarizes the provision for impairment during the periods indicated below (in thousands):

Three Months Ended
March 31,
20222021
Total provision for impairment$ $69 
Number of properties: (1)
Classified as held for sale1
Disposed within the period

(1) Includes the number of properties that were impaired and classified as held for sale or impaired and disposed of during the respective periods. Excludes properties that did not have impairment recorded during the period.

Cash, Cash Equivalents and Restricted Cash

The Company considers all cash balances, money market accounts and highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Restricted cash includes cash restricted for property tenant improvements and cash proceeds from the sale of assets held by qualified intermediaries in anticipation of the acquisition of replacement properties in tax-free exchanges under Section 1031 of the Code. Restricted cash is included in cash, cash equivalents, and restricted cash on the condensed consolidated balance sheets. The Company had no restricted cash as of March 31, 2022 or December 31, 2021.

The Company’s bank balances as of March 31, 2022 and December 31, 2021 include certain amounts over the Federal Deposit Insurance Corporation limits.

Revenue Recognition and Related Matters

The Company’s rental revenue is primarily related to rent received from tenants under leases accounted for as operating leases. Rent from leases that have fixed and determinable rent increases is recognized on a straight-line basis over the non-cancellable initial term of the lease and reasonably certain renewal periods, from the later of the date of the commencement of the lease or the date of acquisition of the property subject to the lease. The difference between rental revenue recognized and the cash rent
10

due under the provisions of the lease is recorded as deferred rent receivable and included as a component of other assets in the condensed consolidated balance sheets.

Variable lease revenues include tenant reimbursements, lease termination fees, changes in the index or market-based indices after the inception of the lease or percentage rents. Variable lease revenues are not recognized until the specific events that trigger the variable payments have occurred. The Company recognized variable lease revenue related to tenant reimbursements and lease termination fees for the periods presented.

Capitalized above-market and below-market lease values are amortized on a straight-line basis as a reduction or increase of rental revenue as appropriate over the remaining non-cancellable terms of the respective leases.

Reserves for uncollectible amounts are provided against the portion of accounts receivable, net including straight-line rents, which is estimated to be uncollectible, which includes a portfolio-based reserve and reserves for specifically disputed amounts. Such reserves are reviewed each period based upon recovery experience and the specific facts of each outstanding amount. As of March 31, 2022 and December 31, 2021, the Company had an immaterial reserve for uncollectible amounts specific to uncharged reimbursable expenses.

Mortgage Loan Receivable

The Company holds one loan receivable, which is a mortgage loan secured by real estate, for long-term investment. The loan receivable is carried at amortized cost.

The Company recognizes interest income on the loan receivable using the effective-interest method. Direct costs associated with originating loans, along with any premium or discount, is deferred and amortized as an adjustment to interest income over the term of the related loan receivable using the effective interest method. The Company evaluates its loans receivable balance, including accrued interest, for potential credit losses by analyzing the credit of the borrower, the remaining time to maturity of the loan, collateral value and quality (if any), and other relevant factors. A loan receivable is placed on nonaccrual status when management determines that full recovery of the contractually specified payments of principal and interest is doubtful.

Stock-Based Compensation

The Company has a share-based compensation award program for our employees and directors. Stock-based compensation expense associated with these awards is recognized in general and administrative expenses in our condensed consolidated statements of operations and comprehensive income. We classify stock-based payment awards either as equity awards or liability awards based upon an analysis of ASC 718 and ASC 480. Equity classified awards are measured based on the fair value on the date of grant. Liability classified awards are remeasured to fair value each reporting period. Stock-based compensation expense is recognized over the requisite service or performance period. The Company recognizes forfeitures as they occur.

Forward Equity Sales

The Company occasionally sells shares of common stock through forward sale agreements to enable the Company to set the price of such shares upon pricing the offering (subject to certain adjustments) while delaying the issuance of such shares and the receipt of the net proceeds by the Company.

To account for the forward sale agreements, the Company considers the accounting guidance governing financial instruments and derivatives. To date, the Company has concluded that its forward sale agreements are not liabilities as they do not embody obligations to repurchase its shares nor do they embody obligations to issue a variable number of shares for which the monetary value are predominantly fixed, varying with something other than the fair value of the shares, or varying inversely in relation to its shares. The Company then evaluates whether the agreements meet the derivatives and hedging guidance scope exception to be accounted for as equity instruments. The Company has concluded that the agreements are classifiable as equity contracts based on the following assessments: (i) none of the agreements’ exercise contingencies are based on observable markets or indices besides those related to the market for the Company’s own stock price and operations; and (ii) none of the settlement provisions precluded the agreements from being indexed to its own stock.


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The Company also considers the potential dilution resulting from the forward sale agreements on the earnings per share calculations. Prior to settlement, a forward sale agreement will be reflected in the diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of the Company’s common stock used in diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares of the Company’s common stock that would be issued upon full physical settlement of such forward sale agreement over the number of shares of the Company’s common stock that could be purchased by the Company in the market (based on the average market price during the period) using the proceeds receivable upon full physical settlement (based on the adjusted forward sale price at the end of the reporting period). Consequently, prior to settlement of a forward sale agreement, there will be no dilutive effect on the Company’s earnings per share except during periods when the average market price of the Company’s common stock is above the adjusted forward sale price. However, upon settlement of a forward sales agreement, if the Company’s elects to physically settle or net share settle such forward sale agreement, delivery of the Company’s shares will result in dilution to the Company’s earnings per share.

Transaction Costs

Transaction costs were $0.2 million for each of the three months ended March 31, 2022 and 2021, respectively, and represent acquisition related expenses, including costs associated with abandoned acquisitions.

Income Taxes

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

NETSTREIT TRS is treated as a taxable REIT subsidiary which may be subject to U.S. federal, state, and local income taxes on its taxable income. In general, NETSTREIT 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.

The Company recognizes franchise and other state and local tax expenses in general and administrative and recognized state and federal income tax expense in income tax expense in the accompanying condensed consolidated statements of operations and comprehensive income.

All provisions for federal income taxes in the accompanying condensed consolidated financial statements are attributable to NETSTREIT TRS. Deferred income tax expense and its ending balance in deferred tax assets and liabilities were immaterial for the years and periods presented.

The Company has elected to record related interest and penalties, if any, as general and administrative expense or as income tax expense based on the nature of the tax on the condensed consolidated statements of operations and comprehensive income. The Company had no material interest or penalties relating to income, franchise, and other state and local taxes for the years and periods presented. Additionally, there were no material accruals for interest or penalties as of March 31, 2022 and December 31, 2021.

The Company files federal, state and local income tax returns. The Company regularly analyzes its various federal and state filing positions and only recognizes the income tax effect in its financial statements when certain criteria regarding uncertain income tax positions have been met. The Company believes that its income tax positions would more likely than not be sustained upon examination by all relevant taxing authorities. Therefore, no provisions for uncertain income tax positions have been recorded in the condensed consolidated financial statements.

All federal tax returns for years prior to 2019 are no longer subject to examination. Additionally, state tax returns for years prior to 2017 are generally no longer subject to examination.


12

Earnings Per Share

Earnings per common share has been computed pursuant to the guidance in FASB ASC Topic 260, Earnings per Share. Basic earnings per share (“EPS”) is computed by dividing net income allocated to common stockholders by the weighted-average number of common shares outstanding for the reporting period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. No effect is shown for any securities that are anti-dilutive. Net income allocated to common stockholders represents net income less income allocated to participating securities and noncontrolling interests. None of the Company’s equity awards are participating securities.

Fair Value Measurement

Fair value measurements are utilized in the accounting of the Company’s assets acquired and liabilities assumed in an asset acquisition and also affect the Company’s accounting for certain of its financial assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The hierarchy described below prioritizes inputs to the valuation techniques used in measuring the fair value of assets and liabilities. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs to be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows: Level 1 inputs, such as quoted prices in an active market; Level 2 inputs, which are observable inputs for similar assets; or Level 3 inputs, which are unobservable inputs.

The Company uses the following inputs in its fair value measurements:    

Level 2 inputs for its debt and derivative financial instrument fair value disclosures. See “Note 6 - Debt” and “Note 7 - Derivative Financial Instruments,” respectively; and

Level 2 and Level 3 inputs when assessing the fair value of assets and liabilities in connection with real estate acquisitions and impairment. See “Note 4 - Real Estate Investments.”

The fair value of the Company’s cash, cash equivalents and restricted cash (including money market accounts), other assets and accounts payable, accrued expenses and other liabilities approximate their carrying value because of the short-term nature of these instruments. Provisions for impairment recognized in the three months ended March 31, 2021 related to an asset held for sale and the impairment was determined based on the estimated or negotiated selling price, less costs of disposal, compared to the carrying value of the property.

Concentrations of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company is exposed to credit risk with respect to cash held at various financial institutions, access to its Credit Facility, amounts due under the mortgage loan receivable, and amounts due or payable under derivative contracts. The credit risk exposure with regard to the Company’s cash, credit facilities, and derivative instruments is spread among a diversified group of investment grade financial institutions.

During the three months ended March 31, 2022, the Company’s rental revenues were derived from 71 separate tenants leasing 354 total properties. During this period there were no tenants with rental revenue that exceeded 10% of total rental revenue.

During the three months ended March 31, 2021, the Company’s rental revenues were derived from 63 separate tenants leasing 234 total properties. During this period there were no tenants with rental revenue that exceeded 10% of total rental revenue.

Segment Reporting

The Company considers each one of its properties to be an operating segment, none of which meets the threshold for a reportable segment. The Company allocates resources and assesses operating performance based on individual property needs. All of the Company’s operating segments meet the aggregation criteria, and thus, the Company reports one segment, rental operations. There were no intersegment sales during the periods presented.

13

Recent Accounting Pronouncements Adopted

In March 2020, the FASB issued ASU 2020-04 “Topic 848: Reference Rate Reform.” ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives, and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. On July 1, 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company determined these elections have not materially impacted the Company's condensed consolidated financial statements. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

In August 2020, the FASB issued ASU 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models currently required. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. ASU 2020-06 also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted earnings per share calculation in certain areas. Effective January 1, 2022 the Company adopted this standard with no material impact to the condensed consolidated financial statements.

Note 3 – Leases

The Company acquires, owns and manages commercial single-tenant lease properties, with the majority being long-term triple-net leases where the tenant is generally responsible for all improvements and contractually obligated to pay all operating costs (such as real estate taxes, utilities and repairs and maintenance costs). As of March 31, 2022, the Company had investments in 361 single-tenant retail net leased properties spanning 42 states, with 71 different tenants represented across 23 retail sectors. As of March 31, 2022, the remaining terms of leases range from one to 32 years, with weighted average lease term of 9.6 years.

The Company’s property leases have been classified as operating leases and some have scheduled rent increases throughout the lease term. The Company’s leases typically provide the tenant one or more multi-year renewal options to extend their leases, subject to generally the same terms and conditions, including rent increases, consistent with the initial lease term.

All lease-related income is reported as a single line item, rental revenue (including reimbursable), in the condensed consolidated statements of operations and comprehensive income and is presented net of any reserves for uncollectible amounts. There were no material reserves for uncollectible amounts during the three months ended March 31, 2022.

The following table provides a disaggregation of lease income recognized under ASC 842 (in thousands):

Three Months Ended
March 31,
20222021
Rental revenue
Fixed lease income (1)
$18,067 $10,953 
Variable lease income (2)
2,689 789 
Other rental revenue:
Above/below market lease amortization, net283 190 
Lease incentives(118) 
Rental revenue (including reimbursable)$20,921 $11,932 

(1) Fixed lease income includes contractual rents under lease agreements with tenants recognized on a straight-line basis over the lease term.
(2) Variable lease income primarily includes tenant reimbursements for real estate taxes, insurance, common area maintenance, and lease termination fees, and the write-off of uncollectible amounts.

14

Scheduled future minimum base rental payments (excluding base rental payments from properties classified as held for sale and straight-line rent adjustments for all properties) due to be received under the remaining non-cancelable term of the operating leases in place as of March 31, 2022 are as follows (in thousands):

Future Minimum Base
Rental Receipts
Remainder of 2022$56,738 
202375,995 
202476,606 
202576,332 
202673,436 
Thereafter406,911 
$766,018 

Future minimum rentals exclude amounts that may be received from tenants for reimbursements of operating costs and property taxes. In addition, the future minimum rents do not include any contingent rents based on a percentage of the lessees' gross sales or lease escalations based on future changes in the Consumer Price Index (“CPI”) or other stipulated reference rate.

Corporate Office Lease

In August 2021, the Company entered into a lease agreement on a new corporate office space, which commenced in October 2021 and is classified as an operating lease. The Company began operating out of the new office in February 2022. The lease has a remaining noncancellable lease term of 10.3 years that expires on July 31, 2032, with a one-time option to terminate in 2029 exercisable by the Company. The lease is also renewable at the Company’s option for two additional periods of five years. No renewals were incorporated in the calculation of the corporate lease right-of-use asset and liability as it is not reasonably certain that the Company will exercise the options. Further, the lease agreement does not contain any material residual value guarantees or material restrictive covenants. The corporate office lease contains variable lease costs related to the lease of parking spaces and non-lease components related to the reimbursement of property operating expenses and certain common area maintenance expenses, all of which are recognized as incurred. The Company elected to use the component practical expedient, which permits the Company to not separate non-lease components from lease components if timing and pattern of transfer is the same.


The following table presents the lease expense components for the three months ended March 31, 2022 (in thousands):

Three Months Ended
March 31,
20222021
Operating lease cost$135 $ 
Variable lease cost
$3 $ 

The Company recorded a right-of-use asset and operating lease liability of approximately $4.5 million at lease commencement. As of March 31, 2022, the right-of-use asset and operating lease liability were $4.5 million and $5.5 million, respectively. The right-of-use asset is included in other assets, net and the operating lease liability is included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.

The following table reflects the maturity analysis of payments due from the Company over the next five years and thereafter for the corporate office lease obligation as of March 31, 2022 (in thousands):

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Future Minimum Lease Payments
Remainder of 2022$150 
2023533 
2024617 
2025636 
2026653 
Thereafter3,981 
Total lease payments6,570 
Less: amount representing interest (1)
(1,090)
Present value of operating lease liabilities$5,480 

(1) Imputed interest was calculated using a discount rate of 3.25%. The discount rate is based on the estimated incremental borrowing rate, calculated as the treasury rate for the same period as the underlying lease term, plus a spread determined using factors including REIT industry performance.


Note 4 – Real Estate Investments

As of March 31, 2022, the Company owned or had investments in 363 properties, including nine properties currently under development. The gross real estate investment portfolio, including properties under development, totaled approximately $1.15 billion and consisted of the gross acquisition cost of land, buildings, improvements, and lease intangible assets and liabilities. The investment portfolio is geographically dispersed throughout 42 states with gross real estate investments in Texas and Illinois representing 11.2% and 10.5%, respectively, of the total gross real estate investment of the Company’s entire portfolio.

Acquisitions
    
During the three months ended March 31, 2022, the Company acquired 34 properties for a total purchase price of $90.0 million, inclusive of $1.2 million of capitalized acquisition costs. During the three months ended March 31, 2021, the Company acquired 31 properties for a total purchase price of $88.2 million, inclusive of $1.1 million of capitalized acquisition costs.

The acquisitions were all accounted for as asset acquisitions. An allocation of the purchase price and acquisition costs paid for the completed acquisitions is as follows (in thousands):

Three Months Ended
March 31,
20222021
Land$14,654 $21,490 
Buildings60,088 48,999 
Site improvements6,538 7,545 
Tenant improvements1,160 1,587 
In-place lease intangible assets8,872 10,942 
Above-market lease intangible assets108  
Construction-in-progress assets  
91,420 90,563 
Liabilities assumed
Below-market lease intangible liabilities(1,423)(2,338)
Accounts payable, accrued expense and other liabilities(24) 
Purchase price (including acquisition costs)$89,973 $88,225 


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Development

As of March 31, 2022, the Company had nine property developments under construction. During the three months ended March 31, 2022, the Company invested $5.0 million in property developments, including the acquisition of one new build-to-suit project with an initial purchase price of $1.0 million. During the three months ended March 31, 2022, the Company completed development on one project under development and reclassified approximately $4.7 million from property under development to land, building, and improvements in the accompanying condensed consolidated balance sheets. Additionally, on January 1, 2022, rent commenced on a development that was previously completed in the fourth quarter of 2021. The remaining nine developments in progress are expected to be substantially completed with rent commencing at various points throughout 2022. The purchase price, including acquisition costs, and subsequent development are included in property under development in the accompanying condensed consolidated balance sheets as of March 31, 2022.

Additionally, during the first three months of 2022, the Company capitalized less than $0.1 million of interest expense associated with properties under development. No interest expense was capitalized during the first three months of 2021.

During the three months ended March 31, 2021, the Company invested a combined total of $1.3 million in a development project in Yuma, Arizona. The Company has a non-binding purchase option to acquire the property upon completion. The Company’s total investment is expected to be $4.4 million with the sole tenant in the property commencing lease payments in 2022. These amounts are included in property under development in the accompanying condensed consolidated balance sheets as of December 31, 2021.

Dispositions

During the three months ended March 31, 2022, the Company sold one property for a total sales price, net of disposal costs, of $2.3 million, recognizing a net gain of $0.2 million on the sale.

There were no dispositions for the three months ended March 31, 2021.

Investment in Mortgage Loan Receivable

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

Note 5 – Intangible Assets and Liabilities

Intangible assets and liabilities consisted of the following (in thousands):

March 31, 2022December 31, 2021
Gross
Carrying
Amount
Accumulated AmortizationNet Carrying AmountGross
Carrying
Amount
Accumulated AmortizationNet Carrying Amount
Assets:
In-place leases$124,605 $(16,724)$107,881 $116,368 $(13,408)$102,960 
Above-market leases17,455 (1,843)15,612 17,348 (1,516)15,832 
Assembled workforce873 (665)208 873 (592)281 
Lease incentives5,343 (188)5,155 5,821 (122)5,699 
Total intangible assets$148,276 $(19,420)$128,856 $140,410 $(15,638)$124,772 
Liabilities:   
Below-market leases$27,425 $(3,410)$24,015 $26,185 $(2,869)$23,316 

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The remaining weighted average amortization period for the Company’s intangible assets and liabilities as of March 31, 2022 and as of December 31, 2021 by category were as follows:

Years Remaining
March 31, 2022December 31, 2021
In-place leases7.39.7
Above-market leases11.812.8
Below-market leases9.812.3
Assembled workforce0.81.0
Lease incentives11.812.7

The Company records amortization of in-place lease assets and assembled workforce intangible assets to amortization expense, and records net amortization of above-market and below-market lease intangibles as well as amortization of lease incentives to rental revenue. The following amounts in the accompanying condensed consolidated statements of operations and comprehensive income related to the amortization of intangibles assets and liabilities for all property and ground leases (in thousands):

Three Months Ended March 31,
20222021
Amortization:
Amortization of in-place leases$3,555 $1,719 
Amortization of assembled workforce73 73 
$3,628 $1,792 
Net adjustment to rental revenue:
Above-market lease assets(327)(183)
Below-market lease liabilities610 373 
Lease incentives(118) 
$165 $190 
The following table provides the projected amortization of in-place lease assets and assembled workforce intangible assets to amortization expense, and the net amortization of above-market, below-market, and lease incentive lease intangibles to rental revenue as of March 31, 2022, for the next five years and thereafter (in thousands):

Remainder of 2022
2023202420252026ThereafterTotal
In-place leases$11,034 $13,704 $12,933 $12,642 $11,430 $46,138 $107,881 
Assembled workforce208      208 
Amortization expense$11,242 $13,704 $12,933 $12,642 $11,430 $46,138 $108,089 
Above-market lease assets(997)(1,330)(1,326)(1,325)(1,324)(9,310)(15,612)
Below-market lease liabilities1,830 2,375 2,317 2,294 2,178 13,021 24,015 
Lease incentives$(322)$(428)$(428)$(428)$(428)$(3,121)$(5,155)
Net adjustment to rental revenue$511 $617 $563 $541 $426 $590 $3,248 


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Note 6 – Debt

Debt consists of the following (in thousands):

Maturity DateInterest RateMarch 31, 2022December 31, 2021
Term Loan (1)
December 23, 20241.36%$175,000 $175,000 
Revolver (2)
December 23, 20231.64%120,000 64,000 
Total debt295,000 239,000 
Unamortized discount and debt issuance costs(613)(670)
Unamortized deferred financing costs, net (3)
(696)(796)
Total debt, net$293,691 $237,534 

(1) Interest rate includes the effect of a variable interest rate that has been swapped to a fixed interest rate.
(2) The annual interest rate of the Revolver assumes one-month LIBOR as of March 31, 2022 of 0.44%. Additionally, the Revolver may be extended up to one year.
(3) The Company records deferred financing costs for the Revolver in other assets, net on its condensed consolidated balance sheets.

Credit Facility

In December 2019, the Company entered into a senior credit facility consisting of (i) a $175.0 million senior secured term loan (“Term Loan”) and (ii) a $250.0 million senior secured revolving credit facility (“Revolver”, and collectively with the Term Loan, the “Credit Facility”). Wells Fargo Securities, LLC is lead arranger and bookrunner and Wells Fargo Bank, National Association is administrative agent under the Credit Facility (the “Administrative Agent”).

The Term Loan matures on December 23, 2024 and the Revolver matures on December 23, 2023, subject to extension up to one year. The Credit Facility, effective during the fourth quarter of 2020, is unsecured as the Administrative Agent released the collateral in connection with the Company’s satisfaction of the collateral release requirements. Therefore interest rates under the Credit Facility are based on the Company’s consolidated total leverage ratio, and are determined by (A) in the case of Term Loan either (i) LIBOR, plus a margin ranging from 1.15% to 1.60%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.15% to 0.60%, based on the Company’s consolidated total leverage ratio and (B) in the case of Revolving Loans either (i) LIBOR, plus a margin ranging from 1.20% to 1.80%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.20% to 0.80%, based on the Company’s consolidated total leverage ratio. Interest is payable monthly or at the end of the applicable interest period in arrears on any outstanding borrowings.

The Company is required to pay a Revolver facility fee at an annual rate of 0.15% of the unused capacity if usage exceeds 50% of the total available facility, or 0.25% of the unused facility if usage does not exceed 50%. Loans from the Revolver are generally restricted if, among other things, the proposed usage of the proceeds from the loan do not meet certain criteria as outlined in the Credit Facility Agreement, if an event of default exists, or if the requested loan will create an event of default. Loans from the Revolver may not exceed the total revolving commitments.

Effective September 28, 2020, the Company entered into an interest rate derivative contract to fix the base interest rate (one-month LIBOR) on the Term Loan. The total interest rate includes the fixed base interest rate of 0.21% plus a leverage-based margin of 1.15% as of March 31, 2022. The interest rate hedge is further described in “Note 7 - Derivative Financial Instruments.”

Deferred financing, discount and debt issuance costs are being amortized over the remaining terms of each respective loan. Total costs amortized on the Term Loan and Revolver were $0.2 million for each of the three months ended March 31, 2022 and March 31, 2021, respectively. This is included in interest expense, net on the Company’s condensed consolidated statements of operations and comprehensive income

For the three months ended March 31, 2022 and 2021, the Term Loan had a weighted average interest rate, exclusive of amortization of deferred financing costs and the effects of the interest rate hedge, of 1.32% and 1.30%, respectively.

The Company incurred interest expense of $0.6 million in connection with the Term Loan for each of the three months ended March 31, 2022 and 2021, respectively.
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The estimated fair value of the Company’s Term Loan has been derived based on market observable inputs such as interest rates and discounted cash flow analysis using estimates of the amount and timing of future cash flows. These measurements are classified as Level 2 within the fair value hierarchy. The Company determined that the carrying value materially approximated the estimated fair value of the Term Loan as of March 31, 2022 and December 31, 2021.

During the three months ended March 31, 2022 and March 31, 2021, the Company incurred interest expense, exclusive of facility fees for unused capacity, on borrowings under the Revolver of $0.4 million and less than $0.1 million, respectively, with a weighted average interest rate, exclusive of amortization of deferred financing costs, of 1.39% and 1.29%, respectively. As of March 31, 2022 and December 31, 2021, the Company had $120.0 million and $64.0 million in borrowings outstanding under the Revolver. The Company also incurred interest expense in connection with unused capacity for the three months ended March 31, 2022 and 2021 of $0.1 million and $0.2 million, respectively.

During the first three months of 2022, the Company capitalized less than $0.1 million of interest expense associated with properties under development. No interest expense was capitalized during the first three months of 2021.

The Company was in compliance with all of its debt covenants as of March 31, 2022 and expects to be in compliance for the following twelve-month period.

Debt Maturity

Payments on the Term Loan are interest only through maturity. All outstanding amounts on the Term Loan are due on December 23, 2024.

Note 7 – Derivative Financial Instruments

The Company uses interest rate derivative contracts to manage its exposure to changes in interest rates on its variable rate debt. These derivatives are considered cash flow hedges and are recorded on a gross basis at fair value. Assessments of hedge effectiveness are performed quarterly using either a qualitative or quantitative approach. The Company recognizes the entire change in the fair value in Accumulated Other Comprehensive Income (“AOCI”) and the change is reflected as cash flow hedge changes in fair value in the supplemental disclosures of non-cash investing and financing activities in the consolidated statement of cash flows. Effective September 28, 2020, such derivatives were initiated to hedge the variable cash flows associated with Term Loan. Accordingly, the interest rate for the variable rate Term Loan is based on the hedged fixed rate (one-month) of 0.21% compared to the variable Term Loan one-month LIBOR rate as of March 31, 2022 of 0.23%, plus a margin of 1.15%. The maturity date of the interest rate swaps coincide with the maturity date of the Term Loan.

Amounts will subsequently be reclassified to earnings when the hedged item affects earnings. The Company does not enter into derivative contracts for speculative or trading purposes and does not have derivative netting arrangements.

The Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company evaluates counterparty credit risk through monitoring the creditworthiness of counterparties, which includes review of debt ratings and financial performance. To mitigate credit risk, the Company enters into agreements with counterparties it considers credit-worthy, such as large financial institutions with favorable credit ratings.

The Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (in thousands, except number of instruments):

Number of InstrumentsNotional
Interest Rate DerivativesMarch 31, 2022December 31, 2021March 31, 2022December 31, 2021
Interest rate swaps4 4 $175,000 $175,000 

The following table presents the fair value of the Company's derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 (in thousands):

20

Derivative Assets
Fair Value at
Derivatives Designated as Hedging Instruments:Balance Sheet LocationMarch 31, 2022December 31, 2021
Interest rate swapsOther assets, net$10,520 $4,310 

The following table presents the effect of the Company's interest rate swaps on the condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2022 and 2021 (in thousands):

Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)Amount of (Loss) Reclassified from Accumulated OCI into Income
(Effective Portion)
Derivatives in Cash Flow Hedging Relationships2022202120222021
For the Three Months Ended March 31
Interest Rate Products$6,188 $2,290 Interest expense, net$(23)$(34)

The Company did not exclude any amounts from the assessment of hedge effectiveness for the three months ended March 31, 2022 and 2021. During the next twelve months, the Company estimates that $2.8 million will be reclassified as a decrease to interest expense.

The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves.

To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2022, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The table below presents the Company’s derivative liabilities measured at fair value on a recurring basis as of March 31, 2022, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):

Fair Value Hierarchy Level
DescriptionLevel 1Level 2Level 3Total Fair Value
March 31, 2022
Derivative assets$ $10,520 $ $10,520 
December 31, 2021
Derivative assets 4,310  4,310 


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Note 8 – Supplemental Detail for Certain Components of the Condensed Consolidated Balance Sheets

Other assets, net consist of the following (in thousands):

March 31, 2022December 31, 2021
Accounts receivable, net$4,147 $2,801 
Deferred rent receivable2,918 2,263 
Prepaid assets2,589 1,473 
Earnest money deposits1,483 853 
Fair value of interest rate swaps10,520 4,309 
Deferred offering costs598 615 
Deferred financing costs, net696 796 
Right-of-use asset4,490 4,581 
Leasehold improvements and other corporate assets2,212 1,657 
Interest receivable202  
Other assets, net673 1,003 
$30,528 $20,351 

Accounts payable, accrued expenses and other liabilities consists of the following (in thousands):

March 31, 2022December 31, 2021
Accrued expenses