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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 September 30, 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 October 25, 2022 was 54,876,295.




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)

September 30,December 31,
20222021
Assets
Real estate, at cost:
Land$380,092 $299,935 
Buildings and improvements839,305 626,457 
Total real estate, at cost1,219,397 926,392 
Less accumulated depreciation(53,255)(30,669)
Property under development17,475 17,896 
Real estate held for investment, net1,183,617 913,619 
Assets held for sale23,985 2,096 
Mortgage loans receivable, net46,406  
Cash, cash equivalents and restricted cash16,190 7,603 
Lease intangible assets, net149,357 124,772 
Other assets, net54,087 20,351 
Total assets$1,473,642 $1,068,441 
Liabilities and equity
Liabilities:
Term loans, net$373,202 $174,330 
Revolving credit facility30,000 64,000 
Mortgage note payable, net7,901  
Lease intangible liabilities, net31,438 23,316 
Liabilities related to assets held for sale416  
Accounts payable, accrued expenses and other liabilities21,200 16,980 
Total liabilities464,157 278,626 
Commitments and contingencies
Equity:
Stockholders’ equity
Common stock, $0.01 par value, 400,000,000 shares authorized; 54,876,295 and 44,223,050 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
549 442 
Additional paid-in capital1,032,634 809,724 
Distributions in excess of retained earnings(58,747)(35,119)
Accumulated other comprehensive income25,335 4,123 
Total stockholders’ equity999,771 779,170 
Noncontrolling interests9,714 10,645 
Total equity1,009,485 789,815 
Total liabilities and equity$1,473,642 $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
September 30,
Nine Months Ended
September 30,
2022202120222021
Revenues
Rental revenue (including reimbursable)$24,339 $15,603 $67,309 $41,333 
Interest income on mortgage loans receivable674  1,671  
Total revenues25,01315,60368,98041,333
Operating expenses
Property2,539 1,737 8,156 4,002 
General and administrative4,552 3,776 13,608 10,904 
Depreciation and amortization13,407 8,074 36,137 21,078 
Provisions for impairment  1,114 3,539 
Transaction costs51 132 704 464 
Total operating expenses20,549 13,719 59,719 39,987 
Other income (expense)
Interest expense, net(3,017)(895)(5,708)(2,693)
Gain on sales of real estate, net143 1,955 2,162 2,452 
Other income  36  
Total other income (expense), net(2,874)1,060 (3,510)(241)
Net income before income taxes1,590 2,944 5,751 1,105 
Income tax expense(171) (356)(50)
Net income1,419 2,944 5,395 1,055 
Net income attributable to noncontrolling interests16 96 63 42 
Net income attributable to common stockholders$1,403 $2,848 $5,332 $1,013 
Amounts available to common stockholders per common share:
Basic$0.03 $0.07 $0.11 $0.03 
Diluted$0.03 $0.07 $0.11 $0.03 
Weighted average common shares:
Basic50,449,735 39,559,605 47,679,870 35,359,551 
Diluted51,384,758 41,333,579 48,657,049 37,108,425 
Other comprehensive income:
Net income$1,419 $2,944 $5,395 $1,055 
Change in value on derivatives, net13,887 5 21,436 2,063 
Total comprehensive income$15,306 $2,949 $26,831 $3,118 
Comprehensive income attributable to noncontrolling interests149 95 287 153 
Comprehensive income attributable to common stockholders$15,157 $2,854 $26,544 $2,965 



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 
Issuance of common stock in public offering, net of issuance costs2,397,035 24 49,976 — — 50,000 — 50,000 
OP Units converted to common stock22,265 — 418 — — 418 (418) 
Dividends and distributions declared on common stock and OP Units— — — (9,588)— (9,588)(104)(9,692)
Dividends declared on restricted stock, net— — — (149)— (149)— (149)
Stock-based compensation, net— — 1,298 — — 1,298 — 1,298 
Other comprehensive income— — — — 1,323 1,323 15 1,338 
Net income— — — 1,987 — 1,987 23 2,010 
Balance at June 30, 202250,341,288 $503 $938,043 $(49,943)$11,581 $900,184 $9,668 $909,852 
Issuance of common stock in public offering, net of issuance costs4,512,003 45 93,477 — — 93,522 — 93,522 
Dividends and distributions declared on common stock and OP Units— — — (10,073)— (10,073)(103)(10,176)
Dividends declared on restricted stock, net— — — (141)— (141)— (141)
Vesting of restricted stock units31,865 1 (1)— — — —  
Repurchase of common stock for tax withholding obligations(8,861)— (187)— — (187)— (187)
Stock-based compensation, net— — 1,302 7 — 1,309 — 1,309 
Other comprehensive income— — — — 13,754 13,754 133 13,887 
Net income— — — 1,403 — 1,403 16 1,419 
Balance at September 30, 202254,876,295 $549 $1,032,634 $(58,747)$25,335 $999,771 $9,714 $1,009,485 


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

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, 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 
Issuance of common stock in public offering, net of issuance costs10,915,688 109 194,052 — — 194,161 — 194,161 
OP Units converted to common stock143,173 1 2,744 — — 2,745 (2,745) 
Dividends and distributions declared on common stock and OP Units— — — (7,890)— (7,890)(287)(8,177)
Dividends declared on restricted stock— — — (132)— (132)— (132)
Stock-based compensation— — 1,041 — — 1,041 — 1,041 
Other comprehensive loss— — — — (253)(253)(12)(265)
Net loss— — — (2,536)— (2,536)(94)(2,630)
Balance at June 30, 202139,525,978 $395 $704,269 $(23,140)$2,181 $683,705 $25,771 $709,476 
OP Units converted to common stock65,840 1 1,246 — — 1,247 (1,247) 
Dividends and distributions declared on common stock and OP Units— — — (7,916)— (7,916)(265)(8,181)
Dividends declared on restricted stock— — — (125)— (125)— (125)
Vesting of restricted stock units35,000 — — — — — — — 
Repurchase of common stock for tax withholding obligations(9,013)— (229)— — (229)— (229)
Stock-based compensation— — 1,026 7 — 1,033 — 1,033 
Other comprehensive income— — — — 6 6 (1)5 
Net income— — — 2,848 — 2,848 96 2,944 
Balance at September 30, 202139,617,805 $396 $706,312 $(28,326)$2,187 $680,569 $24,354 $704,923 



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

NETSTREIT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share and per share data)
(Unaudited)
Nine Months Ended
September 30,
20222021
Cash flows from operating activities
Net income$5,395 $1,055 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization36,137 21,078 
Amortization of deferred financing costs553 471 
Noncash revenue adjustments(2,076)(1,289)
Stock-based compensation expense3,646 2,623 
Gain on sales of real estate, net(2,162)(2,452)
Provisions for impairment1,114 3,539 
Changes in assets and liabilities, net of assets acquired and liabilities assumed:
Other assets, net(3,641)(3,879)
Accounts payable, accrued expenses and other liabilities676 2,065 
Lessee improvement obligations (1)
Lease incentive payments(936)(4,004)
Net cash provided by operating activities38,706 19,206 
Cash flows from investing activities
Acquisitions of real estate(328,986)(292,046)
Real estate development and improvements(15,492)(9,512)
Investment in mortgage loans receivable(46,466) 
Earnest money deposits(3,486)(789)
Purchase of computer equipment and other corporate assets(595)(52)
Proceeds from sale of real estate13,837 30,436 
Net cash used in investing activities(381,188)(271,963)
Cash flows from financing activities
Issuance of common stock in public offerings, net219,019 194,161 
Payment of common stock dividends(28,549)(21,493)
Payment of OP unit distributions(316)(859)
Payment of restricted stock dividends(154)(29)
Proceeds under revolving credit facilities365,000 30,000 
Repayments under revolving credit facilities(399,000)(13,000)
Proceeds from term loans200,000  
Payments of mortgage note payable(12) 
Proceeds under property development incentives605  
Repurchase of common stock for tax withholding obligations(549)(318)
Deferred offering costs(1,220)(704)
Deferred financing costs(3,755) 
Net cash provided by financing activities351,069 187,758 
Net change in cash, cash equivalents and restricted cash8,587 (64,999)
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$16,190 $27,644 
Supplemental disclosures of cash flow information:
Cash paid for interest$4,345 $2,118 
Cash paid for income taxes$45 $ 
Supplemental disclosures of non-cash investing and financing activities:
Dividends declared and unpaid on restricted stock$411 $382 
Deferred offering costs included in accounts payable, accrued expenses and other liabilities$ $88 
Cash flow hedge change in fair value$21,436 $2,063 
Involuntary conversion of building and improvements and change in related insurance proceeds receivable$ $490 
Mortgage note assumed at fair value$7,913 $ 
Accrued capital expenditures and real estate development and improvement costs$952 $345 
Accrued lease incentives$1,690 $ 

The accompanying notes are an integral part of these condensed consolidated financial statements.
7

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 September 30, 2022, the Company owned or had investments in 409 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 SEC. These unaudited interim condensed consolidated financial statements do not include all of the information and notes required by 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 and nine months ended September 30, 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.

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.

8

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 and instability in macroeconomic conditions will have on the global economy and the Company’s business makes any estimates and assumptions as of September 30, 2022 inherently less certain than they would be absent the current and potential impacts of COVID-19 and instability in macroeconomic conditions. 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 periods presented in the condensed 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. 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
9

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 improvements15 years
Tenant improvementsShorter of the term of the related lease or useful life
Acquired in-place leases or leasing commissionsRemaining terms of the respective leases
Assembled workforce3 years
Computer equipment and other corporate assets
35 years

Total depreciation and amortization expense was $13.4 million and $8.1 million during the three months ended September 30, 2022 and 2021, respectively. Total depreciation and amortization expense was $36.1 million and $21.1 million during the nine months ended September 30, 2022 and 2021, respectively.

Depreciation expense on real estate held for investment and computer equipment and other corporate assets was $9.1 million and $5.6 million during the three months ended September 30, 2022 and 2021, respectively. Depreciation expense on real estate held for investment and computer equipment and other corporate assets was $24.4 million and $14.5 million during the nine months ended September 30, 2022 and 2021, respectively.

Amortization expense on acquired in-place lease and assembled workforce intangible assets and leasing commission costs were $4.3 million and $2.5 million during the three months ended September 30, 2022 and 2021, respectively. Amortization expense on acquired in-place lease and assembled workforce intangible assets and leasing commission costs were $11.7 million and $6.5 million during the nine months ended September 30, 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.

Assets Held for Sale

The Company is continually evaluating the portfolio of real estate assets and may elect to dispose of assets considering criteria including, but not limited to, tenant concentration, tenant credit quality, unit financial performance, local market conditions and lease rates, asset location, and tenant operation type (e.g., tenant or retail sector). Real estate assets held for sale are expected to be sold within twelve months. 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 September 30, 2022 or held for sale as discontinued operations as of September 30, 2022, 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 September 30, 2022 and December 31, 2021, there were twelve and one properties, respectively, classified as held for sale.


10

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 September 30,Nine Months Ended September 30,
2022202120222021
Total provision for impairment$ $ $1,114 $3,539 
Number of properties: (1)
Classified as held for sale   3 
Disposed within the period  1 3 

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

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 September 30, 2022 or December 31, 2021.

The Company’s bank balances as of September 30, 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 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 September 30, 2022 and December 31, 2021, the Company had an immaterial reserve for uncollectible amounts specific to uncharged reimbursable expenses.
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Mortgage Loans Receivable

The Company holds loans receivable, which are mortgage loans secured by real estate, for long-term investment. Loans receivable are carried at amortized cost.

The Company recognizes interest income on loans 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 loan receivable balances, 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 sells shares of common stock through forward sale agreements from time to time 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.

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 $0.1 million and $0.1 million for the three months ended September 30, 2022 and 2021, respectively, and represent acquisition related expenses, including costs associated with abandoned acquisitions. Transaction costs were $0.7 million and $0.5 million for the nine months ended September 30, 2022 and 2021.


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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