NETSTREIT Corp. 2023 Q2 Form 10-Q Summary
Business context and reporting period
NETSTREIT is an internally managed REIT focused on single-tenant, retail commercial properties leased on a long-term net basis to high-credit-quality tenants across the United States. It also invests in property developments and mortgage loans secured by real estate. The filing covers the three and six months ended June 30, 2023, with comparative periods ended June 30, 2022. As of June 30, 2023, the company owned or had investments in 525 properties across 45 states, excluding 23 developments where rent had not commenced. The portfolio included 87 tenants across 25 retail sectors, was 100% occupied, and had a 9.4-year weighted-average remaining lease term.
Key financial metrics
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 |
|---|---|---|---|---|
| Total revenue | $31.6 million | $22.6 million | $61.1 million | $44.0 million |
| Net income attributable to common stockholders | $(0.8) million | $2.0 million | $0.7 million | $3.9 million |
| EPS, diluted | $(0.01) | $0.04 | $0.01 | $0.08 |
| Operating income | $4.1 million | $1.7 million | $9.7 million | $4.8 million |
| Operating margin | 13.1% | 7.6% | 15.9% | 10.9% |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $34.4 million | $22.3 million |
| AFFO | $18.7 million | $13.7 million | $36.1 million | $26.9 million |
Rental revenue increased to $29.7 million in the second quarter and $58.2 million for the first half. Interest income on mortgage loans receivable was $1.9 million in the quarter and $2.9 million year to date. Second-quarter Property-Level Cash NOI was $25.8 million, compared with $18.9 million in the prior-year quarter.
At June 30, 2023, total assets were $1.75 billion, including $1.37 billion of net real estate held for investment, $107.8 million of mortgage loans receivable, and $13.1 million of cash, cash equivalents and restricted cash. Total debt was $489.4 million gross, or $484.3 million net of discounts and financing costs. Net debt was $476.3 million. The company reported a 4.6x net debt to annualized adjusted EBITDAre ratio. The filing states that all debt covenants were satisfied.
Material changes versus the prior comparable period
- Second-quarter revenue increased 39.7% and first-half revenue increased 38.9%, primarily from portfolio growth and higher mortgage-loan interest income.
- Second-quarter net income attributable to common stockholders declined to a loss of $0.8 million from income of $2.0 million. First-half net income declined to $0.7 million from $4.0 million.
- Interest expense increased to $5.5 million from $1.5 million in the quarter and to $9.5 million from $2.7 million year to date, reflecting higher interest rates and increased borrowings.
- Depreciation and amortization increased to $15.8 million from $11.8 million in the quarter and to $30.8 million from $22.7 million year to date.
- The company recorded $2.8 million of impairment on six properties classified as held for sale, compared with $1.1 million on one property in the prior-year periods.
- Acquisitions totaled $96.2 million for 28 properties in the second quarter and $163.9 million for 48 properties year to date, compared with $117.3 million and $207.3 million, respectively, in the prior-year periods.
- Mortgage loans receivable increased to $107.8 million from $46.4 million at December 31, 2022, including three new loans totaling approximately $61.5 million.
- Cash flow from operations increased to $34.4 million from $22.3 million for the first six months, while investing cash outflows were $226.5 million and financing cash inflows were $134.7 million.
- Common shares outstanding increased to approximately 67.0 million at June 30, 2023 from approximately 58.0 million at December 31, 2022, primarily from equity offerings and forward-sale settlements.
Guidance, outlook, risks, contingencies and unusual items
Management did not provide specific earnings or operating guidance in the filing. Management expects cash flows from operations, future ATM equity issuance, available Revolver capacity and the new 2029 Term Loan to fund operations, debt service, capital expenditures and working capital requirements for at least the next 12 months.
- On July 3, 2023, the company entered into a $250.0 million sustainability-linked 2029 Term Loan, expandable to $400.0 million subject to conditions. It initially drew $150.0 million and hedged the full commitment at an all-in fixed rate of 4.99% through January 2029.
- In July 2023, the company repaid the $106.0 million outstanding under its Revolver.
- The company expects the remaining 23 developments to be substantially completed, with rent commencing at various points during the next twelve months. Development funding commitments totaled $27.9 million, and tenant improvement commitments totaled $4.1 million.
- The Board declared a third-quarter 2023 dividend of $0.205 per share, payable September 15, 2023.
- Interest-rate exposure remains material. The filing estimates that a 1% adverse change in Revolver interest rates would increase annual exposure by approximately $1.2 million. The term loans are hedged, but the Revolver remains variable-rate debt.
- Management identified volatility in interest rates, commercial real estate valuations, credit markets, access to capital and financing costs as key macroeconomic risks. The filing reports no material changes to the risk factors in the 2022 Form 10-K.
- The company recorded a $128,000 loss on debt extinguishment and included $201,000 of non-recurring executive transition, severance and related charges in second-quarter Core FFO adjustments.
- No material litigation was outstanding, no material off-balance-sheet arrangements were reported, and management concluded that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether recurring rental growth and AFFO growth continue to offset higher interest expense and the company’s thin GAAP net income.
- The timing and economics of rent commencement for the 23 developments under construction, including the remaining $27.9 million funding commitment.
- Refinancing and liquidity plans for the $281.0 million of scheduled 2026 balloon maturities and other debt obligations.
- The effect of variable-rate Revolver borrowings and future rate movements despite hedges on the term loans.
- The valuation and disposition timing of the 14 properties classified as held for sale and the potential for additional impairments.
- The impact of equity issuance and the ATM program on per-share results and shareholder dilution.
- Tenant credit quality, lease expirations and concentration risk, including the stated 68% of annualized base rent from investment-grade-rated tenants and 14% from tenants with an investment-grade profile.