NETSTREIT Corp. 10-Q Summary — First Quarter 2023
Business context and reporting period
NETSTREIT Corp. 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. This unaudited Form 10-Q covers the three months ended March 31, 2023, with comparisons to the three months ended March 31, 2022.
At March 31, 2023, NETSTREIT owned or had investments in 488 properties across 45 states, excluding four developments where rent had not commenced. The portfolio was 100% occupied, had a 9.4-year weighted-average remaining lease term, and generated $108.9 million of annualized base rent. Approximately 67% of annualized base rent came from investment-grade-rated tenants and another 15% from tenants with an investment-grade profile.
Financial performance and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $29.5 million | $21.3 million | +$8.1 million, approximately 38% |
| Rental revenue | $28.5 million | $20.9 million | +$7.6 million, approximately 36% |
| Interest income on mortgage loans | $1.0 million | $0.4 million | +$0.6 million |
| Operating expenses | $23.9 million | $18.3 million | +$5.6 million |
| Operating margin | Approximately 18.8% | Approximately 14.4% | Improved |
| Net income | $1.5 million | $2.0 million | -$0.5 million, approximately 25% |
| Net income attributable to common stockholders | $1.5 million | $1.9 million | -$0.5 million |
| Diluted EPS | $0.03 | $0.04 | Decreased |
| FFO | $16.7 million | $12.7 million | +$4.0 million, approximately 32% |
| AFFO | $17.4 million | $13.1 million | +$4.3 million, approximately 33% |
| Cash NOI | $24.0 million | $17.3 million | +$6.7 million, approximately 39% |
| Net cash provided by operating activities | $14.8 million | $9.0 million | +$5.9 million, approximately 65% |
Net income margin was approximately 5.0% in Q1 2023 versus 9.2% in Q1 2022. The decline primarily reflected higher interest expense, depreciation and amortization, and payroll costs, partially offset by portfolio growth. Interest expense rose to $3.9 million from $1.2 million, driven primarily by higher rates and the 2028 Term Loan.
Cash flow from investing activities was negative $102.4 million, including $67.7 million of acquisitions, $2.5 million of development and improvement spending, and $45.9 million invested in mortgage loans, partly offset by $15.5 million of real estate sale proceeds. Financing activities provided $23.7 million, including $52.9 million of net equity proceeds, partially offset by $11.8 million of dividends and distributions and net revolving-credit repayments.
Balance sheet, debt and liquidity
| Metric | March 31, 2023 | December 31, 2022 |
|---|---|---|
| Total assets | $1.63 billion | $1.61 billion |
| Real estate held for investment, net | $1.32 billion | $1.26 billion |
| Mortgage loans receivable, net | $92.3 million | $46.4 million |
| Total debt, net | $474.8 million | $491.5 million |
| Cash, cash equivalents and restricted cash | $6.6 million | $70.5 million |
| Total equity | $1.10 billion | $1.06 billion |
Gross debt was $479.5 million, consisting of the $175.0 million 2024 Term Loan, $200.0 million 2028 Term Loan, $96.0 million drawn on the New Revolver, and an $8.5 million mortgage note. The term loans were fully hedged, with reported all-in fixed rates of 1.37% and 3.88%, respectively. The Revolver remained exposed to variable SOFR-based rates. Management reported compliance with all debt covenants and expected continued compliance through December 31, 2023.
Debt maturities include the $175.0 million 2024 Term Loan in December 2024, $96.0 million of Revolver borrowings in 2026, and the $200.0 million 2028 Term Loan in February 2028. A 1% adverse change in the Revolver interest rate was estimated to increase annual interest expense by approximately $0.7 million based on the filing’s sensitivity analysis.
Material changes versus the prior comparable period
- Acquisitions declined to 20 properties for $67.7 million from 34 properties for $90.0 million in Q1 2022.
- Mortgage loans receivable nearly doubled to $92.3 million, including new fully collateralized loans of $41.9 million and $4.1 million executed in March 2023.
- Eight properties were sold for $15.5 million, generating a $0.3 million loss, compared with one property sold for $2.3 million and a $0.2 million gain in Q1 2022.
- Interest expense increased by $2.8 million, while depreciation and amortization increased by $4.0 million, reflecting higher borrowings, interest rates and portfolio size.
- The Company partially physically settled its August 2022 forward equity agreements, issuing 2.6 million shares and receiving $50.0 million of net proceeds. Another 4.8 million shares remained unsettled at quarter-end.
- The Company issued 146,745 shares under its ATM program for approximately $2.9 million of net proceeds. Approximately $151.2 million of gross capacity remained under the program.
- Two developments were completed and began generating rent in Q1 2023. Three developments remained under construction, with expected rent commencement in Q3 or Q4 2023 for two projects and Q2 2024 for the remaining project.
Outlook, commentary, risks and unusual items
Management stated that cash flows from operations, future ATM and forward-equity proceeds, and available Revolver capacity should be adequate for ongoing operations, debt service, capital expenditures and working capital needs for at least the next 12 months. No formal earnings or operating guidance was provided in the filing.
In April 2023, the Company borrowed $72.0 million under the Revolver for general corporate purposes, including acquisitions. The Board declared a $0.20-per-share dividend for Q2 2023, payable June 15, 2023.
Management identified inflation, Federal Reserve rate increases, credit-market volatility, fluctuating commercial real estate values, financing costs and potential liquidity disruptions as material environmental risks. The Company also remains exposed to tenant credit, property-level operating, development, refinancing and interest-rate risks. No material litigation, environmental liabilities, impairment provisions or off-balance-sheet arrangements were reported.
Commitments included approximately $4.1 million of tenant improvement allowances and $6.0 million to fund three developments, generally expected to be funded over the next two years. The filing reported no material changes to the risk factors in the 2022 Form 10-K.
Important facts for investors to verify
- Ability to refinance or repay the $175.0 million 2024 Term Loan and manage the $96.0 million Revolver maturity exposure in 2026.
- Actual borrowing costs and cash interest expense as SOFR-based Revolver borrowings increase.
- Timing, remaining costs and rent commencement for the three developments under construction.
- Performance and credit quality of the expanded mortgage loan portfolio, including the $41.9 million loan secured by 46 properties.
- Settlement terms and potential dilution from the 4.8 million unsettled forward-sale shares and future ATM issuances.
- Sustainability of the $0.20-per-share quarterly dividend relative to AFFO, cash flow and capital requirements.
- Whether occupancy, annualized base rent, lease duration and tenant credit metrics remain stable as the portfolio grows.
- Comparability of FFO, Core FFO, AFFO, EBITDAre, NOI and Cash NOI, which are non-GAAP measures and may differ from other REITs’ calculations.