NETSTREIT Corp. Form 10-Q Summary
Business Context and Reporting Period
NETSTREIT Corp. is an internally managed REIT that acquires, owns and manages single-tenant retail properties under long-term net leases across the United States. The filing covers the unaudited three months ended March 31, 2022, compared with the three months ended March 31, 2021. As of March 31, 2022, the company owned or had investments in 363 properties across 42 states, including 361 single-tenant retail net-leased properties, with 71 tenants across 23 retail sectors. The portfolio was 100% occupied, had annualized base rent of approximately $77.0 million, and a weighted-average remaining lease term of 9.6 years.
Financial Performance and Key Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $21.3 million | $11.9 million | +$9.4 million, approximately 79% |
| Rental revenue, including reimbursements | $20.9 million | $11.9 million | +$9.0 million |
| Net income | $2.0 million | $0.7 million | +$1.2 million |
| Net income attributable to common stockholders | $1.9 million | $0.7 million | +$1.2 million |
| Diluted EPS | $0.04 | $0.02 | Increased |
| Net cash provided by operating activities | $9.0 million | $4.3 million | +$4.7 million |
| FFO | $12.7 million | $6.7 million | +$6.0 million |
| AFFO | $13.1 million | $6.9 million | +$6.2 million |
| Cash NOI | $17.3 million | $10.6 million | +$6.7 million |
Net margin was approximately 9.2% in Q1 2022 versus 6.2% in Q1 2021. Cash NOI margin was approximately 81.1% versus 88.4%, reflecting the effect of the company’s growth and related property-level costs. Depreciation and amortization increased to $11.0 million from $5.9 million, while interest expense increased to $1.2 million from $0.9 million.
At March 31, 2022, total assets were $1.20 billion, including $987.5 million of net real estate held for investment, $40.4 million of mortgage loan receivable and $4.7 million of cash, cash equivalents and restricted cash. Total debt was $295.0 million, or $293.7 million net of discounts and financing costs, consisting of a $175.0 million term loan and $120.0 million drawn on the revolving facility. Total equity was $865.0 million.
Investing activities used $133.7 million, primarily for $90.0 million of property acquisitions, $4.4 million of development and improvements, and $40.4 million funded for a mortgage loan receivable. Financing activities provided $121.8 million, including $75.5 million of net equity issuance and $56.0 million of net revolving-facility borrowings. The company paid $9.0 million of common stock and OP-unit distributions.
Material Changes Versus the Prior Comparable Period
- The portfolio expanded materially, with 34 properties acquired for $90.0 million in Q1 2022 versus 31 properties acquired for $88.2 million in Q1 2021.
- The company completed one property development, continued nine developments expected to reach substantial completion with rent commencing at various points during 2022, and invested $5.0 million in development during the quarter.
- The company originated a fully collateralized $40.3 million mortgage loan receivable bearing stated interest of 6.0%, maturing July 26, 2023.
- One property was sold for net proceeds of $2.3 million, producing a $0.2 million gain; no property sales occurred in the prior-year quarter.
- Equity increased through settlement of $72.0 million of forward-sale shares and $3.5 million of ATM-program issuance. Shares outstanding increased to 47.9 million from 44.2 million at December 31, 2021.
- Revolver borrowings increased to $120.0 million from $64.0 million at December 31, 2021, supporting acquisitions and other investment activity.
- No impairment provision was recorded in Q1 2022, compared with a $0.1 million provision in Q1 2021.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific annual earnings, FFO or revenue guidance. Management expects available ATM capacity, future settlement of forward equity sales, operating cash flow and remaining borrowing capacity to support operations, debt service, capital expenditures and working capital for at least the next 12 months.
Management reported that operations and cash flows were not materially affected by COVID-19 during the periods presented, but continued pandemic effects, tenant performance and economic conditions remain risks. The portfolio is concentrated in retail real estate and depends on tenant credit quality, rent collections, occupancy, lease renewals and property values.
The term loan matures December 23, 2024, and the revolver matures December 23, 2023, subject to a potential one-year extension. The term loan is hedged with interest-rate swaps through maturity; the revolver remains exposed to variable rates. Management estimated that a 1% adverse rate change would increase annualized revolver interest exposure by less than $1.2 million. The company also faces LIBOR transition risk because its debt and derivatives reference LIBOR.
The company was in compliance with all debt covenants as of March 31, 2022 and expected to remain compliant for the following 12 months. It had $20.9 million of development commitments expected to be funded over the next 12 months. In April 2022, it borrowed an additional $20.0 million on the revolver for general corporate purposes, including acquisitions. The company declared a second-quarter 2022 dividend of $0.20 per share.
Unusual or noncash items included $6.2 million of other comprehensive income from changes in the fair value of interest-rate derivatives, $1.0 million of stock-based compensation expense, substantial depreciation and lease-intangible amortization, and the $0.2 million gain on property disposition.
Important Facts for Investors to Verify
- Reconcile portfolio growth, acquisition yields and expected rent commencement for the nine developments under construction.
- Assess leverage, revolver availability, debt maturities, covenant headroom and the effect of the additional April 2022 borrowing.
- Review tenant concentration, investment-grade tenant exposure, lease expirations, rent escalations and collection trends.
- Evaluate the economics and settlement timing of the 6.9 million remaining unsettled forward-equity shares, including potential dilution and proceeds.
- Monitor interest-rate exposure, LIBOR-to-SOFR transition provisions and the valuation of the interest-rate swaps.
- Confirm the company’s ability to fund the $20.9 million development commitment, acquisitions, dividends and other capital needs while maintaining liquidity.
- Consider the limitations of FFO, AFFO, NOI and related non-GAAP measures and reconcile them to GAAP results.