NETSTREIT Corp. — Q3 2022 Form 10-Q Summary
Business context and reporting period
NETSTREIT Corp. is an internally managed Maryland REIT operating through NETSTREIT, L.P. It acquires, owns and manages single-tenant retail properties leased on a long-term net-lease basis to high-credit-quality tenants. The report covers the three and nine months ended September 30, 2022; financial statements are unaudited and prepared under U.S. GAAP.
As of September 30, 2022, the Company owned or had investments in 409 properties across 42 states, including 406 single-tenant retail net leases, 77 tenants, and 24 retail sectors. The portfolio was 100% occupied, with annualized base rent of $92.7 million and a weighted average lease term of 9.6 years. Approximately 65% of annualized base rent was attributable to investment-grade tenants and 14% to investment-grade-profile tenants.
Key financial metrics
| Metric | Three months ended September 30, 2022 | Three months ended September 30, 2021 | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 |
|---|---|---|---|---|
| Total revenues | $25.0 million | $15.6 million | $69.0 million | $41.3 million |
| Net income | $1.4 million | $2.9 million | $5.4 million | $1.1 million |
| Net income attributable to common stockholders | $1.4 million | $2.8 million | $5.3 million | $1.0 million |
| Diluted EPS | $0.03 | $0.07 | $0.11 | $0.03 |
| Cash flow from operating activities | Not separately reported | Not separately reported | $38.7 million | $19.2 million |
| AFFO | $15.4 million | $9.7 million | $42.3 million | $24.8 million |
| Cash NOI | $21.2 million | $13.5 million | $57.4 million | $36.0 million |
Third-quarter net income margin was approximately 5.7%, compared with 18.9% in the prior-year quarter. Nine-month net income margin was approximately 7.8%, compared with 2.6% in the prior-year period. The lower third-quarter margin primarily reflected higher depreciation and amortization, interest expense, and lower gains on property sales.
Third-quarter FFO was $14.5 million and Core FFO was $14.5 million. Nine-month FFO was $40.0 million and Core FFO was $40.0 million. These are non-GAAP measures and are not substitutes for GAAP net income or operating cash flow.
Balance sheet, debt and liquidity
- Total assets were $1.47 billion at September 30, 2022, compared with $1.07 billion at December 31, 2021.
- Real estate held for investment, net, increased to $1.18 billion from $913.6 million.
- Cash, cash equivalents and restricted cash totaled $16.2 million, compared with $7.6 million at year-end 2021.
- Total debt, net, was $408.2 million, compared with $237.5 million at year-end 2021. Gross debt consisted principally of the $175.0 million 2024 Term Loan, $200.0 million 2028 Term Loan, $30.0 million drawn on the New Revolver, and an $8.5 million mortgage note.
- The August 2022 refinancing created a $400.0 million senior unsecured revolving facility and a $200.0 million senior unsecured 2028 Term Loan. The New Revolver may be increased by up to $400.0 million in the aggregate.
- The Company had seven interest-rate swaps with a total notional amount of $375.0 million. The term loans were effectively hedged at fixed rates, while the New Revolver remained exposed to SOFR-based rate changes.
- Management stated that the Company was in compliance with all debt covenants and expected to remain compliant for the following twelve months.
- Contractual obligations totaled $487.0 million, including principal, projected interest, facility fees, development commitments, and corporate office lease obligations.
Cash flow and capital deployment
| Cash flow category | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 |
|---|---|---|
| Operating activities | $38.7 million provided | $19.2 million provided |
| Investing activities | $381.2 million used | $272.0 million used |
| Financing activities | $351.1 million provided | $187.8 million provided |
| Net change in cash | $8.6 million increase | $65.0 million decrease |
- The Company acquired 82 properties for $329.0 million during the first nine months of 2022, compared with 92 properties for $292.0 million in the prior-year period.
- It invested $14.3 million in development projects and had six developments under construction at quarter-end, expected to be substantially completed with rent commencing through the first quarter of 2023.
- It invested $46.5 million in two fully collateralized mortgage loans receivable, bearing stated rates of 6.0% and 6.5% and maturing in 2023.
- The Company paid $28.5 million of common stock dividends during the first nine months and declared a fourth-quarter dividend of $0.20 per share payable December 15, 2022.
Material changes versus the prior comparable period
- Third-quarter revenue increased $9.4 million, or approximately 60%, primarily from portfolio growth and $0.7 million of mortgage-loan interest income.
- Nine-month revenue increased $27.7 million, or approximately 67%, primarily from higher cash rental receipts, reimbursements, and new mortgage-loan interest income.
- Third-quarter net income declined $1.5 million, or approximately 52%, despite revenue growth, due mainly to higher depreciation and amortization, higher interest expense, and a $1.8 million reduction in gains on property sales.
- Nine-month net income increased $4.3 million from $1.1 million to $5.4 million. The improvement reflected portfolio growth and lower impairment charges, partly offset by increased depreciation and amortization, interest expense, and corporate expenses.
- Interest expense increased to $3.0 million in the third quarter and $5.7 million for the nine-month period, from $0.9 million and $2.7 million, respectively.
- Common shares outstanding increased to 54.9 million at September 30, 2022 from 44.2 million at December 31, 2021, primarily due to follow-on offerings and forward equity settlements.
- Assets held for sale increased to 12 properties from one at year-end 2021. The Company sold four properties during the first nine months, compared with nine in the prior-year period.
Outlook, risks and unusual items
Management did not provide specific earnings or acquisition guidance in the filing. It stated that cash flows from operations, available borrowing capacity, the ATM program, and settlement of outstanding forward equity sales should be adequate to fund operations, debt service, capital expenditures, and working capital for at least the next twelve months.
- At September 30, 2022, 10.35 million shares remained unsettled under the August 2022 forward sale agreements. Settlement was expected no later than August 3, 2023; cash settlement could result in no proceeds and potentially require cash payment to counterparties.
- The Company had $11.2 million of commitments to fund six development properties, expected to be funded over the following six months.
- COVID-19 had not materially affected operations or cash flows during the reported periods, but management continued to monitor variants and tenant payment performance.
- Key risks include tenant credit and concentration risk, retail-sector conditions, real estate valuation and impairment risk, acquisition and development execution, access to capital, refinancing requirements, and interest-rate volatility.
- The 2024 Term Loan is indexed to LIBOR, and the filing discusses risks associated with the planned discontinuation of USD LIBOR after June 30, 2023, including potential transition, valuation, basis, and systems risks.
- The Company recorded a $1.1 million impairment charge during the first nine months of 2022 on one property that was sold. No impairment charge was recorded in the third quarter.
- The $21.4 million increase in accumulated other comprehensive income primarily reflected gains on interest-rate swaps and is not current-period operating profit.
- The filing reported no material litigation, no material environmental liabilities, no material off-balance-sheet arrangements, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile AFFO, Core FFO, Cash NOI, and other non-GAAP measures to GAAP results and assess the impact of portfolio growth and non-cash adjustments.
- Review the maturity and refinancing plan for the $175.0 million 2024 Term Loan and the $30.0 million New Revolver borrowing.
- Monitor the timing and economics of settlement of the 10.35 million outstanding August 2022 forward-sale shares, including potential dilution or cash-settlement exposure.
- Assess whether acquisition volume, development completions, occupancy, annualized base rent, and lease duration support projected recurring cash flow.
- Evaluate exposure to SOFR, LIBOR transition mechanics, debt covenant compliance, and changes in interest-rate swap valuations.
- Review tenant credit quality, lease expirations, property dispositions, and the twelve properties classified as held for sale.
- Confirm the Company’s ability to fund the $11.2 million development commitment, dividends, debt service, and future acquisitions from operating cash flow and available financing.