NETSTREIT Corp. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2021; comparative period ended March 31, 2020. The filing is unaudited. NETSTREIT is an internally managed REIT focused on single-tenant, retail net-leased properties. At March 31, 2021, it owned 234 properties across 39 states, with 100% occupancy, $48.0 million of annualized base rent and a 10.1-year weighted-average lease term.
Financial Performance and Position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Rental revenue | $11.9 million | $5.5 million | +$6.4 million |
| Total operating expenses | $10.2 million | $5.6 million | +$4.6 million |
| Net income (loss) | $0.7 million | $(1.6) million | Improved $2.3 million |
| Net income attributable to common shareholders | $0.7 million | $(1.1) million | Improved $1.8 million |
| Basic and diluted EPS | $0.02 | $(0.10) | Improved |
| Cash flow from operating activities | $4.3 million | $0.9 million | +$3.4 million |
| FFO | $6.7 million | $0.7 million | +$5.9 million |
| AFFO | $6.9 million | $1.2 million | +$5.8 million |
| Cash NOI | $10.6 million | $5.1 million | +$5.5 million |
Rental revenue increased approximately 117% year over year, primarily from portfolio expansion. The reported net margin was approximately 6.2% of rental revenue, compared with a negative margin in the prior-year quarter. Cash NOI margin was approximately 88.4% of rental revenue; these are supplemental calculations and should not be treated as GAAP margins.
At March 31, 2021, total assets were $737.3 million, including $611.4 million of net real estate held for investment and $13.7 million of cash, cash equivalents and restricted cash. Total equity was $525.5 million.
Debt, Liquidity and Cash Flow
- Total debt was $188.0 million gross, or $186.1 million net of discounts and financing costs, consisting of a $175.0 million term loan and $13.0 million drawn on the $250.0 million revolving facility.
- The term loan matures December 23, 2024; the revolver matures December 23, 2023, subject to a potential one-year extension.
- The term loan was effectively fixed at 1.36%, comprising a 0.21% hedged rate plus a 1.15% margin. The revolver had a weighted-average interest rate of 1.29% during the quarter.
- Cash declined to $13.7 million from $92.6 million at December 31, 2020, primarily because $90.0 million was used for acquisitions and development. Operating cash flow was $4.3 million, and financing activities provided $6.8 million.
- The Company was in compliance with all debt covenants and expected to remain compliant for the following twelve months.
- On April 12, 2021, NETSTREIT raised $194.3 million of net proceeds in a public offering and used $13.0 million to repay the revolver in full. The remaining proceeds were intended for acquisitions and general corporate purposes.
Material Changes Versus the Prior Comparable Period
- The portfolio expanded materially, with 31 properties acquired for $88.2 million in Q1 2021 versus 24 properties acquired for $74.2 million in Q1 2020. The property count increased from 203 at December 31, 2020 to 234 at March 31, 2021.
- Operating cash flow increased due to higher rental income, while investing cash use increased because of greater acquisition and development activity.
- Interest expense fell to $0.9 million from $1.7 million, primarily because of lower effective term-loan interest rates.
- Transaction costs declined to $0.2 million from $1.1 million, as the prior-year period included offering-related expenses.
- General and administrative expense increased to $3.1 million from $1.9 million, driven by public-company staffing, insurance, professional fees and $0.6 million of stock-based compensation.
- Depreciation and amortization increased to $5.9 million from $2.3 million as the real estate portfolio expanded.
- The Company declared and paid a $0.20-per-share dividend during the quarter; no dividends were declared or paid in Q1 2020.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative full-year earnings or acquisition guidance in the filing. Management stated that cash from operations, the April 2021 equity offering and available borrowing capacity were expected to fund operations, debt service, capital expenditures and working capital for at least the next twelve months.
- Management expects continued growth through acquisitions, particularly properties leased to essential or defensive retail businesses. Q1 acquisitions had an underwritten weighted-average capitalization rate of approximately 6.7% and an approximately 8.8-year weighted-average lease term.
- The Company invested $1.3 million in a Yuma, Arizona development project, with expected total investment of $4.4 million. The sole tenant is expected to begin rent payments in 2022, and the purchase option is non-binding.
- COVID-19 did not materially affect operations or cash flows during the quarter. The Company collected 100% of rent due for the quarter and had not provided abatements or deferrals after August 1, 2020. Future effects remain uncertain.
- The quarter included a $0.1 million impairment provision on one property classified as held for sale. Five properties were classified as held for sale at March 31, 2021, compared with three at year-end 2020.
- Interest-rate risk remains relevant for the revolver and other variable-rate exposure. The Company also faces risks associated with the expected discontinuation of USD LIBOR after June 30, 2023, including potential transition, valuation and basis risks.
- There were no current lawsuits, material environmental matters or material off-balance-sheet arrangements reported. The filing states that there were no material changes to the risk factors in the 2020 Form 10-K.
- The Company had $4.4 million of development commitments at quarter-end, of which $1.3 million had been funded and approximately $3.1 million was expected to be funded over the following twelve months.
Key Facts for Investors to Verify
- Whether acquisition volume and portfolio growth can continue without materially increasing leverage or diluting per-share results.
- Post-quarter liquidity and leverage after the April 2021 equity offering and full repayment of the $13.0 million revolver balance.
- Rent collection, tenant credit quality, occupancy and lease expirations, particularly amid continuing economic and COVID-19 uncertainty.
- The sustainability of the $0.20-per-share quarterly dividend relative to AFFO, operating cash flow and future acquisition funding needs.
- The effect of depreciation, amortization, stock-based compensation and other non-cash items when comparing GAAP earnings with FFO and AFFO.
- Progress, funding requirements and tenant commencement timing for the Yuma development project and properties held for sale.
- The Company’s plan for transitioning its LIBOR-based debt and derivatives to an alternative reference rate.