NETSTREIT Corp. annual report, FY2023

NETSTREIT Corp. 2023 Form 10-K Summary

Business context and reporting period

NETSTREIT Corp. is an internally managed REIT focused on acquiring, owning and managing single-tenant retail properties subject to long-term net leases. This Form 10-K covers the fiscal year ended December 31, 2023; the filing does not represent a standalone quarterly Form 10-Q, although fourth-quarter metrics are disclosed.

Portfolio: 598 properties, 85 tenants, 26 retail sectors and 45 states.
Portfolio occupancy was 100%, with weighted average remaining lease term of 9.5 years.
Annualized base rent was $131.9 million; 71% was generated by investment-grade tenants and an additional 14% by tenants with an investment-grade profile.
Approximately 87.7% of annualized base rent came from defensive retail industries, including grocery, drug stores, home improvement, convenience stores and discount retail.

Financial performance and key metrics

Metric	2023	2022	Change
Total revenues	$131.9 million	$96.3 million	+$35.6 million
Rental revenue	$124.0 million	$93.9 million	+$30.0 million
Interest income on mortgage loans	$7.4 million	$2.3 million	+$5.0 million
Total operating expenses	$107.8 million	$82.8 million	+$25.0 million
Net income	$6.9 million	$8.2 million	-$1.3 million
Net income attributable to common stockholders	$6.8 million	$8.1 million	-$1.3 million
Basic and diluted EPS	$0.11	$0.16	-$0.05
FFO	$76.2 million	$54.7 million	+$21.5 million
Core FFO	$76.7 million	$55.4 million	+$21.3 million
AFFO	$79.1 million	$58.5 million	+$20.6 million
Property-Level Cash NOI	$105.8 million	$80.1 million	+$25.7 million
Cash flow from operating activities	$80.2 million	$50.6 million	+$29.5 million

Reported net income declined despite strong growth in revenue and recurring-property metrics, primarily because of higher interest expense, depreciation and amortization, impairment charges, payroll costs and lower gains on property sales. Based on reported figures, total revenue margin was approximately 26.5% in 2023 versus 14.0% in 2022, while net income margin was approximately 5.2% versus 8.5%.

For the fourth quarter of 2023, net income was $2.0 million, EBITDA_re was $26.9 million, Adjusted EBITDA_re was $29.3 million and annualized Adjusted EBITDA_re was $117.2 million. Adjusted net debt to annualized Adjusted EBITDA_re was 4.1x.

Liquidity, leverage and capital allocation

Cash, cash equivalents and restricted cash were $29.9 million at December 31, 2023, compared with $70.5 million at December 31, 2022.
Principal debt outstanding was $613.4 million, consisting of $175.0 million under the 2027 Term Loan, $200.0 million under the 2028 Term Loan, $150.0 million under the 2029 Term Loan and $80.0 million under the revolving facility, plus an $8.4 million mortgage note.
Net debt was $583.4 million; adjusted net debt, after deducting the net value of unsettled forward equity, was $484.8 million.
Debt, net of issuance costs, was $607.9 million, compared with $491.5 million at year-end 2022.
The $400.0 million revolving facility had $80.0 million drawn at year-end, leaving approximately $320.0 million of gross undrawn capacity before other limitations.
The 2029 Term Loan funded $150.0 million in July 2023 and was hedged at an all-in fixed rate of 4.99% through January 2029. The 2028 Term Loan was fully hedged at an all-in rate of 3.88%; the 2027 Term Loan was also fully hedged.
Management reported compliance with all debt covenants as of December 31, 2023 and expects compliance through December 31, 2024.
Contractual principal maturities, excluding extension options, include approximately $405.2 million in 2026 and $200.0 million in 2028.

Material changes versus the prior comparable period

Acquired 103 properties for $345.1 million in 2023, compared with 105 properties for $424.8 million in 2022. The 2023 acquisitions had an underwritten weighted-average capitalization rate of approximately 6.9% and WALT of approximately 10.4 years.
Invested $81.0 million in property developments, compared with approximately $22.0 million in 2022. Eighteen developments remained under construction at year-end, with rent expected to commence during 2024.
Invested $72.3 million in fully collateralized mortgage loans receivable. Mortgage loans receivable increased to $114.5 million gross, or $114.5 million net, from $46.4 million at year-end 2022.
Sold 19 properties for $40.3 million and recognized a $1.2 million gain, versus seven properties sold for $25.5 million and a $4.1 million gain in 2022.
Recorded $7.1 million of impairment charges on 22 properties, compared with $1.1 million on one property in 2022.
Interest expense increased to $19.1 million from $9.2 million, reflecting higher interest rates and increased borrowings.
Operating cash flow increased 58% to $80.2 million, while net cash used in investing activities was $452.0 million and net cash provided by financing activities was $331.2 million.
Common stock dividends increased to $0.810 per share from $0.800 per share, with total common stock dividends of $51.7 million versus $39.5 million.

Guidance, outlook, management commentary, risks and unusual items

Management expects cash from operations, future equity issuances and available borrowing capacity to support ongoing operations, debt service, capital expenditures and working capital requirements for at least the next 12 months. The filing does not provide specific 2024 revenue, FFO, AFFO or acquisition guidance.

Management continues to target a conservative net debt to EBITDA_re leverage ratio of 4.5x to 5.5x, including unsettled forward equity.
High interest rates and inflation have increased acquisition costs and reduced the availability of financing on attractive terms. Commercial real estate pricing and credit markets remain volatile.
Key risks include tenant defaults or bankruptcies, reliance on single-tenant properties, tenant and geographic concentration, lease renewals and re-leasing risk, competition for acquisitions, access to capital, refinancing risk and interest-rate volatility.
The top five tenants generated 35.3% of annualized base rent: Dollar General 10.9%, CVS 7.8%, Walgreens 6.9%, Dollar Tree/Family Dollar 5.0% and Home Depot 4.7%. The top 10 tenants represented 53.7%.
Geographic concentrations include Illinois at 8.6% of annualized base rent, Texas at 7.6%, Wisconsin at 7.2% and New York at 6.5%; the South and Midwest represented 43.4% and 31.3%, respectively.
Unusual or non-recurring items included $7.1 million of impairment charges, $1.2 million of net property-sale gains, a $0.1 million debt-extinguishment loss, $0.6 million of legal settlement proceeds included in other revenue and $0.4 million of non-recurring executive transition and severance costs used in the Core FFO reconciliation.
In January 2024, the Company completed an offering of 11.04 million shares at $18.00 per share and entered into forward sale agreements. Physical settlement and receipt of proceeds are expected no later than January 9, 2025.
The Company declared a $0.205 per-share dividend for the first quarter of 2024, payable March 28, 2024.
No material litigation was outstanding, and management and KPMG reported effective internal control over financial reporting.

Most important facts for investors to verify

Reconcile recurring FFO and AFFO growth with GAAP net income decline and determine the effect of impairment, depreciation and interest costs.
Review the $405.2 million of scheduled 2026 principal maturities, available extension options and refinancing assumptions.
Assess tenant credit quality and concentration, particularly exposure to Dollar General, CVS, Walgreens, Dollar Tree/Family Dollar and Home Depot.
Evaluate the earnings and liquidity impact of 2024 development commitments of $35.7 million, mortgage-loan funding commitments of $13.7 million and tenant-improvement commitments of $4.1 million.
Monitor the remaining unsettled forward equity agreements, including 5.98 million shares under the 2021 ATM program and 11.04 million shares from the January 2024 offering, for dilution and capital availability.
Verify whether the expected 2024 rent commencements from developments occur on schedule and whether the portfolio remains fully occupied.
Review impairment assumptions, property valuations and the sustainability of acquisition capitalization rates in a higher-rate environment.