NETSTREIT Corp. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2022; filed July 28, 2022. Financial statements are unaudited and prepared under U.S. GAAP.
Business Context
NETSTREIT is an internally managed REIT and UPREIT focused on acquiring, owning and managing single-tenant retail properties leased primarily on a long-term triple-net basis to high-credit-quality tenants. At June 30, 2022, the Company owned or had investments in 384 properties across 42 states, including six properties under development. Its portfolio included 381 single-tenant retail net leases, 75 tenants across 24 retail sectors, 100% occupancy, $84.2 million of annualized base rent and a 9.5-year weighted average lease term. Approximately 65% of annualized base rent was from investment-grade tenants and 16% from investment-grade-profile tenants.
Financial Results and Key Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $22.6 million, versus $13.8 million | $44.0 million, versus $25.7 million |
| Net income attributable to common stockholders | $2.0 million, versus $(2.5) million | $3.9 million, versus $(1.8) million |
| Diluted EPS | $0.04, versus $(0.07) | $0.08, versus $(0.06) |
| Net income margin | Approximately 8.9%, versus negative margin in 2021 | Approximately 9.0%, versus negative margin in 2021 |
| Operating cash flow | Not separately disclosed for the quarter | $22.3 million, versus $13.8 million |
| FFO | $12.9 million, versus $7.3 million | $25.5 million, versus $14.0 million |
| AFFO | $13.7 million, versus $8.1 million | $26.9 million, versus $15.0 million |
| Cash NOI | $18.9 million, versus $12.0 million | $36.2 million, versus $22.6 million |
Revenue growth primarily reflected portfolio expansion, higher cash rents and reimbursements, and $1.0 million of mortgage-loan interest income for the first half of 2022. Six-month operating expenses increased to $39.2 million from $26.3 million, driven mainly by higher depreciation and amortization, property expenses, general and administrative costs and stock-based compensation. The provision for impairment declined to $1.1 million from $3.5 million.
Balance Sheet, Debt and Liquidity
- Total assets were $1.370 billion at June 30, 2022, compared with $1.068 billion at December 31, 2021. Net real estate held for investment increased to $1.089 billion from $914 million.
- Cash, cash equivalents and restricted cash were $19.9 million, versus $7.6 million at year-end 2021.
- Total debt was $412.0 million, or $410.8 million net of discounts and financing costs, compared with $239.0 million gross debt at year-end 2021. Debt consisted of a $175.0 million term loan and $237.0 million drawn on a $250.0 million revolving facility.
- The term loan matures December 23, 2024; the revolver matures December 23, 2023 and may be extended by up to one year. The term loan is hedged at a fixed base rate of 0.21% plus a 1.15% margin. Revolver borrowings remain exposed to LIBOR-based rate changes.
- Management stated that the Company was in compliance with all debt covenants and expects to remain compliant over the following twelve months. It believes operating cash flow, available revolver capacity, ATM proceeds and future forward-equity settlements will fund operations and obligations for at least the next twelve months.
- Six-month investing cash outflows were $289.3 million, principally for $207.3 million of property acquisitions, $46.5 million of mortgage loan investments, $8.0 million of development and improvements, and $39.7 million of earnest-money deposits.
- Six-month financing cash inflows were $279.3 million, including $125.5 million of net common-stock proceeds and $173.0 million of net revolver borrowings. Dividends and distributions paid totaled $18.8 million.
Material Changes Versus Prior Comparable Period
- The Company acquired 56 properties for $207.3 million in the first half of 2022, compared with 66 properties for $205.2 million in the prior-year period. Year-to-date acquisitions had an underwritten weighted-average capitalization rate of approximately 6.5%.
- The portfolio expanded from 328 properties at December 31, 2021 to 384 properties at June 30, 2022.
- The Company invested $46.5 million in two fully collateralized mortgage loans bearing stated interest rates of 6.0% and 6.5%; mortgage loan receivables totaled $46.4 million at quarter-end.
- Three properties were sold during the first half of 2022 for $12.2 million, producing a $2.0 million gain, compared with five properties sold for $12.3 million and a $0.5 million gain in the prior-year period.
- The Company settled 5.8 million shares under forward equity agreements and received $122.0 million of net proceeds; it also received approximately $3.5 million from its ATM program. An additional 4.5 million shares remained unsettled at June 30, 2022.
- Interest expense increased to $2.7 million from $1.8 million for the first six months, primarily because of higher revolver borrowings and rising rates.
Outlook, Risks and Unusual Items
No specific earnings or acquisition guidance was provided. Management expects the six remaining development projects to be substantially completed and begin generating rent at various points during 2022. The Company had $19.1 million of development commitments expected to be funded during the next six months.
Management reported no material COVID-19 impact on operations or cash flows during the periods presented, but continues to monitor tenant payment performance, new variants and broader macroeconomic conditions. Key risks include tenant credit and concentration risk, real estate valuation and impairment risk, acquisition and development execution, refinancing and liquidity risk, rising interest rates, and the transition from LIBOR to an alternative reference rate. A 1% adverse rate change was estimated to produce approximately $1.3 million of annual market-risk exposure on the revolver based on 2022 average borrowings.
Unusual items included a $1.1 million impairment charge on one property sold during the quarter, $2.0 million of first-half gains on real estate sales, a $36,000 insurance-related gain, and a $7.5 million increase in the fair value of cash-flow hedges recognized in other comprehensive income. The Company reported no current material litigation, no material environmental contingencies and no material off-balance-sheet arrangements.
On July 26, 2022, the Board declared a $0.20 per-share dividend for the third quarter, payable September 15, 2022. In July 2022, the Company repaid $10.0 million of revolver borrowings.
Investor Verification Items
- Verify lease collections, tenant credit quality, occupancy and the sustainability of the stated $84.2 million annualized base rent.
- Assess leverage, revolver availability, debt maturities and exposure to LIBOR replacement and rising interest rates.
- Review the funding requirements and completion timing for the six development projects and the $19.1 million development commitment.
- Evaluate the economics, collateral and maturity dates of the $46.4 million mortgage loan receivables.
- Reconcile FFO, Core FFO and AFFO to GAAP results and consider the effect of non-cash compensation, straight-line rent, lease-intangible amortization and other adjustments.
- Monitor the 4.5 million unsettled forward-sale shares for potential dilution and future equity proceeds.
- Confirm that the Company continues to satisfy REIT distribution, income and asset tests and maintains debt-covenant compliance.