NETSTREIT Corp. — Q3 2021 Form 10-Q Summary
Business context and reporting period
NETSTREIT is an internally managed REIT that owns and operates single-tenant, retail commercial properties subject to long-term net leases across the United States. The filing covers the unaudited three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
At September 30, 2021, the Company owned 290 properties in 40 states, including four properties under development. The operating portfolio was 100% occupied, with annualized base rent of approximately $59.8 million and a weighted average lease term of 10.0 years.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Rental revenue | $15.6 million | $9.7 million | $41.3 million | $22.3 million |
| Net income attributable to common shareholders | $2.8 million | $(2.1) million | $1.0 million | $(3.5) million |
| Basic EPS | $0.07 | $(0.11) | $0.03 | $(0.26) |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $19.2 million | $5.7 million |
| FFO | $9.0 million | $2.6 million | $23.0 million | $6.3 million |
| AFFO | $9.7 million | $4.8 million | $24.8 million | $8.7 million |
| Cash NOI | $13.5 million | $8.4 million | $36.0 million | $19.2 million |
Q3 operating expenses were $13.7 million, producing operating income before other income and expense of approximately $1.9 million, or 12.1% of rental revenue, versus an operating loss of approximately $1.4 million in Q3 2020. Nine-month operating income before other items was approximately $1.3 million, or 3.3% of revenue, versus a loss of approximately $1.8 million in the prior-year period.
At September 30, 2021, total assets were $927.5 million, including $776.2 million of real estate held for investment, net. Cash, cash equivalents and restricted cash were $27.6 million. Gross debt was $192.0 million, consisting of a $175.0 million term loan and $17.0 million drawn on the revolving facility; debt, net of discounts and financing costs, was $190.4 million. Total equity was $704.9 million.
Material changes versus the prior comparable periods
- Rental revenue increased 61.7% in Q3 and 85.5% for the first nine months, primarily from portfolio expansion and higher cash rent receipts.
- The portfolio expanded from 203 properties at December 31, 2020 to 290 properties at September 30, 2021. The Company acquired 92 properties for $292.0 million during the first nine months and invested $9.5 million in five development projects.
- Q3 net income improved to $2.9 million from a $2.3 million loss, while nine-month net income improved to $1.1 million from a $4.3 million loss.
- Depreciation and amortization increased to $8.1 million in Q3 and $21.1 million for the first nine months, reflecting the larger property base.
- Nine-month impairment expense increased to $3.5 million from $1.8 million. No impairment was recorded in Q3 2021 compared with $0.4 million in Q3 2020.
- Transaction costs declined to $0.1 million in Q3 and $0.5 million for the first nine months, compared with $1.2 million and $3.0 million, respectively, largely because 2020 included IPO-related costs.
- Net cash provided by operating activities increased by $13.5 million to $19.2 million, while investing cash outflows were $272.0 million, primarily for acquisitions and development.
- The Company completed a $194.2 million net common-stock offering in April 2021 and established a $250.0 million at-the-market equity program in September 2021. It also authorized a common-stock repurchase program of up to $150.0 million, although no assurance was provided that repurchases would occur.
Guidance, outlook, risks and unusual items
- No formal earnings or acquisition guidance was provided in the filing. Management expects available cash, operating cash flow, equity proceeds and borrowing capacity to fund operations, debt service, capital expenditures and working capital for at least the next 12 months.
- Management reported collection of 100% of rent for both the three and nine months ended September 30, 2021. COVID-19 did not materially affect operations or cash flows during those periods, but management cautioned that future effects, including effects from variants and tenant conditions, remain uncertain.
- The Company had commitments to fund five development projects totaling $16.9 million; $9.5 million had been funded, leaving approximately $7.4 million expected to be funded over the following five months.
- Hurricane Ida caused estimated damage of $0.5 million to a Louisiana property. The loss was fully offset by insurance proceeds deemed probable of recovery. Repair and replacement costs were estimated at $1.3 million, subject to a $0.1 million deductible, and rent abatement during repairs was expected to be covered by insurance.
- The term loan and revolver are indexed to LIBOR. The term loan is hedged through maturity, but the Company remains exposed to risks associated with the transition from LIBOR to an alternative reference rate.
- The Company was in compliance with all debt covenants at September 30, 2021 and expected to remain compliant for the following 12 months. The term loan matures December 23, 2024 and the revolver matures December 23, 2023, subject to a potential one-year extension.
- Subsequent to quarter-end, the Company acquired 12 properties for $90.0 million, borrowed $70.0 million under the revolver, commenced a new corporate-office lease with a recorded right-of-use asset and lease liability of approximately $4.6 million, and declared a fourth-quarter dividend of $0.20 per share.
- The filing reports no currently outstanding lawsuits, no material environmental liabilities, no material off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether continued acquisitions and development produce sufficient recurring cash flow to support the $0.20-per-share quarterly dividend.
- The Company’s leverage, revolver usage and covenant headroom following the subsequent $70.0 million borrowing.
- Actual rent collections, tenant credit quality and exposure to COVID-19-related tenant weakness despite reported 100% collections through September 30, 2021.
- Funding requirements and completion schedules for the five development projects, including the remaining approximately $7.4 million commitment.
- The impact of impairment charges, property dispositions and acquisition capitalization rates on portfolio returns.
- The future availability and replacement mechanics for LIBOR in the term loan, revolver and related interest-rate hedge.
- The terms, potential dilution and timing of issuance under the $250.0 million ATM program and any activity under the $150.0 million share-repurchase authorization.