NETSTREIT Corp. — Fiscal 2022 Form 10-K Summary
Reporting period: Year ended December 31, 2022. The filing is an annual Form 10-K rather than a standalone fourth-quarter report. The company is an internally managed REIT focused on single-tenant, retail net-leased properties in the United States.
Business context and portfolio
- As of December 31, 2022, the portfolio included 427 operating properties, plus development projects and mortgage-loan investments, spanning 43 states, 80 tenants and 25 retail sectors.
- Operating properties totaled approximately 8.5 million square feet, were 100% occupied and generated annualized base rent of $99.2 million.
- Weighted average remaining lease term was 9.5 years. Approximately 63% of annualized base rent came from investment-grade tenants and 17% from tenants with an investment-grade profile.
- Defensive retail industries represented 86.2% of annualized base rent. The top 10 tenants represented 50.9% of annualized base rent; CVS was the largest tenant at 10.1%.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenues | $96.3 million | $59.1 million | +$37.2 million |
| Rental revenue, including reimbursements | $93.9 million | $59.1 million | +$34.8 million |
| Interest income on mortgage loans | $2.3 million | — | New in 2022 |
| Net income | $8.2 million | $3.2 million | +$5.0 million |
| Net income attributable to common stockholders | $8.1 million | $3.0 million | +$5.1 million |
| Diluted EPS | $0.16 | $0.08 | +$0.08 |
| FFO | $54.7 million | $34.2 million | +$20.5 million |
| Core FFO | $55.4 million | $33.7 million | +$21.6 million |
| AFFO | $58.5 million | $36.2 million | +$22.3 million |
| NOI | $82.2 million | $53.3 million | +$28.9 million |
| Cash NOI | $80.1 million | $51.6 million | +$28.5 million |
| Net cash provided by operating activities | $50.6 million | $31.5 million | +$19.1 million |
Net income margin was approximately 8.5% of revenue in 2022, compared with approximately 5.3% in 2021. Reported profitability was affected by significant non-cash depreciation and amortization of $50.1 million, interest expense of $9.2 million and $1.1 million of impairment provisions.
Balance sheet, debt and liquidity
- Total assets were $1.61 billion, including $1.26 billion of real estate held for investment, net, compared with total assets of $1.07 billion at December 31, 2021.
- Total debt, before unamortized discounts and financing costs, was $496.5 million; net debt reported on the balance sheet was $491.5 million.
- Debt consisted primarily of a $175.0 million 2024 Term Loan, $200.0 million 2028 Term Loan, $113.0 million drawn on the $400.0 million New Revolver and an $8.5 million mortgage note.
- Cash, cash equivalents and restricted cash were $70.5 million at year-end, including $4.7 million of restricted cash.
- The company stated that cash flows from operations, available New Revolver capacity, the ATM program and remaining forward equity settlements were expected to fund operations, capital expenditures and debt service for at least the next 12 months.
- Interest-rate swaps hedged the 2024 and 2028 term loans. Management estimated that a 1% adverse change in interest rates would have an annual market-risk exposure of approximately $1.1 million based on 2022 revolving-facility borrowings.
Cash flow and capital allocation
- Investing cash outflows were $468.4 million, including $424.8 million for 105 property acquisitions, $22.4 million for development and improvements, and $46.5 million for mortgage loans receivable.
- Financing cash inflows were $480.7 million, supported by equity offerings, term-loan proceeds and revolving-credit borrowings. Dividends and distributions paid totaled approximately $40.3 million.
- The company sold seven properties for $25.5 million, recognizing a $4.1 million gain.
- Development investment totaled approximately $22.0 million. Five development projects remained under construction or otherwise in progress at year-end, with expected rent commencements during 2023 and the first quarter of 2024.
- Common dividends totaled $0.80 per share for 2022, unchanged from 2021. The board subsequently declared a $0.20 per share first-quarter 2023 dividend.
Material changes versus 2021
- The operating portfolio expanded from 328 properties at December 31, 2021 to 430 total properties or investments at December 31, 2022, including development projects and mortgage-loan investments; the operating-property count was 427 at year-end.
- Revenue, NOI, AFFO and operating cash flow increased substantially as acquisitions and completed developments contributed additional rent.
- Interest expense increased from $3.7 million to $9.2 million, reflecting higher borrowings, the new credit facility and rising interest rates.
- Impairment provisions declined from $3.5 million to $1.1 million.
- The company refinanced and upsized its revolving facility in August 2022, adding the $200.0 million 2028 Term Loan and replacing the $250.0 million Prior Revolver with a $400.0 million New Revolver.
- Common shares outstanding increased from 44.2 million to 58.0 million, primarily due to follow-on offerings and forward equity settlements.
- The former Chief Financial Officer resigned in November 2022. Lori Wittman was appointed interim Chief Financial Officer, and the company disclosed an ongoing search for a permanent CFO.
Guidance, outlook, risks and unusual items
- The filing does not provide explicit 2023 revenue, earnings, AFFO or acquisition guidance.
- Management expects to continue funding growth through operating cash flow, borrowings and equity issuance, while targeting a net debt to EBITDA re-leverage ratio of 4.5x to 5.5x, excluding forward undrawn equity.
- High inflation and rising interest rates increased acquisition costs and financing costs and reduced the availability of attractive acquisition financing. The filing states that 2022 inflation averaged 6.5%.
- The $175.0 million 2024 Term Loan is scheduled to mature in December 2024, creating a material refinancing or repayment requirement. The New Revolver matures in August 2026, subject to an extension, and the $200.0 million 2028 Term Loan matures in February 2028.
- As of year-end, $10.2 million of development commitments and $4.1 million of tenant-improvement allowances remained, with most expected to be funded within 12 months.
- There were 7,376,056 unsettled shares under the August 2022 forward-sale agreements as of December 31, 2022. Settlement could provide capital but may dilute existing stockholders; cash settlement could result in no proceeds and potentially require cash payment.
- Key risks include tenant defaults or bankruptcies, tenant and geographic concentration, lease expirations and re-leasing risk, real estate valuation declines, access to capital, interest-rate volatility, debt covenants, environmental and insurance liabilities, cybersecurity, REIT qualification and the CFO transition.
- The company recorded $0.8 million of acquisition and abandoned-transaction costs, $0.8 million of non-recurring severance and related charges included in Core FFO adjustments, and $1.1 million of impairment provisions.
- No material litigation was outstanding at year-end. Management and KPMG concluded that internal control over financial reporting was effective, and KPMG issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Reconciliation of AFFO and dividend coverage, including the effect of non-cash compensation and other adjustments.
- Ability to refinance or repay the $175.0 million 2024 Term Loan under prevailing capital-market conditions.
- Actual settlement timing and dilution from the 7.4 million remaining forward-sale shares.
- Tenant credit quality, rent coverage and exposure to CVS, Walgreens, Dollar General, Hobby Lobby and 7-Eleven.
- Progress, costs and rent commencement dates for the five development projects and funding of the $10.2 million development commitments.
- Interest-rate exposure on the $113.0 million New Revolver and compliance with debt covenants.
- Effect of the CFO transition and any subsequent appointment of a permanent CFO.
- Whether high interest rates, inflation and changing retail conditions affect acquisition yields, property values, tenant performance and future growth.