NETSTREIT Corp. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2021. The unaudited filing covers NETSTREIT Corp., an internally managed REIT focused on single-tenant, retail commercial properties leased on a long-term basis to generally high-credit-quality tenants across the United States.
Business Context and Portfolio
- As of June 30, 2021, the company reported 266 owned properties across 39 states, including properties under development; the filing also refers to 267 total properties when including an additional property subject to a non-binding purchase option.
- The operating portfolio was 100% occupied, with annualized base rent of $55.3 million and a weighted-average lease term of 9.9 years.
- Approximately 70% of annualized base rent was from investment-grade tenants and an additional 14% from investment-grade-profile tenants.
- The portfolio included tenants representing 59 brands or concepts across 23 retail sectors, with a focus on defensive retail categories such as home improvement, auto parts, pharmacies, grocers, convenience stores and quick-service restaurants.
- The company acquired 66 properties for $205.2 million during the first six months of 2021 and commenced or funded three development projects.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|---|---|
| Rental revenue | $13.8 million | $7.1 million | $25.7 million | $12.6 million |
| Net loss | $2.6 million | $0.4 million | $1.9 million | $2.0 million |
| Net loss attributable to common shareholders | $2.5 million | $0.3 million | $1.8 million | $1.4 million |
| Diluted loss per share | $0.07 | $0.03 | $0.06 | $0.13 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $13.8 million | $1.8 million |
| FFO | $7.3 million | $3.0 million | $14.0 million | $3.7 million |
| AFFO | $8.1 million | $2.7 million | $15.0 million | $3.9 million |
| Cash NOI | $12.0 million | $5.7 million | $22.6 million | $10.8 million |
- Rental revenue increased 93.9% in the second quarter and 103.8% for the first six months, primarily because of substantial portfolio growth.
- Cash NOI margin was approximately 87.2% in the second quarter and 87.7% for the first six months, calculated as cash NOI divided by rental revenue.
- Net loss increased in the second quarter primarily because of higher impairment charges, depreciation and amortization, general and administrative costs and stock-based compensation. For the six-month period, net loss improved modestly despite the larger portfolio.
- Operating expenses were $16.0 million in the second quarter and $26.3 million for the first six months, including depreciation and amortization of $7.1 million and $13.0 million, respectively.
Liquidity, Capital Resources and Debt
- Cash, cash equivalents and restricted cash totaled $88.1 million at June 30, 2021, compared with $92.6 million at December 31, 2020.
- The company had $175.0 million of term debt, reported at $173.2 million net of unamortized discount and financing costs. The term loan matures December 23, 2024.
- No borrowings were outstanding under the $250.0 million revolving credit facility at quarter-end. The company borrowed and repaid $13.0 million under the revolver during the first quarter of 2021.
- The term loan’s stated interest rate was 1.25% at June 30, 2021. Interest-rate swaps effectively fixed the term-loan rate at 1.36%, consisting of a 0.21% hedged benchmark rate plus a 1.15% margin.
- The company was in compliance with all debt covenants and expected to remain compliant over the following 12 months.
- Net cash provided by financing activities was $179.9 million for the first six months, primarily reflecting $194.2 million of net proceeds from the April 2021 public offering, partially offset by dividends and distributions.
- Management stated that the April offering proceeds, operating cash flow and available borrowing capacity should be adequate for operations, debt service, capital expenditures and working capital for at least the next 12 months.
- Development commitments totaled $10.4 million, of which $5.3 million had been funded by June 30, 2021; the remaining amount was expected to be funded over the following eight months.
Material Changes Versus the Prior Comparable Period
- The company’s property count increased substantially, driving rental revenue from $12.6 million to $25.7 million for the first six months and increasing real estate held for investment, net from $537.6 million at year-end 2020 to $699.6 million at June 30, 2021.
- The April 2021 equity offering issued 10.9 million shares and generated $194.2 million of net proceeds, materially increasing common equity and funding capacity.
- General and administrative expense increased to $7.1 million from $3.7 million for the first six months, including $1.6 million of stock-based compensation versus none in the prior period.
- Interest expense declined to $1.8 million from $2.8 million because of lower effective borrowing rates.
- Transaction costs decreased to $0.3 million from $1.7 million, primarily because the prior-year period included initial public offering-related costs.
- Impairment provisions increased to $3.5 million from $1.4 million for the first six months. The 2021 charges related to three properties identified for sale or sold.
- The company paid $13.6 million of common stock dividends and $0.6 million of OP Unit distributions during the first six months; no common dividends or distributions were paid in the prior-year period.
Outlook, Commentary, Risks and Unusual Items
- Management intends to continue acquiring strategically positioned, single-tenant retail properties, particularly assets leased to essential or defensive retail businesses.
- Two build-to-suit projects in Fond du Lac, Wisconsin were expected to be completed in September 2021. A Yuma, Arizona project had a non-binding purchase option, with the tenant expected to commence rent payments in 2022.
- The company collected 100% of rent due for the three and six months ended June 30, 2021 and had not provided rent abatements or deferrals since August 1, 2020. Management stated that COVID-19 had not materially affected operations or cash flows, while noting that future effects remain uncertain, particularly from new variants and tenant impacts.
- Impairment charges and property dispositions are part of management’s strategy to improve returns and manage risk exposure. Five properties were sold during the first six months for net proceeds of $12.3 million, generating a $0.5 million gain.
- The company remains exposed to LIBOR transition risk because its term loan and revolver reference LIBOR. The term loan is hedged, but changes to reference rates, contractual transition provisions and valuation could affect interest expense and financing risk.
- Other principal risks include tenant credit and concentration risk, real estate market conditions, acquisition and development execution, interest rates, REIT qualification requirements, and the estimates used in impairment and fair-value measurements.
- No material litigation was outstanding, no material off-balance-sheet arrangements were reported, and management reported effective disclosure controls with no material changes in internal control over financial reporting.
- On July 27, 2021, the board declared a third-quarter cash dividend of $0.20 per share, payable September 15, 2021.
Facts Investors Should Verify
- Reconcile the filing’s references to 266 owned properties and 267 total properties, including the property subject to a non-binding purchase option.
- Assess acquisition underwriting, including the approximately 6.6% weighted-average capitalization rate and 9.3-year weighted-average lease term for year-to-date 2021 acquisitions.
- Review tenant credit quality, lease expirations, rent escalations and the concentration of annualized base rent by tenant and industry.
- Evaluate recurring AFFO and cash NOI relative to the $0.40 per-share common dividend declared during the first six months and the subsequent $0.20 quarterly dividend.
- Monitor impairment charges, held-for-sale properties and the company’s disposition strategy.
- Confirm the availability and covenant capacity of the revolver, the December 2024 term-loan maturity and the implications of LIBOR replacement.
- Review the full 2020 Form 10-K risk factors and non-GAAP reconciliations because FFO, AFFO, NOI and related measures are not GAAP measures and may not be comparable with other REITs.