NETSTREIT Corp. 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. The filing presents NETSTREIT as the “Successor” and the prior-year periods as the “Predecessor” following formation transactions on December 23, 2019; direct comparisons therefore have limited comparability. NETSTREIT is an internally managed REIT owning single-tenant, retail net-lease properties. At quarter-end, it owned 189 properties in 37 states, with 100% occupancy, $38.9 million of annualized base rent, 11.1 years of weighted-average lease term, and approximately 68% of annualized base rent from investment-grade tenants.
Key Financial Metrics
| Metric | Three months ended September 30, 2020 | Three months ended September 30, 2019 | Nine months ended September 30, 2020 | Nine months ended September 30, 2019 |
|---|---|---|---|---|
| Rental revenue | $9.7 million | $4.8 million | $22.3 million | $16.2 million |
| Total operating expenses | $11.0 million | $6.8 million | $24.1 million | $18.2 million |
| Net loss | $2.3 million | $2.7 million | $4.3 million | $4.6 million |
| Net loss attributable to common shareholders | $2.1 million | $2.7 million | $3.5 million | $4.6 million |
| Loss per diluted share | $0.11 | Not provided for predecessor | $0.26 | Not provided for predecessor |
| Cash flow from operating activities | Not separately provided | Not separately provided | $5.7 million | $5.3 million |
| FFO | $2.6 million | $1.1 million | $6.3 million | $4.0 million |
| Core FFO | $3.5 million | $1.1 million | $8.3 million | $4.0 million |
| AFFO | $4.8 million | $1.8 million | $8.7 million | $6.0 million |
| Cash NOI | $8.4 million | $4.9 million | $19.2 million | $16.5 million |
GAAP operating margin, calculated as net loss before other income and expense divided by rental revenue, was approximately negative 14.3% in the third quarter and negative 8.1% for the nine-month period. Non-GAAP measures are not substitutes for GAAP earnings or cash flow and may not be comparable with other REITs.
- Liquidity: Cash, cash equivalents and restricted cash were $137.0 million at September 30, 2020, down from $169.3 million at December 31, 2019.
- Debt: Net term loan debt was $174.0 million, with $175.0 million principal due December 23, 2024. The $250.0 million revolving facility had no outstanding balance at quarter-end.
- Debt capacity: The Company temporarily borrowed and repaid $50.0 million under the revolver during 2020. It was in compliance with all debt covenants and expected to remain compliant for the following twelve months.
- Interest-rate risk: Four swaps with aggregate notional value of $175.0 million became effective September 28, 2020. The hedge fixed the term loan’s base rate at 0.21%, plus the applicable margin.
- Equity: The August 2020 initial public offering generated $227.3 million of net proceeds. Total shareholders’ equity was $447.1 million and noncontrolling interests were $81.6 million at quarter-end.
- Dividend: The Company declared and paid a third-quarter cash dividend of $0.10 per share, totaling $2.8 million. A $0.20 per-share fourth-quarter dividend was declared after quarter-end.
Material Changes Versus the Prior Comparable Period
- Rental revenue increased 101.7% in the third quarter and 37.5% for the nine months, primarily reflecting portfolio growth from 99 properties at September 30, 2019 to 189 properties at September 30, 2020.
- The Company acquired 30 properties for $102.6 million in the third quarter and 98 properties for $327.3 million year to date. Year-to-date acquisitions had an underwritten weighted-average capitalization rate of approximately 6.8% and a weighted-average lease term of approximately 12.1 years.
- General and administrative expense increased to $4.1 million in the quarter and $7.8 million year to date, driven by internalized management, public-company infrastructure and $1.7 million of stock-based compensation expense.
- Interest expense declined to $1.0 million in the quarter and $3.8 million year to date, compared with $2.4 million and $8.3 million, respectively, in the prior periods.
- Impairment provisions declined to $0.4 million in the quarter and $1.8 million year to date, compared with $2.8 million and $6.3 million in the predecessor periods.
- Investing cash flow changed from $68.7 million provided in the prior-year nine-month period to $316.9 million used, reflecting substantial property acquisitions. Financing cash flow was $278.9 million provided, primarily from the private offering and IPO.
- Net loss remained broadly similar despite portfolio expansion because higher rental revenue was offset by increased depreciation, public-company costs, internalized management expenses and stock compensation.
Guidance, Outlook, Risks and Unusual Items
- Management expects available IPO proceeds, operating cash flow and revolver capacity to fund operations, debt service, capital expenditures and working capital for at least the next twelve months.
- The Company had identified 30 properties totaling approximately $89 million that it expected to purchase before December 31, 2020. Five of those properties, totaling $8.8 million, were acquired after quarter-end.
- COVID-19 had not materially affected operations or cash flows through September 30. Collections of contractual base rent were 94.9% for July, 99.3% for August, 100.0% for September and 100.0% for October as of October 29, 2020. The Company had not provided abatements or deferrals after August 1.
- COVID-19 remains a material uncertainty because tenant financial conditions, rent collections, property values and impairment estimates could deteriorate as the pandemic continues.
- Unusual or nonrecurring items included $2.2 million of year-to-date IPO and private-offering costs, $1.4 million of stock-compensation catch-up expense associated with IPO-related vesting conditions, a $0.3 million gain from forfeited earnest money, and $1.8 million of year-to-date impairment provisions.
- Eight properties were classified as held for sale at September 30, 2020. Subsequent to quarter-end, two were sold for $4.4 million with a $1.1 million net gain.
- Subsequent events also included the acquisition of five properties for $8.8 million and the conversion of 2.2 million OP Units into common stock.
- The filing reports no material pending litigation, environmental liabilities, off-balance-sheet arrangements or commitments for re-leasing costs and recurring or nonrecurring building improvements.
Most Important Facts for Investors to Verify
- Reconcile the successor/predecessor presentation before relying on year-over-year growth or margin comparisons.
- Assess the sustainability of rent collections and tenant credit quality as COVID-19 effects evolve; 7-Eleven represented 12.2% of third-quarter rental revenue.
- Review acquisition underwriting, cap rates, lease maturities and concentration by tenant, sector and geography as the portfolio expands.
- Evaluate leverage, covenant requirements, the December 2024 term-loan maturity and exposure to LIBOR or other benchmark-rate changes despite the new hedge.
- Separate recurring operating performance from IPO costs, stock-based compensation, impairment charges, asset-sale gains and other nonrecurring items in FFO, Core FFO and AFFO.
- Confirm the Company’s ability to fund planned acquisitions and dividends while maintaining adequate liquidity and REIT qualification.