NETSTREIT Corp. 2020 Form 10-K Summary
Business context and reporting period
NETSTREIT is an internally managed REIT focused on acquiring, owning and managing single-tenant, retail commercial properties under long-term net leases across the United States. This filing covers the fiscal year ended December 31, 2020; it is not a standalone fourth-quarter filing. Comparisons with 2019 are affected by the December 23, 2019 formation transactions and the separate successor and predecessor reporting periods.
- Portfolio at December 31, 2020: 203 properties in 38 states, approximately 3.7 million square feet and 100% occupied.
- Annualized base rent: $41.8 million; weighted average remaining lease term: 10.5 years.
- Approximately 70.0% of ABR was from investment-grade tenants and 8.0% from investment-grade profile tenants.
- Approximately 90.5% of ABR came from necessity, service-oriented or discount retail industries.
- The common stock began trading on the NYSE under NTST in August 2020.
Financial performance and key metrics
| Metric | 2020 | Comparable 2019 period |
|---|---|---|
| Rental revenue | $33.7 million | $19.8 million predecessor period, plus $0.5 million successor period |
| Total operating expenses | $35.2 million | $22.8 million predecessor period, plus $0.3 million successor period |
| Net income attributable to common stockholders | $0.7 million | $(8.1) million predecessor period, plus $0.03 million successor period |
| Basic EPS | $0.04 | Not meaningful for the predecessor period |
| Diluted EPS | $0.01 | Not meaningful for the predecessor period |
| Funds from operations | $11.8 million | $3.9 million predecessor period |
| Core FFO | $13.8 million | $4.3 million predecessor period |
| AFFO | $14.6 million | $7.0 million predecessor period |
| NOI | $31.2 million | $18.7 million predecessor period |
| Cash NOI | $29.0 million | $20.3 million predecessor period |
| Net cash provided by operating activities | $12.7 million | $6.0 million predecessor period |
| Net cash used in investing activities | $(362.1) million | $75.9 million provided by predecessor period |
| Net cash provided by financing activities | $272.7 million | $(82.3) million predecessor period |
Revenue growth primarily reflected substantial portfolio expansion. Net income was limited by $15.5 million of depreciation and amortization, $11.3 million of general and administrative expense, $3.2 million of transaction costs and $2.7 million of impairment charges. The company recognized $6.2 million of gains on property sales and a $0.25 million gain on forfeited earnest money.
At December 31, 2020, total assets were $725.8 million, including $537.6 million of real estate held for investment, net. Total liabilities were $197.7 million and total equity was $528.1 million. Cash, cash equivalents and restricted cash totaled $92.6 million, including $14.8 million of restricted cash.
Material changes versus the prior comparable period
- Property count increased from 94 properties at December 31, 2019 to 203 properties at December 31, 2020.
- The company acquired 124 properties for $408.6 million, including capitalized acquisition costs, and sold 15 properties for net proceeds of $48.1 million.
- Real estate held for investment, net increased from $223.9 million to $537.6 million.
- Revenue increased to $33.7 million from $19.8 million for the predecessor period, while operating expenses increased to $35.2 million from $22.8 million.
- General and administrative expense increased to $11.3 million, primarily due to internalization of management, public-company costs, compensation and stock-based compensation.
- Impairment expense declined to $2.7 million from $7.2 million in the predecessor period.
- Interest expense declined to $4.7 million from $10.7 million in the predecessor period, reflecting lower effective rates and borrowings during the comparable period.
- The company raised approximately $219.0 million of net proceeds in private offerings and $227.3 million net proceeds in its initial public offering, or approximately $446.3 million in aggregate net capital raised since December 2019.
Debt, liquidity and capital allocation
- Term Loan principal outstanding was $175.0 million, with a net carrying value of $174.1 million and maturity on December 23, 2024.
- No amounts were outstanding under the $250.0 million Revolver at year-end. The Revolver matures December 23, 2023, subject to a potential one-year extension.
- The company was in compliance with all debt covenants and expected to remain compliant for the following twelve months.
- The Term Loan’s variable-rate exposure was hedged beginning September 28, 2020; the hedged rate was 0.21% plus a 1.15% margin as of year-end.
- Management stated that IPO proceeds, operating cash flow and available borrowing capacity should fund operations, debt service, capital expenditures and working capital for at least the next 12 months.
- Cash distributions to common stockholders totaled $8.1 million in 2020, including quarterly dividends of $0.10 and $0.20 per share. The board declared a $0.20 per-share dividend for the first quarter of 2021.
Guidance, outlook, commentary and risks
Management intends to pursue growth through acquisitions of properties leased to high-credit-quality tenants in defensive retail sectors. As of March 4, 2021, management identified 38 potential acquisitions with an aggregate purchase price of approximately $122 million expected within the next 60 days. Subsequent to year-end, the company acquired eight properties totaling $17.4 million and invested $1.3 million in a Yuma, Arizona development project, with total expected investment of $4.4 million.
COVID-19 did not materially affect 2020 operations or cash flows according to the company. Rent deferrals were provided for 12 properties, representing 0.5% of ABR, and rent abatements for 15 properties, representing 1.7% of ABR. No new abatements or deferrals were provided after August 1, 2020, and the company reported collecting 100% of 2020 contractual rent payments. Management nevertheless stated that the ultimate impact of COVID-19 remains uncertain.
- Key risks include tenant defaults or bankruptcies, particularly because each property is generally single-tenant.
- The top four tenants represented approximately 31.6% of ABR: 7-Eleven 8.9%, Lowe’s 8.6%, Advance Auto Parts 7.6% and Walmart 6.5%.
- Geographic exposure is concentrated in Texas, Georgia, Virginia, Mississippi and Ohio; the South and Midwest represented 56.1% and 24.5% of ABR, respectively.
- Approximately 30% of properties were leased to unrated or sub-investment-grade tenants assessed through internal credit tools.
- Lease expirations are limited in the near term: 0.6% of ABR expires in 2023 and 0.2% in 2024, but 5.5% expires in 2025 and 14.5% in 2030.
- Risks also include interest-rate volatility, LIBOR transition, access to capital, acquisition execution, real estate valuation and impairment, environmental and insurance liabilities, cybersecurity, competition and maintaining REIT qualification.
- The company had no outstanding lawsuits or material off-balance-sheet arrangements at year-end.
Most important facts for investors to verify
- Reconcile 2020 results with the predecessor and successor presentation before assessing year-over-year growth or margins.
- Evaluate recurring cash flow using AFFO, Cash NOI and rent collections, while separating gains on property sales and other non-recurring items.
- Review tenant and geographic concentration, including exposure to the top four tenants and unrated tenants.
- Assess acquisition yields, integration and financing needs against management’s planned acquisition pipeline.
- Review the $175.0 million 2024 Term Loan maturity, Revolver availability, covenant requirements and interest-rate hedge terms.
- Confirm the sustainability and coverage of dividends relative to AFFO, taxable income and required REIT distributions.
- Monitor COVID-19 effects, tenant credit quality, lease renewals and the first material lease expirations beginning in 2023.