Executive Summary / Key Takeaways

• NETSTREIT Corp. (NTST) is executing a deliberate strategy to enhance portfolio quality and diversification by actively recycling capital from higher-concentration tenants into acquisitions with better lease terms and growth, supported by rigorous, technology-enhanced underwriting.
• First quarter 2025 results demonstrated continued growth, with total revenues increasing over 21% year-over-year, driven by portfolio expansion through acquisitions, developments, and mortgage loan investments, alongside accretive dispositions.
• The company maintains a strong balance sheet and ample liquidity, utilizing a mix of term loans, a revolving credit facility, and forward equity agreements, while targeting an investment grade credit rating to optimize its cost of capital.
• Despite macroeconomic pressures and tenant-specific headlines, NTST's focus on defensive retail industries, unit-level performance analysis, and real estate fungibility has resulted in minimal credit losses and disruption to cash flows since inception.
• Management's 2025 guidance reflects a measured investment pace influenced by the current cost of equity, but the company is positioned to accelerate growth should investment spreads become more favorable, while remaining committed to achieving diversification targets, including having no tenant above 5% of ABR by year-end.

The Foundation: Disciplined Growth in Defensive Retail

NETSTREIT Corp., established in late 2019, operates as an internally managed real estate investment trust focused on acquiring, owning, and managing a diversified portfolio of single-tenant retail properties across the United States. The company strategically targets properties subject to long-term net leases with high-credit-quality tenants, emphasizing those in defensive retail industries where a physical presence is critical, such as necessity goods and essential services. This foundational strategy, honed since its inception, aims to generate stable, recurring cash flow, a core tenet of the net lease model.

In the competitive landscape of net lease REITs, NTST positions itself against larger, more established players like Realty Income (O), NNN REIT (NNN), and growth-focused peers such as Essential Properties Realty Trust (EPRT) and Agree Realty (ADC). While NTST commands a smaller market share (estimated 5-10% in net lease retail) compared to giants like Realty Income (20-25%), its strength lies in its strategic agility and a differentiated acquisition approach. Unlike some competitors that may prioritize scale or pure investment-grade credit above all else, NTST employs a rigorous "bell curve investing" philosophy. This involves a deep dive into corporate credit, unit-level cash flow production, and the underlying real estate's fungibility, aiming for the best risk-adjusted returns across the credit spectrum, not solely focusing on the highest credit ratings. This allows NTST to potentially identify undervalued or niche transactions, achieving greater acquisition efficiency and potentially higher long-term cash flow per unit compared to peers who might face more intense competition for purely investment-grade assets.

The Underwriting Edge: Technology as a Moat

A critical differentiator for NTST is its sophisticated underwriting and asset management process, significantly enhanced by technology. While specific details on proprietary software aren't provided, the company leverages tools like Placer.ai for detailed foot traffic analysis and combines this with direct dialogue with tenants and internal financial modeling. This technology-supported approach allows NTST to move beyond surface-level corporate credit ratings and gain deep insights into the performance and viability of individual store locations.

The tangible benefits of this technology-enhanced underwriting are evident in the portfolio's performance. By analyzing unit-level cash flows and foot traffic, NTST can identify locations that are highly profitable for the tenant, even if the corporate entity faces headwinds. This significantly reduces renewal risk and provides a "moat of protection" around rental streams. Furthermore, assessing the fungibility of the real estate collateral ensures that even in the rare event of a vacancy, the property can be re-tenanted with minimal downtime and capital expenditure, often at market or higher rents. This stands in contrast to competitors who may rely more heavily on corporate guarantees alone, potentially facing greater losses or repositioning costs if a tenant defaults on a less adaptable property. The company's track record of minimal credit losses since inception, including zero credit losses during the COVID-19 pandemic and successfully navigating tenant restructurings like Big Lots (BIG) with negligible economic impact (just 20 basis points of credit loss from the Big Lots event), underscores the effectiveness of this granular, technology-backed underwriting process.

Operational Execution and Financial Performance

NTST's operational strategy centers on disciplined capital allocation across acquisitions, developments, and dispositions to enhance portfolio quality and drive accretive growth. In the first quarter of 2025, the company made gross investments totaling $90.7 million at a blended cash yield of approximately 7.7% and a weighted average lease term of 9.2 years. Notably, 66% of the ABR from these acquisitions came from investment grade or investment grade profile tenants, demonstrating continued adherence to quality standards. This investment activity was partially funded by strategic dispositions, with 16 properties sold for $38.6 million, realizing a net gain of $2.1 million. These dispositions are a key component of NTST's strategy to reduce tenant concentrations and recycle capital into higher-yielding or better-termed assets.

The impact of this operational activity is reflected in the company's financial performance. For the three months ended March 31, 2025, total revenues increased significantly by $8.2 million, or 21.9%, to $45.9 million compared to the same period in 2024. This growth was primarily driven by the expansion of the portfolio through acquisitions and increased interest income from mortgage loans receivable. Operating expenses also increased, largely due to the larger property base, with depreciation and amortization rising by $3.4 million to $20.9 million. General and administrative expenses, however, saw a decrease of $0.5 million to $5.2 million, reflecting ongoing efforts to achieve efficiencies and economies of scale as the portfolio grows. Interest expense increased substantially by $5.3 million to $11.5 million, primarily due to higher average borrowings and the impact of new debt issuances, including the 2030 Term Loan B. Despite the rise in expenses, net income increased to $1.7 million in Q1 2025 from $1.1 million in Q1 2024, benefiting from higher revenues and increased gains on asset sales. AFFO per diluted share grew by 3.2% year-over-year in Q1 2025, underscoring the accretive nature of recent investments.

The company's balance sheet remains robust, supporting its growth ambitions. As of March 31, 2025, total assets stood at $2.29 billion. Liquidity was strong at $584 million, comprising cash, Revolver availability, and unsettled forward equity.

Adjusted net debt, including the impact of forward equity, was $724 million, resulting in an adjusted net debt to annualized adjusted EBITDAre of 4.7 times, comfortably within the company's target range of 4.5x to 5.5x. Recent debt transactions in January 2025, including the new $175 million 2030 Term Loan B and an upsized $500 million Revolver, along with maturity extensions on existing term loans, have enhanced financial flexibility and pushed out debt maturities, with no material debt maturing until February 2028 (including extension options).

The company is actively pursuing an investment grade credit rating, targeting discussions with rating agencies in the latter half of 2025, which is expected to result in improved pricing on its credit facilities.

Outlook and Strategic Priorities

Management's outlook for 2025 reflects a continuation of its disciplined strategy amidst prevailing macroeconomic uncertainty. The company has provided AFFO per share guidance for 2025 in the range of $1.28 to $1.30, based on a net investment activity target of $75 million to $125 million. This measured investment pace, while lower than historical levels, is a conscious decision driven by the current cost of equity relative to available investment spreads. Management emphasizes that they are not willing to sacrifice balance sheet strength or per-share earnings growth for the sake of increasing asset size. However, they are actively sourcing opportunities and are prepared to accelerate investment pace significantly should market conditions and their cost of capital become more favorable.

A key strategic priority for 2025 is the continued reduction of tenant concentrations. The company is confident in its ability to achieve its goal of having no single tenant represent more than 5% of ABR by year-end, primarily through strategic dispositions. These sales are expected to continue at accretive spreads, allowing the company to recycle capital into new acquisitions that further enhance portfolio diversification and internal growth through favorable lease escalations. The focus remains on adding high-quality tenants, including those with investment grade profiles, across defensive retail sectors like convenience stores, quick service restaurants, auto service, grocery, and farm supplies. The guidance includes an assumption for unknown rent loss, initially set at 100 basis points and later refined to 75 basis points, which management views as conservative given their historical performance and proactive asset management capabilities.

Risks and Mitigation

While NTST's focus on defensive retail and strong underwriting provides resilience, the company is not immune to risks. Macroeconomic headwinds, including fluctuating interest rates, persistent inflation, and potential recessionary pressures, could impact tenant performance and consumer spending, potentially leading to lower revenues or increased tenant defaults. The tightening credit markets and increased acquisition costs could also constrain investment opportunities and impact the pace of growth. Tenant-specific issues, particularly for those facing industry-wide challenges or undergoing corporate changes (like the going-private transactions for Family Dollar (DLTR) and Walgreens (WBA)), could generate negative headlines and potentially impact investor sentiment, even if the direct economic impact on NTST's portfolio is minimal due to strong asset-level performance. Operational risks, as highlighted by the fraud incident in Q2 2024, also exist, although the company has implemented enhanced controls to mitigate future occurrences.

NTST mitigates these risks through several layers of defense. The focus on necessity-based retail provides a buffer against discretionary spending cuts. The rigorous underwriting process, leveraging technology and unit-level analysis, aims to identify and acquire properties with tenants that have strong financial health and locations with robust cash flows, even within challenging sectors. The active disposition strategy allows the company to proactively manage tenant concentrations and exit potentially riskier assets. Furthermore, maintaining a conservative balance sheet and ample liquidity provides financial flexibility to weather market downturns and capitalize on opportunistic acquisitions. The use of interest rate hedges helps manage exposure to variable rate debt.

Conclusion

NETSTREIT Corp. presents a compelling investment thesis grounded in its disciplined approach to acquiring high-quality, single-tenant retail properties in defensive industries. The company's differentiated underwriting process, enhanced by technology and focused on unit-level performance and real estate fundamentals, provides a robust defense against tenant-specific and macroeconomic risks, as evidenced by its track record of minimal credit losses. While the current market environment necessitates a measured investment pace due to cost of capital considerations, NTST is strategically positioned with a strong balance sheet and ample liquidity to accelerate growth when conditions are more favorable. The ongoing execution of its diversification strategy, aiming for lower tenant concentrations through accretive dispositions, further enhances portfolio resilience. Investors should monitor the company's progress on achieving its diversification targets, the impact of macroeconomic conditions on tenant performance, and developments regarding its pursuit of an investment grade credit rating, all of which are critical factors shaping NTST's trajectory and its ability to deliver consistent, long-term value.