NETSTREIT Corp. (NTST) is an internally managed real estate investment trust (REIT) that acquires, owns, invests in, and manages a diversified portfolio of single-tenant, retail commercial real estate leased on a long-term basis to high credit quality tenants across the United States. The company has demonstrated consistent growth and stability, positioning it as an attractive investment opportunity in the current market environment.
Business Overview
NETSTREIT's portfolio consists of 628 single-tenant retail net leased properties as of March 31, 2024, excluding 16 property developments where rent has yet to commence. The company's properties are diversified by tenant, industry, and geography, with 88 different tenants operating across 26 retail sectors in 45 states. NETSTREIT focuses on tenants in defensive retail industries where a physical location is critical to generating sales and profits, such as home improvement, auto parts, drug stores and pharmacies, general retail, grocers, convenience stores, discount stores, and quick-service restaurants.
Approximately 71.1% of NETSTREIT's annualized base rent (ABR) is derived from investment-grade credit rated tenants, and an additional 13.0% of ABR is from tenants with an investment-grade profile. This high-quality tenant base, along with the company's long-term leases, provides stability and predictability to NETSTREIT's cash flows. Exclusive of mortgage loans receivable, the portfolio was 100% occupied with a weighted average remaining lease term (WALT) of 9.2 years as of March 31, 2024.
Financials
NETSTREIT reported strong financial results for the first quarter of 2024. The company generated net income of $1.1 million, annual net income of $6.8 million, annual revenue of $123.1 million, annual operating cash flow of $80.2 million, and annual free cash flow of $80.1 million.
On a quarterly basis, the company reported revenue of $37.7 million, a 28.0% increase from the prior-year period. This growth was driven by an increase in the number of operating leases and properties securing the company's mortgage loans. NETSTREIT's Core Funds from Operations (Core FFO) for the first quarter of 2024 was $22.5 million, or $0.30 per diluted share, and Adjusted Funds from Operations (AFFO) was $22.9 million, or $0.31 per diluted share, representing a 3.3% increase over the prior-year period.
The company's focus on high-quality tenants and long-term leases has provided stability to its cash flows. NETSTREIT's AFFO payout ratio for the first quarter of 2024 was 66%, demonstrating the company's ability to retain capital for future growth.
Investment Activity
During the first quarter of 2024, NETSTREIT acquired 28 properties for a total purchase price of $95.2 million, inclusive of $1.2 million in capitalized acquisition costs. These acquisitions were located in 16 states and had a weighted average remaining lease term of approximately 10.6 years. The underwritten weighted-average capitalization rate on these acquisitions was approximately 7.3%.
The company also continued to execute on its development pipeline, investing $11.0 million in property developments during the first quarter of 2024. NETSTREIT completed development on seven projects and reclassified approximately $18.4 million from property under development to land, buildings, and improvements. Rent commenced for four of the seven completed developments in the first quarter of 2024, with the remaining three expected to commence in the second quarter.
In addition to its acquisition and development activities, NETSTREIT sold 12 properties for a total sales price, net of disposal costs, of $20.5 million, recognizing a net gain of $1.0 million. These dispositions were part of the company's strategy to recycle capital and improve the overall quality of its portfolio.
Liquidity
NETSTREIT maintains a strong balance sheet, with total adjusted net debt, including the impact of all forward equity, of $395.1 million as of March 31, 2024. The company's weighted average debt maturity is 3.9 years, and its weighted average interest rate is 4.36%, including extension options.
During the first quarter of 2024, NETSTREIT drew the remaining $100 million on its $250 million 2029 term loan, which is hedged at a fixed interest rate of 4.99% through January 2029. The company also remained active in the capital markets, selling over $198 million of forward equity at $18 per share in a follow-on offering and an additional $31 million through its at-the-market (ATM) program, including $2 million in March.
As of March 31, 2024, NETSTREIT had $638.1 million in liquidity, consisting of $22.3 million in cash, $324.9 million available on its revolving credit facility, and $290.9 million of unsettled forward equity. Adjusting for the company's April ATM activity, pro forma liquidity at quarter-end was $666.8 million. This strong liquidity position provides NETSTREIT with ample flexibility to fund its investment activities and growth initiatives.
Outlook
NETSTREIT has increased the low end of its 2024 AFFO per share guidance to a new range of $1.25 to $1.28. The company also expects cash general and administrative (G&A) expenses, excluding transaction costs and one-time severance payments, to range between $13.5 million and $14.5 million for the year.
The company's management team remains optimistic about the current market environment, noting that the decrease in competition has allowed NETSTREIT to pursue investment opportunities at attractive prices. The team is focused on investing in properties with the strongest tenants in defensive retail sectors that heavily rely on their physical locations to generate profits.
NETSTREIT's low leverage and well-capitalized balance sheet provide the company with sufficient capacity to grow externally should the capital markets remain volatile, while also allowing it to remain highly competitive and opportunistic on the investment front.
Risks and Challenges
While NETSTREIT's portfolio and tenant focus are well-positioned to weather potential economic headwinds, the company is not immune to broader market risks. Factors such as rising interest rates, changes in consumer spending patterns, and tenant bankruptcies or store closures could impact the company's financial performance and growth prospects.
Additionally, NETSTREIT's reliance on a limited number of large customers, with its top 10 tenants accounting for approximately 57.2% of its ABR as of March 31, 2024, presents a concentration risk. The company's ability to successfully execute its capital recycling and portfolio optimization strategies will be crucial in mitigating this risk.
Conclusion
NETSTREIT's focus on defensive retail sectors, high-quality tenants, and long-term leases has positioned the company as a stable and attractive investment opportunity in the current market environment. The company's strong financial performance, prudent capital management, and strategic investment activities demonstrate its ability to deliver consistent growth and value for shareholders. While NETSTREIT faces certain risks, its well-diversified portfolio, experienced management team, and robust liquidity position suggest the company is well-equipped to navigate the challenges ahead and capitalize on future opportunities.