Business Overview and History
NETSTREIT Corp. (NTST) is a nationwide owner of high-quality, single-tenant net lease properties across the United States. The company has established itself as a diversified real estate investment trust (REIT) with a focus on defensive retail industries, providing stable cash flows and solid risk-adjusted returns for its shareholders.
NETSTREIT was incorporated on October 11, 2019 as a Maryland corporation and commenced operations on December 23, 2019. The company elected to be treated and qualify as a REIT for U.S. federal income tax purposes beginning with its short taxable year ended December 31, 2019. NETSTREIT conducts its operations through NETSTREIT, L.P., a Delaware limited partnership, with NETSTREIT GP, LLC, a wholly owned subsidiary, serving as the sole general partner.
The company is structured as an umbrella partnership real estate investment trust (UPREIT) and is an internally managed real estate company that acquires, owns, 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. NETSTREIT also invests in property developments and mortgage loans secured by real estate.
NETSTREIT was formed to take advantage of the fragmented single-tenant net lease real estate market. The company's initial public offering was in August 2020, raising $194.9 million in gross proceeds. This provided NETSTREIT with the capital to begin building out its portfolio of high-quality, single-tenant, retail net lease properties.
Over the next few years, NETSTREIT grew its portfolio through strategic acquisitions. By the end of 2023, the company owned or had investments in 632 single-tenant retail net leased properties diversified by tenant, industry and geography. During this period of rapid growth, NETSTREIT faced some challenges. In 2022, the company experienced an impairment charge of $4.4 million on 10 properties. NETSTREIT carefully navigated these headwinds by maintaining a disciplined underwriting approach focused on acquiring properties with strong real estate fundamentals and creditworthy tenants.
As of September 30, 2024, the company owned or had investments in 671 properties, located in 45 states, excluding eight property developments where rent has yet to commence. The company's portfolio is diversified by tenant, industry, and geography, with 93 different tenants across 26 retail sectors. Approximately 61% of the company's annualized base rent (ABR) is derived from investment-grade credit rated tenants, and an additional 14% of ABR is from tenants with an investment-grade profile.
Acquisitions and Development
NETSTREIT has demonstrated a strong track record of strategic acquisitions and developments to grow its portfolio and diversify its tenant base. During the nine months ended September 30, 2024, the company acquired 68 properties for a total purchase price of $302.3 million, inclusive of $2.8 million in capitalized acquisition costs. These acquisitions were primarily focused on defensive retail industries, such as home improvement, auto parts, drug stores and pharmacies, general retail, grocers, convenience stores, discount stores, and quick-service restaurants.
In addition to acquisitions, NETSTREIT has also been active in property developments. As of September 30, 2024, the company had six property developments under construction, having invested $27.9 million in these projects during the nine-month period. The company completed development on 16 projects during the period, with 14 of these commencing rent in the third quarter of 2024. The remaining six developments are expected to be substantially completed with rent commencing at various points throughout the fourth quarter of 2024 and the first quarter of 2025.
Dispositions and Portfolio Diversification
NETSTREIT has also been strategic in its asset recycling efforts, actively managing its portfolio to reduce tenant concentrations and improve diversification. During the nine months ended September 30, 2024, the company sold 26 properties for a total sales price, net of disposal costs, of $55.6 million, recognizing a net gain of $0.9 million.
As a result of these divestments, the company has reduced its top 10 tenant concentration by 410 basis points to 45.1% of ABR, including a 100 basis point reduction in Walgreens to 3.8% of ABR and a 260 basis point drop in Dollar General to 8.6% of ABR. Management has stated that it expects the top 10 tenant concentration to more closely mirror the sector average over the near- to intermediate-term, with no tenant expected to exceed 5% of ABR by the end of 2025.
Mortgage Loans Receivable
In addition to its real estate portfolio, NETSTREIT has also invested in mortgage loans receivable. During the nine months ended September 30, 2024, the company invested an additional $39 million in fully collateralized mortgage loans receivable with stated interest rates ranging from 6.9% to 13.1%, inclusive of $12.7 million provided through seller financing transactions. The mortgage loans receivable are collateralized by real estate, primarily leased by investment-grade credit rated tenants.
Financial Performance
For the nine months ended September 30, 2024, NETSTREIT reported a net loss of $6.6 million, or $0.09 per diluted share. However, the company's core funds from operations (Core FFO) and adjusted funds from operations (AFFO) for the same period were $70.7 million and $71.5 million, or $0.95 and $0.96 per diluted share, respectively. This represents growth of 3.3% in Core FFO and AFFO per share compared to the same period in 2023.
In the most recent quarter, NETSTREIT reported revenue of $41.44 million, representing a 22% increase compared to the same quarter in the prior year. The company's net income for the quarter was -$5.424 million. Operating cash flow (OCF) and free cash flow (FCF) for the quarter both stood at $28.036 million.
For the full year of 2024, NETSTREIT reported a net loss of $0.16 per diluted share, core FFO of $1.26 per diluted share, and AFFO of $1.26 per diluted share, which represented 3.3% growth over 2023.
Liquidity and Balance Sheet
The company's balance sheet remains strong, with a pro forma total adjusted net debt of $848 million as of September 30, 2024. This includes the impact of the company's recent debt transactions, which included a new $175 million senior unsecured term loan and an upsize to its revolving credit facility to $500 million. The company's pro forma weighted average debt maturity was 4.3 years, and its pro forma weighted average interest rate was 4.53%.
NETSTREIT's pro forma liquidity as of September 30, 2024, was $635 million, which consisted of $14 million in cash, $436 million in available revolving credit facility capacity, and $185 million in unsettled forward equity. The company's adjusted net debt to annualized Adjusted EBITDAre ratio was 4.5x at the end of the third quarter, well within its targeted leverage range of 4.5x to 5.5x.
As of the most recent quarter, NETSTREIT had $28.75 million in cash and a $400 million senior unsecured revolving credit facility, of which $150 million was outstanding. The company's current ratio and quick ratio both stood at 0.609.
Guidance and Outlook
For the full year 2025, NETSTREIT has provided the following guidance: - AFFO per share of $1.27 to $1.30 - Net investment activity of $75 million to $125 million - Cash G&A of $14.5 million to $15.5 million, excluding transaction costs and severance payments - Rent loss assumption of approximately 100 basis points at the midpoint of the range
The company's guidance reflects its disciplined approach to growth and balance sheet management, as it focuses on maximizing risk-adjusted returns and maintaining a strong financial position to support its long-term success.
Real Estate Investments Segment
NETSTREIT's primary business activities are centered around its real estate investments segment. As of September 30, 2024, the company's gross real estate investment portfolio, including properties under development, totaled approximately $2.1 billion and consisted of the gross acquisition cost of land, buildings, improvements, lease intangible assets and liabilities, and property development costs. The investment portfolio is geographically dispersed throughout 45 states, with gross real estate investments in Texas and Illinois representing 11.6% and 10.0%, respectively, of the total gross real estate investment of the company's investment portfolio.
During the three months ended September 30, 2024, NETSTREIT acquired 22 properties for a total purchase price of $111.5 million, inclusive of $1.1 million in capitalized acquisition costs. These properties are located in 10 states with a weighted-average remaining lease term (WALT) of approximately 12.1 years. The underwritten weighted-average capitalization rate on the second quarter acquisitions was approximately 7.3%.
Property Development
As of September 30, 2024, NETSTREIT had six property developments under construction. During the three months ended September 30, 2024, the company invested $5.0 million in property developments. Over the nine months ended September 30, 2024, the company invested $27.9 million in property developments, including the land acquisition of four new developments with a combined initial purchase price of $2.0 million. During the nine-month period, the company completed development on 16 projects and reclassified approximately $47.8 million from property under development to land, buildings and improvements, and other assets.
Conclusion
NETSTREIT has established itself as a diversified net lease REIT with a strong track record of strategic acquisitions, developments, and portfolio management. The company's focus on defensive retail industries, high-quality tenants, and disciplined underwriting has enabled it to deliver stable cash flows and attractive risk-adjusted returns for its shareholders. With a solid balance sheet, ample liquidity, and a prudent growth strategy, NETSTREIT appears well-positioned to continue creating value for its investors in the years ahead.