Business Overview NETSTREIT Corp. (NTST) is a real estate investment trust (REIT) that has established itself as a leading acquirer, owner, and manager of single-tenant, retail commercial properties leased to high-credit-quality tenants across the United States. With a diverse portfolio spanning 671 properties in 45 states, NETSTREIT has demonstrated its ability to navigate the evolving retail landscape and deliver consistent growth and stability to 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 to qualify as a REIT for U.S. federal income tax purposes beginning with its short taxable year ended December 31, 2019. NETSTREIT is structured as an umbrella partnership REIT (UPREIT) and is internally managed, focusing on the acquisition, ownership, and management of single-tenant, retail commercial real estate leased on a long-term basis to high credit quality tenants across the United States. The company also invests in property developments and mortgage loans secured by real estate.
In December 2019, NETSTREIT entered into an agreement governing a $175 million senior unsecured term loan, marking its first major debt financing after formation. The company completed its initial public offering in August 2020, raising $271 million in gross proceeds, which provided additional capital to fund its growth strategy.
During 2021 and 2022, NETSTREIT actively expanded its portfolio, growing to over 550 properties by the end of 2022. The company also increased its debt capacity, entering into a $200 million senior unsecured term loan and a $400 million senior unsecured revolving credit facility in 2022. Despite the challenges posed by the COVID-19 pandemic, NETSTREIT maintained high occupancy levels and collected substantially all of its contractual rents throughout this period, demonstrating the resilience of its business model.
The company's portfolio is diversified across 93 tenants operating in 26 different industries, with over 75% of its total annualized base rent (ABR) derived from investment-grade or investment-grade profile tenants. As of September 30, 2024, NETSTREIT's weighted-average lease term remaining on the portfolio was 9.5 years, with less than 3% of ABR expiring through 2026. This long-term, stable lease profile has been a key driver of the company's financial performance.
NETSTREIT's real estate investment portfolio is primarily comprised of properties in the retail sector, focused on necessity goods and essential services, including industries such as home improvement, auto parts, drug stores and pharmacies, general retail, grocers, convenience stores, discount stores, and quick-service restaurants. Approximately 61% of the company's annualized base rent (ABR) is derived from investment grade credit rated tenants, and an additional 14% is from tenants with an investment grade profile.
Financial Strength and Resilience NETSTREIT has demonstrated strong financial performance, with total revenue of $123.12 million for the fiscal year ended December 31, 2023, up from $92.50 million in the prior year. The company's net income for the same period was $6.84 million, compared to $8.12 million in 2022. NETSTREIT's operating cash flow for 2023 was $80.16 million, while its free cash flow was $80.12 million.
For the most recent quarter (Q3 2024), NETSTREIT reported revenue of $41.44 million, representing a year-over-year growth of 21.9%. However, the company experienced a net loss of $5.30 million in the quarter, primarily due to higher interest expense, depreciation, and impairment charges. Despite this, operational cash flow remained strong at $25.11 million, with free cash flow of $17.80 million, supporting the company's ability to fund growth and dividends.
As of September 30, 2024, NETSTREIT had total assets of $1.95 billion, with $1.73 billion in non-current assets, primarily consisting of investment properties. The company's balance sheet remained strong, with a net debt to annualized adjusted EBITDAre ratio of 4.0x as of the same date, well within its targeted leverage range of 4.5x to 5.5x.
NETSTREIT utilizes non-GAAP measures such as Funds from Operations (FFO), Core FFO, and Adjusted FFO to evaluate its operating performance. For the nine months ended September 30, 2024, the company reported Adjusted FFO of $71.5 million.
Liquidity NETSTREIT has maintained a strong liquidity position, which has allowed it to pursue its growth strategy and navigate industry challenges. The company's access to capital markets and its revolving credit facility provide it with the financial flexibility to fund acquisitions and manage its operations effectively.
As of September 30, 2024, NETSTREIT reported a debt-to-equity ratio of 0.58, indicating a conservative capital structure. The company held $28.75 million in cash and cash equivalents and had access to $250 million under its revolving credit facility. This strong liquidity position enables NETSTREIT to capitalize on acquisition opportunities and maintain financial flexibility in various market conditions.
Strategic Acquisitions and Dispositions NETSTREIT has been actively managing its portfolio, making strategic acquisitions and dispositions to optimize its performance. During the third quarter of 2024, the company acquired 22 properties for a total purchase price of $111.5 million, with a weighted-average lease term of 12.5 years and a blended cash yield of 7.5%. Additionally, the company sold 8 properties for a total sales price, net of disposal costs, of $23.0 million, recognizing a net loss of $0.1 million.
These transactions have allowed NETSTREIT to enhance the quality and longevity of its portfolio, while also reducing tenant concentrations in certain industries, such as the pharmacy and dollar store sectors, which have faced some challenges in recent years.
During the nine months ended September 30, 2024, NETSTREIT also invested $27.9 million in property developments and $39 million in mortgage loans receivable, further diversifying its investment portfolio and creating additional avenues for growth.
Navigating Industry Challenges NETSTREIT has demonstrated its ability to navigate industry challenges, such as the ongoing headwinds faced by the pharmacy and dollar store sectors. The company has proactively managed its exposure to these industries, reducing its Walgreens concentration from 5.9% at the end of the second quarter to 4.8% as of September 30, 2024. NETSTREIT expects to further decrease this concentration in the coming quarters.
Additionally, the company has worked to mitigate the impact of the Big Lots bankruptcy, which had previously represented 80 basis points of its total ABR. Through strategic negotiations, NETSTREIT was able to extend the lease terms for the affected properties, while also securing new tenants for one of the locations.
Outlook and Future Growth Looking ahead, NETSTREIT remains focused on maintaining its disciplined acquisition strategy, prioritizing properties with long-term leases, strong tenant credit profiles, and attractive rent growth potential. The company is also committed to actively managing its portfolio, reducing tenant concentrations and recycling capital into higher-quality assets.
For the full year 2024, NETSTREIT is maintaining its AFFO per share guidance midpoint and updating the range to $1.26 to $1.27, from its prior range of $1.25 to $1.28. This guidance reflects the company's ability to deliver consistent and reliable financial performance, even in the face of industry challenges.
NETSTREIT's AFFO per share for the third quarter of 2024 was $0.32, representing over a 3% increase compared to the prior year. The company's AFFO payout ratio for the same quarter was 66%, demonstrating a balanced approach to returning capital to shareholders while retaining funds for growth. In line with this, NETSTREIT's Board declared a quarterly cash dividend of $0.21 per share, payable on December 13 to shareholders of record as of December 2.
Conclusion NETSTREIT's strong track record of growth, financial discipline, and strategic portfolio management has positioned the company as a well-respected player in the single-tenant, retail commercial real estate sector. Despite industry headwinds, the company has demonstrated its ability to navigate challenges and deliver consistent value to its shareholders. With a robust pipeline of acquisition opportunities, a focus on high-quality tenants, and a commitment to prudent capital allocation, NETSTREIT is well-equipped to continue its trajectory of sustainable growth and stability.
The company's 100% occupancy rate (excluding mortgage loans receivable) as of September 30, 2024, coupled with its weighted average remaining lease term of 9.5 years, provides a stable foundation for recurring cash flow. This stability, combined with NETSTREIT's strategic focus on essential retail sectors and high-credit-quality tenants, positions the company favorably for continued success in the evolving retail real estate landscape.