Executive Summary / Key Takeaways

• Credit Quality Moat Proven Through Crisis: NETSTREIT's underwriting discipline has delivered zero credit losses during COVID and a lifetime average of just 4 basis points, with "virtually no impact" from major tenant closures at Walgreens (WBA), CVS (CVS), Family Dollar (DLTR), Advanced Auto (AAP), and Big Lots (BIG)—demonstrating a durable competitive advantage that underpins the entire investment thesis.

• Capital Allocation Inflection Point: Management's cost of capital has "meaningfully improved" throughout 2025, enabling a dramatic acceleration in net investment guidance from $75-125 million to $350-400 million while maintaining the discipline to not "sacrifice our balance sheet for growth."

• Portfolio Transformation Through Strategic Recycling: Aggressive disposition activity (over $130 million year-to-date) has reduced top-10 tenant concentration by 410 basis points to 45.1%, while recycling proceeds into record-yielding acquisitions—achieving a 7.8% cash yield in Q2 2025, the highest in company history.

• Defensive Retail Positioning: With 99.9% occupancy, a 9.90-year weighted average lease term, and 62% of ABR from investment-grade or investment-grade profile tenants, the portfolio is structured to generate predictable cash flows through economic cycles, supporting a 4.88% dividend yield with room for growth.

• Execution Risk at Scale: The central risk is whether NETSTREIT can deploy $350-400 million in 2025 while maintaining its underwriting standards and per-share earnings growth, as management explicitly states they "will not grow for the sake of asset growth without an appropriate level of per-share earnings growth."

Setting the Scene: The Net Lease Specialist's Emerging Moat

NETSTREIT Corp. was incorporated on October 11, 2019, as a Maryland corporation and commenced operations on December 23, 2019, going public in early 2020. Headquartered in Dallas, Texas, the company operates as an internally managed real estate investment trust focused exclusively on single-tenant commercial retail properties across the United States. Unlike larger, diversified net lease REITs that span industrial, office, and international markets, NETSTREIT has deliberately narrowed its aperture to necessity-based retail—what management calls "defensive retail industries" where physical location is critical to sales and profits.

The business model is straightforward: acquire properties leased to high-credit-quality tenants on long-term net leases, generating stable cash flows that support dividend growth. Yet the execution is anything but simple. The net lease market is highly fragmented, with institutional ownership representing a small fraction of the $4 trillion U.S. net lease real estate market. This fragmentation creates opportunity for players with superior access to deals and underwriting capabilities, but it also means competition is intense and often mispriced.

NETSTREIT sits in the middle of a competitive landscape dominated by giants like Realty Income Corporation (O) with its $82 billion enterprise value and global footprint, National Retail Properties (NNN) with its 3,000+ property portfolio, Agree Realty (ADC) with its grocery-anchored focus, and Essential Properties (EPRT) with its experiential property strategy. Each competitor brings scale, but NETSTREIT brings specialization. The company's entire strategy rests on a single proposition: that its underwriting methodology—going "well beyond just understanding the corporate credit" to decipher unit-level productivity and real estate strength—creates a sustainable moat in an industry where many investors treat net lease assets as commoditized bonds.

This matters because it explains how a sub-$2 billion market cap REIT can compete effectively against multi-billion-dollar peers. While larger REITs rely on scale and cost of capital advantages, NETSTREIT relies on selectivity and risk-adjusted returns. The company's history proves this approach works: zero credit losses during COVID, when many net lease REITs suffered significant tenant defaults, and an average credit loss of just 4 basis points since inception. This track record isn't luck—it's the result of "utilizing technology and asymmetrical information" to underwrite locations, not just tenants.

Strategic Differentiation: Underwriting as a Competitive Weapon

NETSTREIT's core competitive advantage isn't a proprietary technology platform or a unique asset class—it's a disciplined underwriting process that treats each property as a distinct investment with its own risk-return profile. Management emphasizes that their evaluation "includes much more than understanding a tenant's corporate credit" and involves deciphering "the unit-level productivity of our locations and the strength of our real estate." This approach creates several tangible benefits that directly impact financial performance.

First, it enables superior tenant selection. When Family Dollar, Walgreens, CVS, and Advanced Auto announced closures affecting nearly 10% of their store bases, NETSTREIT experienced "virtually no impact" despite owning 162 properties leased to these tenants. Only one store went dark—a smaller asset generating $100,000 in annual base rent with over 8 years remaining lease term, where re-tenanting projections show no expected loss. The Big Lots bankruptcy resulted in just 20 basis points of credit loss because six of seven locations were assumed by Variety Wholesalers. This performance isn't accidental; it's the result of selecting locations with "demographics to support not only the use of the asset that we're buying, but also potentially future uses and future tenants."

Second, the underwriting discipline supports higher yields on new investments. In Q2 2025, NETSTREIT achieved a record 7.8% blended cash yield on $117.1 million of gross investments, while disposing of assets at 6.5-7.3% yields. This 50-150 basis point spread between acquisition and disposition yields is the mechanical engine of value creation. The company is systematically selling lower-quality, concentrated positions and recycling capital into higher-yielding, better-diversified assets. This capital recycling strategy directly drives per-share earnings growth, which management explicitly prioritizes over mere asset growth.

Third, the focus on newer properties with longer lease terms reduces capital expenditure requirements and extends cash flow visibility. The portfolio's weighted average remaining lease term stands at 9.90 years as of September 30, 2025, with Q3 2025 acquisitions averaging 13.4 years. This duration advantage means NETSTREIT can lock in today's attractive yields for longer periods while competitors chase shorter-duration assets.

The internal management structure further differentiates NETSTREIT from externally advised peers. By avoiding external advisor fees, the company retains more cash flow for reinvestment and maintains direct control over acquisition decisions. This agility shows up in the numbers: G&A as a percentage of total revenues rationalized to 10.6% in Q3 2025 from 11.1% last year, and management expects this rationalization to "accelerate in 2026 and beyond" as hiring pace moderates.

Financial Performance: Evidence of Strategy Working

NETSTREIT's financial results in 2025 provide clear evidence that the capital recycling strategy is delivering tangible results. For the three months ended September 30, 2025, total revenues increased 16.7% to $48.3 million, driven by $5.8 million in additional cash rental receipts from new acquisitions. More importantly, net income swung from a $5.3 million loss in Q3 2024 to a $0.6 million profit, a $5.9 million improvement driven by increased rental revenues, higher net gains on real estate sales, and lower impairment provisions.

The nine-month picture is even stronger: revenues up 20.1% to $142.5 million, net income of $5.6 million versus a $6.6 million loss in the prior year. This turnaround isn't due to one-time accounting adjustments—it's the cumulative effect of deploying capital into accretive investments while disposing of non-core assets. The company sold 60 properties for $130.2 million year-to-date, recognizing a $6.7 million net gain, while acquiring 87 properties for $368.3 million at blended cash yields of 7.4-7.8%.

The balance sheet transformation is equally impressive. In January 2025, NETSTREIT secured $275 million in additional financing, including a new $175 million term loan at 5.02% fixed rate through 2030 and an upsized $500 million revolving credit facility. In September 2025, the company added a $200 million term loan at 4.59% and a $250 million delayed-draw term loan, with $150 million available until September 2026. This ladder of long-term, fixed-rate debt with weighted average interest rates around 4.5-4.6% provides certainty in a volatile rate environment.

Liquidity stands at $594 million as of Q2 2025, comprising cash, revolver availability, and unsettled forward equity. Adjusted net debt to annualized EBITDAre is 4.6x, comfortably within the 4.5-5.5x target range. No material debt matures until February 2028, giving the company a clear runway to execute its growth strategy without refinancing risk.

The capital markets execution has been equally disciplined. In July 2025, NETSTREIT completed a 12.42 million share follow-on offering, raising $209.7 million in net proceeds. The company has $271.3 million remaining capacity under its 2024 ATM program and has strategically used forward sale agreements to time equity issuance. As management explains, the decision to settle forward equity "just really depends on if we raise additional capital, but the governor for us is kind of we need to maintain our debt to gross assets below 35% to get the most attractive pricing off of our term loans and credit facilities."

Outlook and Guidance: The Inflection Point Becomes Clear

Management's guidance evolution throughout 2025 tells the story of an inflection point. The year began with conservative net investment guidance of $75-125 million, reflecting a "measured approach" until the cost of capital improved. By Q2, with the cost of capital "meaningfully improved," guidance increased to $125-175 million. Then Q3's "record quarterly investment activity" of $203.9 million prompted a substantial increase to $350-400 million for the full year.

This guidance acceleration is significant because it comes while maintaining discipline on per-share metrics. AFFO per share guidance has been reiterated at $1.29-1.31 throughout 2025, despite dilution from equity issuance. Management explicitly states they "will not sacrifice our balance sheet for growth nor will we grow for the sake of asset growth without an appropriate level of per-share earnings growth." This commitment to per-share metrics is rare in the REIT space and signals a shareholder-friendly capital allocation framework.

The investment opportunity set supports this acceleration. Management describes seeing the "most attractive opportunity set that we have seen since going public over 5 years ago," with cap rates on new acquisitions in the 7.4-7.5% range. This is 150-160 basis points wide of their estimated weighted average cost of capital, creating meaningful accretion. The focus remains on "high-quality and less volatile necessity-based retail properties" in sectors like grocery, auto service, convenience stores, and quick-service restaurants.

Disposition activity is expected to moderate after Q4 2025, with management stating this will be the "last quarter of elevated disposition volume due to our focus on diversification." The goal is to have no tenant exceed 5% of ABR by year-end, with most tenants targeted below 3%. This diversification reduces tenant-specific risk and improves portfolio quality, which should command a lower cost of capital over time.

The path to 2026 and beyond looks increasingly attractive. With $150 million of delayed-draw term loan capacity available at rates in the "mid-4s" and a potential investment-grade rating on the horizon, management is confident in achieving "an above-average growth rate in 2026 and beyond." The combination of a well-capitalized balance sheet, improving cost of capital, and a robust opportunity set positions NETSTREIT to compound per-share value at attractive rates.

Risks and Asymmetries: What Could Break the Thesis

The primary risk to NETSTREIT's thesis is execution failure at scale. Deploying $350-400 million in a single year while maintaining underwriting discipline is a significant operational challenge. If the company chases volume over quality, it could compromise the credit loss record that underpins its competitive advantage. Management acknowledges this tension, stating they "need to maintain our debt to gross assets below 35% to get the most attractive pricing," which acts as a governor on growth velocity.

Tenant concentration remains a watch item despite improvement. While top-10 concentration has declined to 45.1%, the company still has meaningful exposure to individual tenants. The Walgreens take-private transaction by Sycamore Partners creates uncertainty, though management is sanguine, noting Sycamore's "proven" track record with Staples and their intention to operate with low leverage. Family Dollar's new ownership also plans to return the brand to its "successful roots," but these are qualitative assessments that could prove optimistic.

Macroeconomic pressures present a two-sided risk. On one hand, NETSTREIT's defensive retail focus (88% of ABR from necessity, discount, and service-oriented industries) should provide resilience during economic slowdowns, as demonstrated during COVID. On the other hand, the lower-income consumer continues to struggle, and "macroeconomic pressures, including new tariffs and recession fears, may impact tenants as consumers reduce discretionary spending." While the portfolio is designed for resilience, a severe recession could test the unit-level productivity assumptions underlying the underwriting.

Interest rate sensitivity is a structural risk for any REIT. While NETSTREIT has locked in attractive long-term financing, rising rates could increase the cost of future debt and compress acquisition spreads. Conversely, if rates decline further, the company could benefit from additional cap rate compression, though management notes competition is increasing as "the 10-year Treasury has decreased from approximately 4.5% to below 4%."

The competitive landscape is evolving. Private equity firms are entering the net lease space, with some "focused on smaller transactions, but further down the credit curve than really where we like to play." While management believes the fragmented market provides "more than enough opportunity" for multiple players, increased competition could compress acquisition yields and make it harder to find accretive deals.

Valuation Context: Positioning in the Net Lease Universe

At $17.60 per share, NETSTREIT trades at a market capitalization of $1.70 billion and an enterprise value of $2.75 billion. The stock offers a 4.88% dividend yield with a payout ratio of 66% based on AFFO guidance, providing income while retaining capital for growth.

Key valuation metrics place NETSTREIT in the middle of the net lease peer group:

• Price/Operating Cash Flow: 15.59x (comparable to O's 14.20x, NNN's 11.85x)
• EV/EBITDA: 18.78x (higher than O's 16.24x and NNN's 15.24x, but lower than ADC's 20.11x)
• Price/Sales: 9.80x (in line with O's 9.81x)
• Debt/Equity: 0.85x (reasonable leverage, though higher than ADC's 0.58x)

The company's balance sheet strength is a key differentiator. With $594 million in total liquidity, no material debt maturities until 2028, and adjusted net debt/EBITDAre of 4.6x, NETSTREIT has the financial flexibility to execute its growth strategy without diluting shareholders excessively. The forward equity overhang—approximately 8-9 million shares to be settled in Q4 2025 and the remainder in 2026—creates a known dilution event that the market has likely already discounted.

What makes the valuation interesting is the inflection in growth trajectory. While larger peers like Realty Income and National Retail Properties grow at mid-single-digit rates, NETSTREIT is accelerating investment activity by 3-4x. If management can deliver on its promise of "above-average growth rate in 2026 and beyond" while maintaining credit quality, the current multiples could prove reasonable for a company compounding per-share value at double-digit rates.

The key valuation driver will be the sustainability of acquisition spreads. With new investments yielding 7.4-7.5% and a cost of capital in the mid-5% range (including equity), NETSTREIT is creating 150-160 basis points of spread per dollar invested. Over a $2.6 billion portfolio, this spread creation translates into meaningful earnings growth. If competition compresses these spreads or if underwriting discipline slips, the growth premium would evaporate quickly.

Conclusion: The Capital Recycling Flywheel

NETSTREIT has reached a strategic inflection point where its proven underwriting discipline and improved cost of capital are enabling an accelerated capital recycling strategy that transforms portfolio quality while driving accretive per-share growth. The company's ability to generate record investment activity of $203.9 million in Q3 2025 while maintaining a 4.6x leverage ratio and 99.9% occupancy demonstrates the power of its defensive retail focus and disciplined capital allocation.

The central thesis hinges on two variables: execution velocity and underwriting quality. If NETSTREIT can deploy $350-400 million in 2025 while maintaining its best-in-class credit loss statistics and 150+ basis point acquisition spreads, the company will have created a self-reinforcing flywheel. Better assets lead to lower cost of capital, which enables more accretive acquisitions, which drives per-share earnings growth, which supports a higher stock price and lower cost of equity.

The risks are tangible but manageable. Tenant concentration is declining, interest rate risk is mitigated through long-term fixed-rate debt, and the defensive retail focus provides recession resilience. The primary concern is whether management can scale its underwriting process without compromising quality—a risk they acknowledge by refusing to grow for growth's sake.

For investors, NETSTREIT offers a rare combination: a 4.88% dividend yield from a 99.9% occupied portfolio, plus the potential for double-digit per-share earnings growth as the capital recycling strategy accelerates. The stock's valuation is neither cheap nor egregious, but it prices in execution rather than speculation. If the company delivers on its 2026 growth ambitions, today's investors will have bought into a net lease REIT at the precise moment its flywheel began to spin at full speed.