NetSTREIT(NTST) - 2023 Q4 - Annual Report

PART I Item 1. Business NETSTREIT Corp. is a REIT managing 598 single-tenant retail properties, generating $131.9 million ABR with 100% occupancy and a 9.5-year WALT Portfolio Overview as of December 31, 2023 | Metric | Value | | :--- | :--- | | Properties Owned/Invested In | 598 | | Tenants | 85 | | Retail Sectors | 26 | | States | 45 | | Annualized Base Rent (ABR) | $131.9 million | | Occupancy (exclusive of mortgage loans) | 100% | | Weighted Average Remaining Lease Term (WALT) | 9.5 years | | ABR from Investment Grade Tenants | ~71% | | ABR from Investment Grade Profile Tenants | ~14% | - The company's investment strategy is multi-faceted, including acquiring stabilized leases, blend-and-extend transactions, mortgage loans, build-to-suit projects, and sale-leaseback transactions to build its portfolio opportunistically[31][32][33] - In 2023, the company entered into a new $250.0 million sustainability-linked senior unsecured term loan (2029 Term Loan) and amended its $175.0 million term loan (2027 Term Loan) It also established a new $300.0 million ATM program, raising approximately $76.5 million in net proceeds by year-end[19][20][23] - The underwriting and portfolio management process is a three-part strategy focusing on: (1) Tenant Credit Underwriting, (2) Real Estate Valuation, and (3) Unit-Level Profitability analysis[35][37] - As of December 31, 2023, the company had 28 full-time employees The workforce was approximately 64% male and 36% female, with 29% being ethnically diverse[55][56] Item 1A. Risk Factors The company faces multiple risks, primarily related to global economic conditions, commercial real estate ownership, and financing - Macro-economic conditions, such as high inflation and interest rates, have increased acquisition costs and reduced the availability of attractive financing, potentially slowing the company's historical growth rate[59][61] - The business is highly dependent on tenants' financial stability A downturn in a key tenant's business, such as Dollar General (10.9% of ABR), CVS (7.8%), or Walgreens (6.9%), could materially and adversely affect the company[63][69] - The portfolio has significant geographic concentrations, with substantial holdings in Illinois (8.6% of ABR), Texas (7.6%), and Wisconsin (7.2%), making the company susceptible to adverse developments in these markets[68] - The company relies on external capital to fund growth due to the REIT requirement to distribute at least 90% of taxable income Inability to access capital on favorable terms could hinder acquisitions and operations[88] - Failure to qualify as a REIT would result in severe tax consequences, including being subject to corporate income tax and the inability to deduct dividends paid to stockholders, which would substantially reduce funds available for distribution[93] - Cybersecurity risks, including data breaches from internal systems or third-party vendors, could lead to operational disruptions, financial loss, and reputational harm[79][80][81] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[137] Item 1C. Cybersecurity The company implements an information security program, overseen by its IT Manager and Chief Accounting Officer, with Board audit committee oversight - The company has implemented information security processes to identify, assess, and manage material risks from cybersecurity threats[138] - Cybersecurity oversight is managed by the IT Manager and Chief Accounting Officer, with ultimate oversight responsibility falling to the Board's audit committee[139][144] - The company utilizes third-party service providers for functions like cybersecurity monitoring and has processes to manage risks associated with these vendors[141][142] Item 2. Properties NETSTREIT's portfolio consists of 598 single-tenant retail properties, 100% occupied, diversified across 85 tenants and 26 sectors Portfolio Summary (as of Dec 31, 2023) | Metric | Value | | :--- | :--- | | Properties | 598 | | Square Feet | 10.6 million | | Occupancy | 100% | | Annualized Base Rent (ABR) | $131.9 million | | WALT | 9.5 years | | Investment Grade Tenants (by ABR) | ~71% | | Investment Grade Profile Tenants (by ABR) | ~14% | Tenant and Industry Diversification Top 5 Tenants by % of ABR | Tenant | % of ABR | | :--- | :--- | | Dollar General Corporation | 10.9% | | CVS Health Corporation | 7.8% | | Walgreen Co. | 6.9% | | Dollar Tree / Family Dollar | 5.0% | | Home Depot U.S.A, Inc. | 4.7% | Top 5 Industries by % of ABR | Tenant Industry | % of ABR | | :--- | :--- | | Dollar Stores | 15.8% | | Grocery | 15.4% | | Drug Stores & Pharmacies | 14.6% | | Home Improvement | 11.6% | | Convenience Stores | 7.3% | - Defensive retail industries, defined as necessity-based, service-oriented, and discount-focused, account for 87.7% of the portfolio's ABR[153][154] Geographic Diversification and Lease Expirations Top 5 States by % of ABR | State | % of ABR | | :--- | :--- | | Illinois | 8.6% | | Texas | 7.6% | | Wisconsin | 7.2% | | New York | 6.5% | | North Carolina | 5.9% | - The portfolio has a well-staggered lease expiration schedule, with no single year before 2033 accounting for more than 9.5% of total ABR expirations[156] Item 3. Legal Proceedings The company is not currently subject to any material lawsuits, claims, or other legal proceedings - The company states it is not currently subject to any lawsuits, claims, or other legal proceedings[159] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[160] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE under "NTST", with regular quarterly dividends, totaling $0.810 per share in 2023 - As of February 12, 2024, there were 73,221,810 shares of common stock outstanding[161] Dividends Per Share | Year | Dividend Per Share | | :--- | :--- | | 2023 | $0.810 | | 2022 | $0.800 | Total Stockholder Return Performance (from 8/13/2020 to 12/31/2023) | Index | 12/31/2023 Value (assuming $100 initial investment) | | :--- | :--- | | NETSTREIT Corp. | $115.61 | | S&P 500 | $149.14 | | NAREIT US EQUITY REIT Index | $125.23 | Item 6. Reserved This item is reserved Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, revenues increased 37% to $131.9 million, but net income decreased to $6.9 million due to higher interest and impairment expenses - During 2023, the company acquired 103 properties for $345.1 million, invested $81.0 million in property developments, and sold 19 properties for $40.3 million[177][178][179] - The company invested $72.3 million in fully collateralized mortgage loans receivable with interest rates ranging from 6.89% to 10.25%[180] Results of Operations Comparison of Operating Results (Years Ended Dec 31, in thousands) | (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Total revenues | $131,905 | $96,279 | | Total operating expenses | $107,805 | $82,776 | | Interest expense, net | ($19,058) | ($9,181) | | Net income | $6,890 | $8,205 | - Revenue increased by $35.6 million (37.0%) in 2023 compared to 2022, primarily due to the growth in the number of operating leases and properties securing mortgage loans[183] - Total operating expenses increased by $25.0 million, driven by higher depreciation and amortization ($13.6 million increase), property expenses ($4.7 million increase), and provisions for impairment ($6.0 million increase)[184][190] - Net income decreased by $1.3 million, primarily due to higher interest expense, depreciation, and impairment charges, which offset the significant revenue growth from portfolio expansion[191] Liquidity and Capital Resources - As of December 31, 2023, the company had $525.0 million outstanding under its term loans and $80.0 million outstanding under its $400.0 million revolver[192] Historical Cash Flow Summary (Years Ended Dec 31, in thousands) | (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $80,155 | $50,647 | | Net cash used in investing activities | ($451,953) | ($468,361) | | Net cash provided by financing activities | $331,184 | $480,654 | - As of December 31, 2023, the company had commitments to fund $35.7 million for properties under development and $13.7 million for mortgage notes receivable, expected to be funded over the next 12 months[198] Non-GAAP Financial Measures Reconciliation of Net Income to AFFO (Years Ended Dec 31, in thousands) | (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net income | $6,890 | $8,205 | | FFO | $76,177 | $54,669 | | Core FFO | $76,684 | $55,391 | | AFFO | $79,070 | $58,517 | Reconciliation of Net Income to EBITDAre (Years Ended Dec 31, in thousands) | (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net income | $6,890 | $8,205 | | EBITDA | $89,128 | $67,056 | | EBITDAre | $95,036 | $64,022 | - As of December 31, 2023, the company's Adjusted Net Debt was $484.8 million, resulting in an Adjusted Net Debt to Annualized Adjusted EBITDAre ratio of 4.1x[228][231] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on variable-rate debt, mitigated by derivative contracts - The company's principal market risk exposure is related to interest rate fluctuations on its floating-rate debt, which totaled $605.0 million as of December 31, 2023 (excluding the mortgage note)[236] - The company has hedged its interest rate risk associated with the 2027, 2028, and 2029 Term Loans by entering into interest rate derivative contracts that convert the variable-rate debt to a fixed interest rate[237] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2023, with an unqualified opinion from KPMG LLP - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of the company's internal control over financial reporting as of December 31, 2023[242][249][250] - The auditor identified two Critical Audit Matters: (1) the evaluation of indicators for potential impairment of long-lived asset groups, and (2) the evaluation of the fair value of land and buildings in certain real estate asset acquisitions[253][254][257] Consolidated Balance Sheet Highlights (as of Dec 31, in thousands) | (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Total real estate held for investment, net | $1,538,693 | $1,262,500 | | Total assets | $1,946,236 | $1,605,692 | | Total liabilities | $672,804 | $547,269 | | Total equity | $1,273,432 | $1,058,423 | Consolidated Statement of Operations Highlights (Year Ended Dec 31, in thousands) | (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total revenues | $131,905 | $96,279 | $59,140 | | Net income | $6,890 | $8,205 | $3,150 | | Diluted EPS | $0.11 | $0.16 | $0.08 | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure - None[420] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures are effective[421] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, which was audited by KPMG LLP[424] Item 9B. Other Information This item is not applicable - Not applicable[426] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - Not applicable[427] PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[428] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[430] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2024 Proxy Statement, with 1,014,906 securities available for future issuance - Information is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[431] Equity Compensation Plan Information (as of Dec 31, 2023) | Plan Category | Securities to be Issued Upon Exercise | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 587,045 | 1,014,906 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[433] Item 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2024 Proxy Statement; KPMG LLP is the auditor - Information is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[434] - The company's independent registered public accounting firm is KPMG LLP[434] PART IV Item 15. Exhibit and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K - This item lists all documents filed as part of the Form 10-K, including financial statements, schedules (Schedule III - Real Estate and Accumulated Depreciation; Schedule IV - Mortgage Loans on Real Estate), and exhibits[435] Item 16. Form 10-K Summary No Form 10-K summary is provided - None[440]