NETSTREIT Corp. (NTST)

A. Company Overview

NETSTREIT Corp. is an internally managed real estate investment trust (REIT) that specializes in the acquisition, ownership, investment, and management of a diverse portfolio of single-tenant retail commercial real estate across the United States. Established as a Maryland corporation on October 11, 2019, the company commenced trading on the New York Stock Exchange under the symbol "NTST" on August 13, 2020. NETSTREIT operates through an umbrella partnership structure, allowing it to own its properties and run its business through an operating partnership, where NETSTREIT GP, LLC serves as the sole general partner.

As of December 31, 2023, NETSTREIT owned or invested in 598 single-tenant retail net leased properties with a diversified tenant base, comprising 85 distinct tenants across 26 retail sectors in 45 states. The investment strategy focuses on securing long-term leases predominantly with tenants in sectors deemed essential for retail success, such as home improvement, auto parts, drug stores, general retail, grocery stores, convenience stores, discount stores, and quick-service restaurants. Approximately 85% of the company’s annualized base rent (ABR), which totaled $131.9 million as of the same date, is derived from investment-grade tenants or those with strong credit profiles.

NETSTREIT aims to create a resilient portfolio positioned to withstand economic fluctuations, focusing on necessity goods and services which are expected to be less vulnerable to e-commerce disruption. The average remaining lease term (WALT) across the portfolio is 9.5 years, contributing to a stable cash flow.

B. Business Model

NETSTREIT's business model revolves around the acquisition and management of single-tenant retail properties under long-term net leases. The company prioritizes investments with high credit quality tenants—typically those rated investment-grade or having an investment-grade profile based on financial health metrics. The properties are selected based on their physical location's capacity to generate sales and profits, ensuring they remain competitive despite e-commerce pressures.

Investment Criteria

The company's strategy is defined by strict investment criteria designed to optimize risk-adjusted returns. Key elements of these criteria include:

• Limiting exposure to any single tenant, property, retail sector, or state, maintaining a diverse portfolio to mitigate risk.
• Commitment to long-term leases (minimum of 10 years) with predominantly investment-grade tenants.
• Focus on properties that are e-commerce resistant and exhibit resilience through various economic cycles.

NETSTREIT achieves growth through both the acquisition of existing properties and various strategic investments, including sale-leaseback transactions, build-to-suit developments, and blend-and-extend acquisitions.

C. Property Portfolio

Acquisitions and Property Types

NETSTREIT has positioned itself to capitalize on a fragmented and undercapitalized market for retail net leased properties. The company typically targets properties priced between $1 million and $10 million but does consider larger acquisitions when beneficial to portfolio quality. As of the end of 2023, the average property purchase price in NETSTREIT's portfolio was $3.4 million, with a corresponding ABR per property of approximately $232,000.

The company employs a rigorous underwriting process that evaluates key metrics such as property location, tenant creditworthiness, unit-level profitability, and market rent conditions. This multifaceted approach aims to ensure the sustainability of its tenants' businesses, directly contributing to the overall stability of NETSTREIT's portfolio.

Segments of Investment Strategy

• Existing Stabilized Leases: Acquiring properties with long-term leases already in place.
• Blend-and-Extend Acquisitions: Purchasing properties with shorter lease terms and negotiating for longer lease extensions.
• Mortgage Loans Receivable: Offering fully collateralized mortgage loans to property owners.
• Build-to-Suit Transactions: Financing the development of properties with guaranteed long-term leases.
• Sale-Leaseback Transactions: Acquiring properties from sellers who lease them back to maintain operational continuity.

D. Financing and Capital Structure

Debt Transactions

NETSTREIT maintains a structured and strategic approach to financing its operations and growth. The company has recently secured a $250 million sustainability-linked senior unsecured term loan as part of its financial strategy, with options to increase the borrowing limit. This loan, alongside other financing mechanisms such as revolver facilities and term loans with various maturities, supports its investment and operational needs.

As of December 31, 2023, NETSTREIT had several debt instruments, including a $400 million senior unsecured revolving credit facility and various term loans scheduled to mature between 2026 and 2029. The company targets a conservative net debt to EBITDAre leverage ratio to balance growth prospects with debt servicing needs effectively.

Capital Allocation Strategy

NETSTREIT focuses on generating and managing its capital flow prudently. The strategy is oriented toward maintaining financial flexibility for targeted acquisitions and ensuring adherence to REIT operational requirements. The management aims to achieve a target dividend payout ratio that allows for reinvestment in growth opportunities while ensuring that cash flows are stable and reliable.

E. Risk Management and Underwriting

NETSTREIT employs a comprehensive risk management framework concentrating on tenant credit quality, real estate valuation, and unit-level profitability. With particular attention to the current economic climate, the assessment process is designed to safeguard the company's interests against potential defaults and ensure the sustainable operation of its portfolio. Regular reviews of properties help identify changes in tenant performance and allow management to proactively address risks.

F. Competitive Landscape

Operating within a highly competitive commercial real estate market, NETSTREIT faces competition from various entities, including publicly traded REITs, institutional investors, and private equity firms. The company distinguishes itself through its targeted investment strategy that focuses on smaller transactions, which are often overlooked by larger players. This strategic positioning, combined with strong tenant relationships and a reliable sourcing network, enables NETSTREIT to maintain a sustainable pipeline of opportunistic acquisitions.