Summary
- NETSTREIT delivered solid 2022 results, even if we were not particularly impressed with 2023 guidance.
- NETSTREIT is putting a lot of effort into building an extremely resilient real estate portfolio.
- We believe shares are reasonably valued at ~16.5x the estimated AFFO for 2023.
As NETSTREIT ( NTST ) continued building its portfolio it generated significant FFO/AFFO growth during 2022. AFFO per share grew an impressive 23.4%, but that is not likely to be repeated in 2023. For 2023 the company is guiding for AFFO per share of $1.2 at the midpoint, only 4 cents higher that what it delivered in 2022, or a ~3.4% increase. In Q4 of 2022 the company delivered core FFO of $0.28 and AFFO of $0.29 per diluted share. For the full year 2022, core FFO was $1.10 and AFFO was $1.16 per diluted share. I last covered NTST in Dec 2022.
During the latest earnings call the company talked about how buying and selling activity is slowing down, and that it believes that the number of transactions industry-wide is likely to be significantly lower in 2023 compared to 2022. On the positive side, NETSTREIT is seeing significantly less competition for properties, allowing it to be more selective and invest with a higher yield. Another interesting fact shared by the company is that it now has basically completed the necessary team to run the REIT, and that cost increases from now on will be more moderate, probably slightly above inflation. This is important, because it should allow the company to start showing operating leverage, as its fixed costs remain relatively stable while it grows its portfolio.
While NETSTREIT is relatively young and unproven, we see a lot of potential. In particular we like the strategy it is following in the building of its portfolio. It is being very careful to choose tenants that are relatively resistant to both recessions and e-commerce competition. NETSTREIT also puts a lot of emphasis on unit level financials, and the specific characteristics of each real estate location. By making sure that each individual property is attractive it makes it easier to rent to another tenant should one default on their lease, or to sell the property without taking a significant loss.
Portfolio
NETSTREIT ended the year with an 8.5 million square feet portfolio, leased to 80 tenants, and paying roughly $99 million in annualized base rent or ABR. The portfolio had a weighted average lease term remaining of 9.5 years, and ~80% of ABR was represented by tenants with investment grade ratings or investment grade profiles. The portfolio is spread over 43 states in the US, and is 100% occupied.
Looking at the top tenant industries, it is clear this is a very defensive portfolio. Drug Stores & Pharmacies is the top industry representing ~16.5% of rent, with tenants such as CVS Health ( CVS ) and Walgreens ( WBA ). It is followed by Grocery at ~12.9%, and some tenant examples in this category include Walmart ( WMT ), Target ( TGT ), and Kroger ( KR ). The third biggest industry is Home Improvement at ~12.1%, with Lowe's ( LOW ) and Home Depot ( HD ) as important tenants.
NETSTREIT Investor Presentation
The portfolio is therefore focused on recession and e-commerce resilient industries, such as necessity, discount, and service-oriented retailers. Further improving the defensiveness of the portfolio is a strong focus on unit-level profitability. NETSTREIT looks for a minimum 2x in rent coverage, and it tries to buy properties that are ranked in the top half of a tenant's store portfolio. It also makes sure that the real estate itself is valuable, and that it can be adapted for other uses, or sold at a good price, should the tenant default on its lease. The slide below summarizes some of the things NETSTREIT looks at before buying a property.
NETSTREIT Investor Presentation
Balance Sheet
The company ended the year with total debt of $496 million, and with a weighted average term of approximately 3.7 years. Its net debt to annualized adjusted EBITDA was 3.4x when taking into consideration unsettled share sales. Excluding the forward shares, the net debt to annualized adjusted EBITDA was 5x. The company has a ~27% debt to total assets ratio.
What these leverage figures mean is that the company still has significant capacity to further grow its portfolio.
NETSTREIT Investor Presentation
Dividend
NETSTREIT has been paying a $0.20 quarterly dividend, which at current prices of close to $20 per share, represents a ~4% dividend yield. Some investors have been disappointed that the company has not raised the dividend in a long time. It appears that the priority is building out the portfolio. The good news is that the dividend is very well covered, with an AFFO payout ratio in the fourth quarter of ~69%. This is actually on the lower side of the company's target of two-thirds to three-quarters of AFFO.
Guidance
For 2023 NETSTREIT expects AFFO per share will be in the range of $1.17 to $1.23 per share. This assumes acquisition activity of ~$400 million during the year. This appears quite realistic given that the company completed ~$104 million of gross investments in Q4, and $507 million during 2022.
Valuation
While NETSTREIT has an attractive dividend yield of ~4%, the company has been slow to raise it. This can be seen in the dividend history below.
We like that the company has a very solid balance sheet, but that has meant a lot of share issuances. Overall we believe shares are reasonably valued at ~16.5x the estimated AFFO for 2023.
Looking at the average FFO estimates from analysts, they project very little growth for the next two years, but we believe that to be too conservative. As the company increases leverage and further builds out its portfolio, we believe FFO/AFFO will continue to grow, even if we don't expect the ~23% AFFO per share increase the company delivered during 2022 to be repeated any time soon.
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Risks
The main risk we see with NETSTREIT is that it is a relatively young and unproven REIT. The company is also operating with an interim CFO and has yet to name the permanent replacement. We would also like to see a longer average duration for its debt. These risks are mitigated by relatively low leverage, and a very defensive real estate portfolio.
Conclusion
We believe NETSTREIT delivered solid 2022 results, even if we were not particularly impressed with 2023 guidance. This is a small, but very interesting REIT that is putting a lot of effort in building an extremely resilient real estate portfolio. Shares currently appear fairly valued, and we would be tempted to buy if they dip from current prices. After reviewing the Q4 and 2022 results we are maintaining our 'Buy' rating.
For further details see:
Netstreit: This Small REIT Is Delivering Solid Results