NETSTREIT Corp. - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q | ||
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 001-39443
NETSTREIT Corp. | ||||||||
(Exact name of registrant as specified in its charter) | ||||||||
| Maryland | 84-3356606 | |||||||||||||
| (State or other jurisdiction of | (I.R.S. Employer | |||||||||||||
| incorporation or organization) | Identification No.) | |||||||||||||
5910 N. Central Expressway Suite 1600 | ||||||||||||||
Dallas, Texas | 75206 | |||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
(972) 200-7100 | ||||||||||||||
| (Registrant’s telephone number, including area code) | ||||||||||||||
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||||||||
| Common stock, par value $0.01 per share | NTST | The New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||||||||||
| Emerging growth company | ☒ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the issuer’s common stock, par value $0.01, outstanding as of April 26, 2021 was 39,405,410.
NETSTREIT CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
NETSTREIT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
| March 31, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Real estate, at cost: | |||||||||||
| Land | $ | 209,376 | $ | 189,373 | |||||||
| Buildings and improvements | 414,865 | 358,360 | |||||||||
| Total real estate, at cost | 624,241 | 547,733 | |||||||||
| Less accumulated depreciation | (14,157) | (10,111) | |||||||||
| Property under development | 1,346 | — | |||||||||
| Real estate held for investment, net | 611,430 | 537,622 | |||||||||
| Assets held for sale | 18,102 | 14,802 | |||||||||
| Cash, cash equivalents and restricted cash | 13,716 | 92,643 | |||||||||
| Acquired lease intangible assets, net | 83,560 | 75,024 | |||||||||
| Other assets, net | 10,443 | 5,724 | |||||||||
| Total assets | $ | 737,251 | $ | 725,815 | |||||||
| Liabilities and equity | |||||||||||
| Liabilities: | |||||||||||
| Term loan, net | $ | 174,161 | $ | 174,105 | |||||||
| Revolving credit facility | 13,000 | — | |||||||||
| Lease intangible liabilities, net | 18,895 | 16,930 | |||||||||
| Liabilities related to assets held for sale | 399 | 399 | |||||||||
| Accounts payable, accrued expenses and other liabilities | 5,318 | 6,308 | |||||||||
| Total liabilities | 211,773 | 197,742 | |||||||||
| Commitments and contingencies | |||||||||||
| Equity: | |||||||||||
| Stockholders’ equity | |||||||||||
Common stock, $0.01 par value, 400,000,000 shares authorized; 28,467,117 and 28,203,545 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively | 285 | 282 | |||||||||
| Additional paid-in capital | 506,432 | 501,045 | |||||||||
| Retained (loss) earnings | (12,582) | (7,464) | |||||||||
| Accumulated other comprehensive income | 2,434 | 235 | |||||||||
| Total stockholders’ equity | 496,569 | 494,098 | |||||||||
| Noncontrolling interests | 28,909 | 33,975 | |||||||||
| Total equity | 525,478 | 528,073 | |||||||||
| Total liabilities and equity | $ | 737,251 | $ | 725,815 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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NETSTREIT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share data)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenues | |||||||||||
| Rental revenue (including reimbursable) | $ | 11,932 | $ | 5,508 | |||||||
| Operating expenses | |||||||||||
| Property | 950 | 285 | |||||||||
| General and administrative | 3,137 | 1,886 | |||||||||
| Depreciation and amortization | 5,929 | 2,346 | |||||||||
| Provisions for impairment | 69 | — | |||||||||
| Transaction costs | 151 | 1,094 | |||||||||
| Total operating expenses | 10,236 | 5,611 | |||||||||
| Other income (expense) | |||||||||||
| Interest expense, net | (905) | (1,699) | |||||||||
| Gain on forfeited earnest money deposit | — | 250 | |||||||||
| Total other income (expense), net | (905) | (1,449) | |||||||||
| Net income (loss) before income tax expense | 791 | (1,552) | |||||||||
| Income tax expense | (50) | — | |||||||||
| Net income (loss) | 741 | (1,552) | |||||||||
| Net income (loss) attributable to noncontrolling interests | 40 | (425) | |||||||||
| Net income (loss) attributable to common shareholders | $ | 701 | $ | (1,127) | |||||||
| Amounts available to common shareholders per common share: | |||||||||||
| Basic | $ | 0.02 | $ | (0.10) | |||||||
| Diluted | $ | 0.02 | $ | (0.10) | |||||||
| Weighted average common shares: | |||||||||||
| Basic | 28,348,975 | 11,797,645 | |||||||||
| Diluted | 30,052,940 | 11,797,645 | |||||||||
| Other comprehensive income (loss): | |||||||||||
| Net income (loss) | $ | 741 | $ | (1,552) | |||||||
| Change in unrealized gain on derivatives, net | 2,323 | — | |||||||||
| Total comprehensive income (loss) | 3,064 | (1,552) | |||||||||
| Comprehensive income (loss) attributable to noncontrolling interests | 164 | (425) | |||||||||
| Comprehensive income (loss) attributable to common shareholders | $ | 2,900 | $ | (1,127) | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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NETSTREIT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except share data)
(Unaudited)
| Preferred stock | Common stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Additional Paid-in Capital | Retained (Loss) Earnings | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | — | $ | — | 8,860,760 | $ | 89 | $ | 164,416 | $ | 28 | $ | — | $ | 164,533 | $ | 87,899 | $ | 252,432 | |||||||||||||||||||||||||||||||||||||||||
| Issuance of preferred stock | 125 | 125 | — | — | — | — | — | 125 | — | 125 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Offering and related costs of preferred stock | — | (21) | — | — | — | — | — | (21) | — | (21) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in private offering | — | — | 2,936,885 | 29 | 57,974 | — | — | 58,003 | — | 58,003 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Offering and related costs of common stock | — | — | — | — | (3,444) | — | — | (3,444) | — | (3,444) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (1,127) | — | (1,127) | (425) | (1,552) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | 125 | $ | 104 | 11,797,645 | $ | 118 | $ | 218,946 | $ | (1,099) | $ | — | $ | 218,069 | $ | 87,474 | $ | 305,543 | |||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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NETSTREIT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except share data)
(Unaudited)
| Preferred stock | Common stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Additional Paid-in Capital | Retained (Loss) Earnings | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | — | $ | — | 28,203,545 | $ | 282 | $ | 501,045 | $ | (7,464) | $ | 235 | $ | 494,098 | $ | 33,975 | $ | 528,073 | |||||||||||||||||||||||||||||||||||||||||
| OP Units converted to common stock | — | — | 253,344 | 3 | 4,920 | — | — | 4,923 | (4,923) | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends and distributions declared on common stock and OP units | — | — | — | — | — | (5,687) | — | (5,687) | (307) | (5,994) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared on restricted stock | — | — | — | — | — | (132) | — | (132) | — | (132) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | 15,190 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock for tax withholding obligations | — | — | (4,962) | — | (90) | — | — | (90) | — | (90) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 557 | — | 557 | — | 557 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 2,199 | 2,199 | 124 | 2,323 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 701 | — | 701 | 40 | 741 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | — | $ | — | 28,467,117 | $ | 285 | $ | 506,432 | $ | (12,582) | $ | 2,434 | $ | 496,569 | $ | 28,909 | $ | 525,478 | |||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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NETSTREIT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per share data)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income (loss) | $ | 741 | $ | (1,552) | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 5,929 | 2,346 | |||||||||
| Amortization of deferred financing costs | 157 | 152 | |||||||||
| Noncash revenue adjustments | (430) | (146) | |||||||||
| Stock-based compensation expense | 557 | — | |||||||||
| Gain on forfeited earnest money deposit | — | (250) | |||||||||
| Provisions for impairment | 69 | — | |||||||||
| Changes in assets and liabilities, net of assets acquired and liabilities assumed: | |||||||||||
| Other assets, net | (1,109) | (683) | |||||||||
| Accounts payable, accrued expenses and other liabilities | (1,644) | 1,024 | |||||||||
| Net cash provided by operating activities | 4,270 | 891 | |||||||||
| Cash flows from investing activities | |||||||||||
| Acquisitions of real estate | (88,225) | (74,166) | |||||||||
| Real estate development | (1,346) | — | |||||||||
| Earnest money deposits | (451) | (1,091) | |||||||||
| Proceeds from sale of real estate | — | 548 | |||||||||
| Net cash used in investing activities | (90,022) | (74,709) | |||||||||
| Cash flows from financing activities | |||||||||||
| Issuance of common stock in private offering, net | — | 54,559 | |||||||||
| Issuance of preferred stock, net | — | 104 | |||||||||
| Payment of common stock dividends | (5,687) | — | |||||||||
| Payment of OP unit distributions | (307) | — | |||||||||
| Payment of restricted stock dividends | (5) | — | |||||||||
| Proceeds under revolving credit facility | 13,000 | — | |||||||||
| Repurchase of common stock for tax withholding obligations | (90) | — | |||||||||
| Deferred offering costs | (86) | (287) | |||||||||
| Net cash provided by financing activities | 6,825 | 54,376 | |||||||||
| Net change in cash, cash equivalents and restricted cash | (78,927) | (19,442) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of the period | 92,643 | 169,319 | |||||||||
| Cash, cash equivalents and restricted cash at end of the period | $ | 13,716 | $ | 149,877 | |||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid for interest | $ | 758 | $ | 1,450 | |||||||
| Supplemental disclosures of non-cash investing and financing activities: | |||||||||||
| OP units converted into common stock | $ | 4,923 | $ | — | |||||||
| Dividends declared and unpaid on restricted stock | $ | 132 | $ | — | |||||||
| Deferred offering costs included in accounts payable, accrued expenses and other liabilities | $ | 526 | $ | 371 | |||||||
| Cash flow hedge change in fair value | $ | 2,323 | $ | — | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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NETSTREIT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 – Organization and Description of Business
NETSTREIT Corp. (“Successor” or the “Company”) was incorporated on October 11, 2019 as a Maryland corporation and commenced operations on December 23, 2019. The Company conducts its operations through NETSTREIT, L.P., a Delaware limited partnership (the “Operating Partnership”). NETSTREIT GP, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company, is the sole general partner of the Operating Partnership.
The Company elected to be treated and to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with its short taxable year ended December 31, 2019 upon the filing of its U.S. federal income tax return for such taxable year. Additionally, the Operating Partnership formed NETSTREIT Management TRS, LLC (“NETSTREIT TRS”), which together with the Company jointly elected to be treated as a taxable REIT subsidiary under Section 856(a) of the Internal Revenue Code of 1986, as amended, (the “Code”) for U.S. federal income tax purposes.
The Company is structured as an umbrella partnership real estate investment trust (commonly referred to as an “UPREIT”) and is an internally managed real estate company that acquires, owns and manages a diversified portfolio of single-tenant, retail commercial real estate leased on a long-term basis to high credit quality tenants across the United States. As of March 31, 2021, the Company owned 234 properties, located in 39 states with a non-binding option to purchase one property currently under development.
Private Offering and Formation Transactions
On December 23, 2019, the Company completed a series of transactions (collectively the “Private Offering”) pursuant to which the Company sold 8,860,760 shares of common stock at $19.75 per share in a private placement under Rule 144A and Regulation D under the Securities Act of 1933, as amended (the “Securities Act”). In connection with the Private Offering, the Company completed the formation transactions described below. On January 30, 2020, the initial purchaser in the Private Offering exercised its over-allotment option to purchase 2,936,885 shares of the Company’s common stock, which were delivered on February 6, 2020. The Company contributed the net proceeds of $219.0 million from the Private Offering to the Operating Partnership in exchange for 11,797,645 Class A units of limited partnership of the Operating Partnership (“Class A OP Units”). Upon completion of the Private Offering and the over-allotment option, noncontrolling interest holders owned approximately 27.4% of the Operating Partnership (the Operating Partnership issued total Class A and Class B OP Units of 15,449,794 and 796,870, respectively).
Concurrently with the closing of the Private Offering, EverSTAR Income and Value Fund V, LP, a Delaware limited partnership (the “Predecessor”), was merged with and into the Operating Partnership, with the Operating Partnership surviving, and the continuing investors in the Operating Partnership receiving an aggregate of 3,652,149 Class A OP Units, other than the Chief Executive Officer of the Company, who received 8,884 Class B units of limited partnership of the Operating Partnership (“Class B OP Units,” and collectively with Class A OP Units, “OP Units”), and an affiliate of the Predecessor’s general partner, which received 287,234 Class B OP Units.
The Operating Partnership entered into a contribution agreement with EBA EverSTAR LLC, a Texas limited liability company, to internalize the Company’s management infrastructure, whereby EBA EverSTAR LLC contributed 100% of the membership interests in EBA EverSTAR Management, LLC, a Texas limited liability company and the manager of the Predecessor, to the Operating Partnership in exchange for 500,752 Class B OP Units. In connection with the internalization, EBA EverSTAR Management, LLC was re-domiciled in Delaware and its name was changed to NETSTREIT Management, LLC. A 0.01% interest in NETSTREIT Management, LLC was issued to NETSTREIT TRS.
Concurrently with the consummation of the Private Offering, the Company entered into a $175.0 million term loan and $250.0 million revolving credit facility. On December 23, 2019, in connection with the acquisition of the Predecessor, the Company fully drew down on its term loan and used the proceeds to acquire the Predecessor, which concurrently settled its outstanding debt facilities. As part of the acquisition, the Company did not assume any obligations under the Predecessor’s then outstanding debt facilities.
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Series A Preferred Stock
To maintain the Company’s status as a REIT, on January 27, 2020, the Company issued and sold 125 shares of 12.0% Series A Cumulative Non-Voting Preferred Stock, par value $0.01 per share (“Series A Preferred Stock”), for $1,000 per share to accredited investors pursuant to Regulation D under the Securities Act. The shares of Series A Preferred Stock may be redeemed solely at the Company’s option for consideration equal to $1,000 per share, plus accrued and unpaid dividends thereon to and including the date fixed for redemption, plus a redemption premium as follows (i) until December 31, 2021, $100 and (ii) thereafter, no redemption premium. The Company redeemed all 125 outstanding shares of Series A Preferred Stock upon the completion of the initial public offering.
Initial Public Offering
On August 17, 2020, the Company completed the initial public offering of its common stock. The Company sold 12,244,732 shares of common stock and selling stockholders sold 255,268 shares of common stock at a price of $18.00 per share. The Company's common stock began trading on the New York Stock Exchange under the symbol “NTST” on August 13, 2020. On September 16, 2020, the Company issued an additional 1,436,829 shares of its common stock pursuant to the underwriters' over-allotment option in connection with the Company's initial public offering. The net proceeds to the Company from the initial public offering was $227.3 million, which is net of transaction costs and underwriter fees of $18.9 million. The Company contributed the net proceeds of the initial public offering and related over-allotment option to the Operating Partnership in exchange for 13,681,561 Class A OP Units. In addition, an equivalent number of Class A OP Units were issued for the 255,268 shares sold by selling stockholders.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and the rules and regulations of the U.S. Securities and Exchange Commission (SEC). The accompanying condensed consolidated financial statements include the accounts of the Company and subsidiaries in which the Company has a controlling financial interest. All intercompany accounts and transactions have been eliminated in consolidation and the Company’s net income (loss) is reduced by the portion of net income (loss) attributable to noncontrolling interests.
Interim Unaudited Financial Information
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited interim condensed consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements, and should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto on the Annual Report on Form 10-K as of and for the year ended December 31, 2020, which provide a more complete understanding of the Company’s accounting policies, financial position, operating results, business properties, and other matters. In the opinion of management, all adjustments of a normal recurring nature necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2021 and 2020 are not necessarily indicative of the results for the full year.
Noncontrolling Interests
The Company presents noncontrolling interests, which represents OP Units, and classifies such interests as a component of permanent equity, separate from the Company's stockholders’ equity. Noncontrolling interests were created as part of an asset acquisition and recognized at fair value as of the date of the transaction. Effective with the Company’s initial public offering, each limited partner of the Operating Partnership has the right to require the Operating Partnership to redeem part or all of its OP Units for cash, based upon the value of an equivalent number of shares of the Company’s common stock at the time of the redemption, or, at the Company’s election, shares of the Company’s common stock on a one-for-one basis, subject to certain adjustments and the restrictions on ownership and transfer of the Company’s common stock. The election to pay cash or issue common stock is solely within the control of the Company to satisfy a noncontrolling interest holder's redemption request.
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Net income or loss of the Operating Partnership is allocated to its noncontrolling interests based on the noncontrolling interests’ ownership percentages in the Operating Partnership throughout the period. Ownership percentage is calculated by dividing the number of OP Units held by the noncontrolling interests by the total OP Units outstanding.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s most significant assumptions and estimates relate to the useful lives of real estate assets, lease accounting, real estate impairment assessments, and allocation of fair value of purchase consideration. These estimates are based on historical experience and other assumptions which management believes are reasonable under the circumstances. The Company evaluates its estimates on an ongoing basis and makes revisions to these estimates and related disclosures as experience develops or new information becomes known. Further, the uncertainty over the ultimate impact COVID-19 will have on the global economy and the Company’s business makes any estimates and assumptions as of March 31, 2021 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to conform with current period presentation. Transaction costs within the condensed consolidated statements of operations and comprehensive income (loss) were previously included within the caption “general and administrative.”
Risk and Uncertainties
COVID-19
On March 11, 2020, the World Health Organization announced a new strain of coronavirus (“COVID-19”) was reported worldwide, resulting in COVID-19 being declared a pandemic, and on March 13, 2020 the U.S. President announced a National Emergency relating to the disease. COVID-19 and the measures taken to limit its spread are negatively impacting the economy across many industries, including industries in which our tenants operate. The impacts may continue and increase in severity as the duration of the pandemic lengthens. As a result, the Company is not yet able to determine the full impact of COVID-19 on its operations, and therefore, whether any such impact will be material. However, the Company’s operations and cash flows during the three months ended March 31, 2021 and 2020 were not materially impacted by COVID-19. The Company has collected 100.0% of all rent payments for the three months ended March 31, 2021. In addition, the Company has not provided for any abatements or deferrals after August 1, 2020.
The Company also adopted an optional remote-work policy and other physical distancing policies for its corporate office. The Company does not anticipate these policies to have any adverse impact on its ability to continue to operate its business. Transitioning to a remote-work environment has not had a material adverse impact on the Company's general ledger system, internal controls or controls and procedures related to its financial reporting process.
Real Estate Held for Investment
Real estate is recorded and stated at cost less any provision for impairment. Assets are recognized at fair value at acquisition date. For properties developed by the Company, all direct and indirect costs related to planning, development and construction, including interest, real estate taxes and other miscellaneous costs incurred during the construction period, are capitalized for financial reporting purposes and recorded as property under development until construction has been completed.
The Company evaluates each acquisition transaction to determine whether the acquired asset meets the definition of a business and therefore accounted for as a business combination or if the acquisition transaction should be accounted for as an asset acquisition. Under Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”), an acquisition does not qualify as a business when substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets or the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost,
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effort or delay. Transaction costs related to acquisitions that qualify as asset acquisitions are capitalized as part of the cost basis of the acquired assets, while transaction costs for acquisitions that are deemed to be acquisitions of a business are expensed as incurred.
The Company allocates the purchase price of acquired properties accounted for as asset acquisitions to tangible and identifiable intangible assets or liabilities based on their relative fair values. Tangible assets may include land, buildings, site improvements and tenant improvements. Intangible assets include the value of in-place leases and above-market leases and intangible liabilities include below-market leases.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases based on the specific characteristics of each tenant’s lease. The Company estimates the cost to execute leases with terms similar to the remaining lease terms of the in-place leases, including leasing commissions, legal and other related expenses. The fair value of above-market or below-market leases is recorded based on the net present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between the contractual amount to be paid pursuant to the in-place lease and the Company’s estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining non-cancelable term of the lease including any below-market fixed rate renewal options for below-market leases. In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including real estate valuations prepared by independent valuation firms. The Company also considers information and other factors including market conditions, the industry that the tenant operates in, characteristics of the real estate; e.g., location, size, demographics, value and comparative rental rates; tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business. Additionally, the Company considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets and liabilities acquired. Based on these inputs for measuring and allocating the fair value of real estate acquisitions, the Company utilizes both observable market data (categorized as level 2 on the three-level valuation hierarchy of Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement), and unobservable inputs that reflect the Company’s own internal assumptions (categorized as level 3 under ASC Topic 820).
Depreciation and Amortization
Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets:
| Buildings | 13 – 35 years | ||||
| Building improvements | 15 years | ||||
| Tenant improvements | Shorter of the term of the related lease or useful life | ||||
| Acquired in-place leases | Remaining terms of the respective leases | ||||
| Assembled workforce | 3 years | ||||
| Computer equipment | 3 years | ||||
Total depreciation and amortization expense was $5.9 million and $2.3 million during the three months ended March 31, 2021 and 2020, respectively.
Depreciation expense on real estate held for investment and computer equipment was $4.1 million and $1.6 million during the three months ended March 31, 2021 and 2020, respectively.
Amortization expense on acquired in-place lease and assembled workforce intangible assets, and leasing commission costs were $1.8 million and $0.7 million during the three months ended March 31, 2021 and 2020, respectively.
Repairs and maintenance are charged to operations as incurred; major renewals and betterments that extend the useful life or improve the operating capacity of the asset are capitalized. Upon the sale or disposition of a property, the asset and the related accumulated depreciation are removed from the condensed consolidated balance sheets with the difference between the proceeds received, net of sales costs, and the carrying value of the asset group recorded as a gain or loss on sale, subject to impairment considerations.
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Assets Held for Sale
Properties classified as held for sale, including the related intangibles, on the condensed consolidated balance sheets include only those properties available for immediate sale in their present condition, which are actively being marketed, and for which management believes that it is probable that a sale of the property will be completed within one year. Properties held for sale are carried at the lower of cost or fair value, less estimated selling costs. No depreciation expense or amortization expense is recognized on properties held for sale and the related intangible assets or liabilities once they have been classified as such. Only disposals representing a strategic shift in operations are presented as discontinued operations. Accordingly, we have not reclassified results of operations for properties disposed during the interim period ended March 31, 2021 or held for sale as discontinued operations, as these events are a normal part of the Company’s operations and do not represent strategic shifts in the Company’s operations. As of March 31, 2021 and December 31, 2020, there were five and three properties, respectively, classified as held for sale.
Impairment of Long-Lived Assets
Fair value measurement of an asset occurs when events or changes in circumstances related to an asset indicate that the carrying amount of the asset is no longer recoverable. If indicators are present, the Company will prepare a projection of the undiscounted future cash flows of the property, excluding interest charges, and determine if the carrying amount of the real estate is recoverable. When a carrying amount is not recoverable, an impairment loss is recognized to the extent that the carrying amount of the asset exceeds its fair market value. The Company estimates fair value using data such as operating income, estimated capitalization rates or multiples, leasing prospects, local market information, and with regard to assets held for sale, based on the estimated or negotiated selling price, less estimated costs of disposal. Based on these unobservable inputs, the Company determined that its valuations of impaired real estate and intangible assets fall within Level 3 of the fair value hierarchy under ASC Topic 820.
The following table summarizes the provision for impairment during the periods indicated below (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Total provision for impairment | $ | 69 | $ | — | |||||||
Number of properties: (1) | |||||||||||
| Classified as held for sale | 1 | — | |||||||||
| Disposed within the period | — | — | |||||||||
(1) Includes the number of properties that were impaired and classified as held for sale or impaired and disposed of during the respective periods. Excludes properties that did not have impairment recorded during the year.
Cash, Cash Equivalents and Restricted Cash
The Company considers all cash balances, money market accounts and highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Restricted cash includes cash restricted for property tenant improvements and cash proceeds from the sale of assets held by qualified intermediaries in anticipation of the acquisition of replacement properties in tax-free exchanges under Section 1031 of the Code. The Company had less than $0.1 million of restricted cash as of March 31, 2021, which was included in cash, cash equivalents, and restricted cash on the condensed consolidated balance sheets. The Company had $14.8 million of restricted cash as of December 31, 2020.
The Company’s bank balances as of March 31, 2021 and December 31, 2020 include certain amounts over the Federal Deposit Insurance Corporation limits.
Revenue Recognition and Related Matters
The Company’s rental revenue is primarily related to rent received from tenants under leases accounted for as operating leases. Rent from leases that have fixed and determinable rent increases is recognized on a straight-line basis over the non-cancellable initial term of the lease and reasonably certain renewal periods, from the later of the date of the commencement of the lease or
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the date of acquisition of the property subject to the lease. The difference between rental revenue recognized and the cash rent due under the provisions of the lease is recorded as deferred rent receivable and included as a component of other assets in the condensed consolidated balance sheets.
Variable lease revenues include tenant reimbursements, lease termination fees, changes in the index or market-based indices after the inception of the lease or percentage rents. Variable lease revenues are not recognized until the specific events that trigger the variable payments have occurred. The Company recognized variable lease revenue related to tenant reimbursements and lease termination fees for the periods presented.
Capitalized above-market and below-market lease values are amortized on a straight-line basis as a reduction or increase of rental revenue as appropriate over the remaining non-cancellable terms of the respective leases.
An allowance for doubtful accounts is provided against the portion of accounts receivable, net including straight-line rents, which is estimated to be uncollectible, which includes a portfolio-based reserve and reserves for specific disputed amounts. Such allowances are reviewed each period based upon recovery experience and the specific facts of each outstanding amount. As of March 31, 2021 and December 31, 2020, there was no allowance for doubtful accounts.
Stock-Based Compensation
The Company has a share-based compensation award program for our employees and directors. Stock-based compensation expense associated with these awards is recognized in general and administrative expenses in our condensed consolidated statements of operations and comprehensive income (loss). We classify stock-based payment awards either as equity awards or liability awards based upon an analysis of ASC 718 and ASC 480. Equity classified awards are measured based on the fair value on the date of grant. Liability classified awards are remeasured to fair value each reporting period. Stock-based compensation expense is recognized over the requisite service or performance period. The Company recognizes forfeitures as they occur.
Transaction Costs
Transaction costs represent costs incurred by the Company to facilitate the private offering, formation transactions and the initial public offering. In addition, transaction costs include the costs associated with abandoned acquisitions and other acquisition related activity. There were no offering costs incurred during the three months ended March 31, 2021. Offering costs for the three months ended March 31, 2020 were $0.7 million. Acquisition related expenses were $0.2 million and $0.4 million for the three months ended March 31, 2021 and 2020, respectively.
Income Taxes
The Company elected to be treated and qualify as a REIT for U.S. federal income tax purposes beginning with its short taxable year ended December 31, 2019 upon the filing of its U.S. federal income tax return for such taxable year. To qualify as a REIT, the Company must meet certain organizational, income, asset and distribution tests. Accordingly, the Company will generally not be subject to corporate U.S. federal or state income tax to the extent that it makes qualifying distributions of all of its taxable income to its shareholders and provided it satisfies on a continuing basis, through actual investment and operating results, the REIT requirements, including certain asset, income, distribution and share ownership tests. The Company intends to make sufficient distributions during 2021 to receive a full dividends paid deduction.
The Company made a joint election with NETSTREIT TRS for it to be treated as a taxable REIT subsidiary which may be subject to U.S. federal, state, and local income taxes on its taxable income. In general, NETSTREIT TRS may perform services for tenants of the Company, hold assets that the Company cannot hold directly and may engage in any real estate or non-real estate-related business.
During three months ended March 31, 2021, the Company recognized state and local and franchise tax expense which is included in income tax expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss).
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Earnings Per Share
Earnings per common share has been computed pursuant to the guidance in FASB ASC Topic 260, Earnings per Share. Basic earnings per share (“EPS”) is computed by dividing net income (loss) allocated to common stockholders by the weighted-average number of common shares outstanding for the reporting period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. No effect is shown for any securities that are anti-dilutive. Net income (loss) allocated to common stockholders represents net income (loss) less income allocated to participating securities and noncontrolling interests. None of the Company’s equity awards are participating securities.
Fair Value Measurement
Fair value measurements are utilized in the accounting of the Company’s assets acquired and liabilities assumed in an asset acquisition and also affect the Company’s accounting for certain of its financial assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The hierarchy described below prioritizes inputs to the valuation techniques used in measuring the fair value of assets and liabilities. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs to be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows: Level 1 inputs, such as quoted prices in an active market; Level 2 inputs, which are observable inputs for similar assets; or Level 3 inputs, which are unobservable inputs.
The Company uses the following inputs in its fair value measurements:
–Level 2 inputs for its debt and derivative financial instrument fair value disclosures. See “Note 6 - Debt” and “Note 7 - Derivative Financial Instruments,” respectively; and
–Level 2 and Level 3 inputs when assessing the fair value of assets and liabilities in connection with real estate acquisitions and impairment. See “Note 4 - Real Estate Investments.”
The fair value of the Company’s cash, cash equivalents and restricted cash (including money market accounts), other assets and accounts payable, accrued expenses and other liabilities approximate their carrying value because of the short-term nature of these instruments. Provisions for impairments recognized in the three months ended March 31, 2021 and 2020 related to assets held for sale and the impairment was determined based on the estimated or negotiated selling price, less costs of disposal, compared to the carrying value of the property.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company is exposed to credit risk with respect to cash held at various financial institutions, access to its Credit Facility, and amounts due or payable under derivative contracts. The credit risk exposure with regard to the Company’s cash, credit facilities, and derivative instruments is spread among a diversified group of investment grade financial institutions.
During the three months ended March 31, 2021, the Company’s rental revenues were derived from 63 separate tenants leasing 234 total properties. During this period there were no tenants with rental revenue that exceeded 10% of total rental revenue.
During the three months ended March 31, 2020, the Company’s rental revenues were derived from 48 separate tenants leasing 117 total properties. During this period there were no tenants with rental revenue that exceeded 10% of total rental revenue.
Segment Reporting
The Company considers each one of its properties to be an operating segment, none of which meets the threshold for a reportable segment. The Company allocates resources and assesses operating performance based on individual property needs. All of the Company’s operating segments meet the aggregation criteria, and thus, the Company reports one segment, rental operations. There were no intersegment sales during the periods presented.
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Recent Accounting Pronouncements Issued But Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04 “Topic 848: Reference Rate Reform.” ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives, and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. On July 1, 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company determined these elections have not materially impacted the Company's condensed consolidated financial statements. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
Note 3 – Leases
The Company acquires, owns and manages commercial single-tenant lease properties, with the majority being long-term triple-net leases where the tenant is generally responsible for all improvements and contractually obligated to pay all operating costs (such as real estate taxes, utilities and repairs and maintenance costs). As of March 31, 2021, the Company owned 234 single-tenant retail net leased properties spanning 39 states, with tenants representing 59 different brands or concepts across 23 retail sectors. As of March 31, 2021, the remaining terms of leases range from 2-33 years.
The Company’s property leases have been classified as operating leases and some have scheduled rent increases throughout the lease term.
All lease-related income is reported as a single line item, rental revenue (including reimbursable), in the condensed consolidated statements of operations and comprehensive income (loss) and is presented net of provision for doubtful accounts. There were no provisions for doubtful accounts during the three months ended March 31, 2021 and 2020.
The following table provides a disaggregation of lease income recognized under ASC 842 (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Rental revenue | |||||||||||
Fixed lease income (1) | $ | 10,953 | $ | 5,224 | |||||||
Variable lease income (2) | 789 | 292 | |||||||||
| Other rental revenue: | |||||||||||
| Above/below market lease amortization, net | 190 | (8) | |||||||||
| Rental revenue (including reimbursables) | $ | 11,932 | $ | 5,508 | |||||||
(1) Fixed lease income includes contractual rents under lease agreements with tenants recognized on a straight-line basis over the lease term.
(2) Variable lease income primarily includes tenant reimbursements for real estate taxes, insurance, common area maintenance, and lease termination fees.
Scheduled future minimum base rental payments (excluding base rental payments from properties classified as held for sale and straight line rent adjustments for all properties) due to be received under the remaining non-cancelable term of the operating leases in place as of March 31, 2021 are as follows (in thousands):
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| Future Minimum Base Rental Receipts | |||||
| Remainder of 2021 | $ | 35,206 | |||
| 2022 | 46,624 | ||||
| 2023 | 46,656 | ||||
| 2024 | 46,467 | ||||
| 2025 | 46,240 | ||||
| Thereafter | 261,749 | ||||
| $ | 482,942 | ||||
Future minimum rentals exclude amounts that may be received from tenants for reimbursements of operating costs and property taxes. In addition, the future minimum rents do not include any contingent rents based on a percentage of the lessees' gross sales or lease escalations based on future changes in the Consumer Price Index (“CPI”) or other stipulated reference rate.
Note 4 – Real Estate Investments
Acquisitions
During the three months ended March 31, 2021, the Company acquired 31 properties for a total purchase price of $88.2 million, inclusive of $1.1 million of capitalized acquisition costs. During the three months ended March 31, 2020, the Company acquired 24 properties for a total purchase price of $74.2 million, inclusive of $0.7 million of capitalized acquisition costs.
The acquisitions were all accounted for as asset acquisitions. An allocation of the purchase price and acquisition costs paid for the completed acquisitions is as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Land | $ | 21,490 | $ | 30,261 | |||||||
| Buildings | 48,999 | 36,962 | |||||||||
| Site improvements | 7,545 | 3,147 | |||||||||
| Tenant improvements | 1,587 | 479 | |||||||||
| In-place lease intangible assets | 10,942 | 8,741 | |||||||||
| Above-market lease intangible assets | — | 507 | |||||||||
| Construction-in-progress assets | — | 49 | |||||||||
| 90,563 | 80,146 | ||||||||||
| Liabilities assumed | |||||||||||
| Below-market lease intangible liabilities | (2,338) | (4,257) | |||||||||
| Accounts payable, accrued expense and other liabilities | — | (1,723) | |||||||||
| Purchase price (including acquisition costs) | $ | 88,225 | $ | 74,166 | |||||||
Development
During the three months ended March 31, 2021, the Company invested a combined total of $1.3 million in a development project in Yuma, Arizona. The Company has a non-binding purchase option to acquire the property upon completion. The Company’s total investment is expected to be $4.4 million with the sole tenant in the property commencing lease payments in 2022. These amounts are included in property under development in the accompanying condensed consolidated balance sheets as of March 31, 2021.
During the three months ended March 31, 2020, the Company acquired a property in North Little Rock, Arkansas and commenced development of a build-to-suit project. The total cost for the project was $1.6 million which was completed in December 2020. Rent commenced in January 2021. These amounts were included in buildings and improvements in the accompanying condensed consolidated balance sheets as of December 31, 2020.
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Dispositions
There were no dispositions for the three months ended March 31, 2021. During the three months ended March 31, 2020, the Company sold one property for a total sales price, net of disposal costs, of $0.5 million, recognizing no gain or loss on the sale.
During 2019, the Company entered into an agreement to sell one property to a third-party and received a nonrefundable $0.3 million earnest money deposit, which upon the third-party’s failure to perform under the purchase and sale agreement in the first quarter of 2020, was recognized as a gain.
Note 5 – Intangible Assets and Liabilities
Intangible assets and liabilities consisted of the following (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||
| In-place leases | $ | 80,102 | $ | (5,836) | $ | 74,266 | $ | 69,470 | $ | (4,146) | $ | 65,324 | |||||||||||||||||||||||
| Above-market leases | 9,443 | (650) | 8,793 | 9,607 | (481) | 9,126 | |||||||||||||||||||||||||||||
| Assembled workforce | 873 | (372) | 501 | 873 | (299) | 574 | |||||||||||||||||||||||||||||
| Total Intangible assets | $ | 90,418 | $ | (6,858) | $ | 83,560 | $ | 79,950 | $ | (4,926) | $ | 75,024 | |||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||
| Below-market leases | $ | 20,289 | $ | (1,394) | $ | 18,895 | $ | 17,951 | $ | (1,021) | $ | 16,930 | |||||||||||||||||||||||
The remaining weighted average amortization period for the Company’s intangible assets and liabilities as of March 31, 2021 and as of December 31, 2020 by category were as follows:
| Years Remaining | |||||||||||
| March 31, 2021 | December 31, 2020 | ||||||||||
| In-place leases | 10.5 | 11.1 | |||||||||
| Above-market leases | 12.3 | 12.6 | |||||||||
| Below-market leases | 12.4 | 13.4 | |||||||||
| Assembled workforce | 1.7 | 2.0 | |||||||||
The Company records amortization of in-place lease assets to amortization expense, and records net amortization of above-market and below-market lease intangibles to rental revenue. The following amounts in the accompanying condensed consolidated statements of operations and comprehensive income (loss) related to the amortization of intangibles assets and liabilities for all property and ground leases (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Amortization: | |||||||||||
| Amortization of in-place leases | $ | 1,719 | $ | 669 | |||||||
| Amortization of assembled workforce | 73 | 73 | |||||||||
| $ | 1,792 | $ | 742 | ||||||||
| Net adjustment to rental revenue: | |||||||||||
| Above-market lease assets | (183) | (144) | |||||||||
| Below-market lease liabilities | 373 | 136 | |||||||||
| $ | 190 | $ | (8) | ||||||||
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The following table provides the projected amortization of in-place lease assets and assembled workforce intangible assets to amortization expense, and the net amortization of above-market and below-market lease intangibles to rental revenue as of March 31, 2021, for the next five years and thereafter (in thousands):
Remainder of 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | |||||||||||||||||||||||||||||||||||
| In-place leases | $ | 6,068 | $ | 8,091 | $ | 7,969 | $ | 7,789 | $ | 7,633 | $ | 36,716 | $ | 74,266 | |||||||||||||||||||||||||||
| Assembled workforce | 218 | 283 | — | — | — | — | 501 | ||||||||||||||||||||||||||||||||||
| Amortization expense | $ | 6,286 | $ | 8,374 | $ | 7,969 | $ | 7,789 | $ | 7,633 | $ | 36,716 | $ | 74,767 | |||||||||||||||||||||||||||
| Above-market lease assets | (571) | (761) | (761) | (756) | (756) | (5,188) | (8,793) | ||||||||||||||||||||||||||||||||||
| Below-market lease liabilities | 1,270 | 1,694 | 1,687 | 1,672 | 1,661 | 10,911 | 18,895 | ||||||||||||||||||||||||||||||||||
| Net adjustment to rental revenue | $ | 699 | $ | 933 | $ | 926 | $ | 916 | $ | 905 | $ | 5,723 | $ | 10,102 | |||||||||||||||||||||||||||
Note 6 – Debt
Debt consists of the following (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Term Loan (due December 23, 2024) | $ | 175,000 | $ | 175,000 | |||||||
| Revolver (due December 23, 2023) | 13,000 | — | |||||||||
| Total debt | 188,000 | 175,000 | |||||||||
| Unamortized discount and debt issuance costs | (839) | (895) | |||||||||
Unamortized deferred financing costs, net(1) | (1,098) | (1,198) | |||||||||
| Total debt, net | $ | 186,063 | $ | 172,907 | |||||||
(1) The Company records deferred financing costs for the Revolver in other assets, net on its condensed consolidated balance sheets.
Credit Facility
In December 2019, the Company entered into a senior credit facility consisting of (i) a $175.0 million senior secured term loan (“Term Loan”) and (ii) a $250.0 million senior secured revolving credit facility (“Revolver”, and collectively with the Term Loan, the “Credit Facility”). Wells Fargo Securities, LLC is lead arranger and bookrunner and Wells Fargo Bank, National Association is administrative agent under the Credit Facility (the “Administrative Agent”).
The Term Loan matures on December 23, 2024 and the Revolver matures on December 23, 2023, subject to extension up to one year. The Administrative Agent released the collateral in connection with the Company’s satisfaction of the Collateral Release Requirements in the fourth quarter of 2020, therefore interest rates under the Credit Facility are based on the Company’s consolidated total leverage ratio, and are determined by (A) in the case of Term Loan either (i) LIBOR, plus a margin ranging from 1.15% to 1.60%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.15% to 0.60%, based on the Company’s consolidated total leverage ratio and (B) in the case of Revolving Loans either (i) LIBOR, plus a margin ranging from 1.20% to 1.80%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.20% to 0.80%, based on the Company’s consolidated total leverage ratio. Interest is payable monthly or at the end of the applicable interest period in arrears on any outstanding borrowings.
Prior to the collateral release, the Credit Facility was secured by a first priority perfected security interest in and lien on all existing and future equity interests of the Company’s direct and indirect subsidiaries of any Eligible Property (as defined in the Credit Facility) owned by the Company or any of the Company’s subsidiaries. The Credit Facility also provided that the Administrative Agent has the option to release the collateral securing the Credit Facility upon delivery of satisfactory evidence from the Company that Collateral Release Requirements (as defined in the Credit Facility) have been met, which requirements include, among others, conditions related to the unencumbered asset value and asset diversification of the Company.
For so long as the Credit Facility was secured, which was through the period ended September 30, 2020, the interest rates under the Credit Facility were based on the Company’s consolidated total leverage ratio, and are determined by (A) in the case of Term Loan either (i) LIBOR, plus a margin ranging from 1.25% to 2.25%, based on the Company’s consolidated total leverage
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ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.25% to 1.25%, based on the Company’s consolidated total leverage ratio and (B) in the case of Revolving Loans either (i) LIBOR, plus a margin ranging from 1.35% to 2.30%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.35% to 1.30%, based on the Company’s consolidated total leverage ratio.
The Company is required to pay a Revolver facility fee at an annual rate of 0.15% of the unused capacity if usage exceeds 50% of the total available facility, or 0.25% of the unused facility if usage does not exceed 50%. Loans from the Revolver are generally restricted if, among other things, the proposed usage of the proceeds from the loan do not meet certain criteria as outlined in the Credit Facility Agreement, if an event of default exists, or if the requested loan will create an event of default. Loans from the Revolver may not exceed the total revolving commitments.
During the second quarter of 2020, the Company entered into an amendment to the Credit Facility to amend and redefine its debt covenant calculations. The Company incurred and capitalized less than $0.1 million of financing costs relating to this amendment, which has been pro-rated to the Term Loan and Revolver based on their respective borrowing capacities.
Effective September 28, 2020, the Company entered into an interest rate derivative contract to fix the interest rate on the Term Loan. The interest rate is effectively fixed to 1.36% which includes the fixed rate (one-month LIBOR) of 0.21% plus a margin of 1.15%. The interest rate hedge is further described in “Note 7 - Derivative Financial Instruments.”
Deferred financing costs are being amortized over the remaining terms of each respective loan. Term Loan deferred financing costs of $1.1 million, of which $0.8 million and $0.9 million is unamortized at March 31, 2021 and December 31, 2020, respectively, is included within Term Loan, net on the condensed consolidated balance sheets. Revolver deferred financing costs of $1.6 million, of which $1.1 million and $1.2 million is unamortized at March 31, 2021 and December 31, 2020, respectively, is included within other assets, net on the condensed consolidated balance sheets.
Total deferred financing costs amortized on the Term Loan and Revolver for the three months ended March 31, 2021 and 2020 were $0.2 million and $0.2 million, respectively. This is included in interest expense, net on the Company’s condensed consolidated statements of operations and comprehensive income (loss).
For the three months ended March 31, 2021 and 2020, the Term Loan had a weighted average interest rate, exclusive of amortization of deferred financing costs and the effects of the interest rate hedge, of 1.30% and 3.23%, respectively.
The Company incurred interest expense in connection with the Term Loan for the three months ended March 31, 2021 and 2020 of $0.6 million and $1.4 million, respectively.
The estimated fair value of the Company’s Term Loan has been derived based on market observable inputs such as interest rates and discounted cash flow analysis using estimates of the amount and timing of future cash flows. These measurements are classified as Level 2 within the fair value hierarchy. The Company determined that the carrying value materially approximated the estimated fair value of the Term Loan as of March 31, 2021 and December 31, 2020.
The Company incurred interest expense, exclusive of facility fees for unused capacity, on borrowings under the Revolver of less than $0.1 million for the three months ended March 31, 2021, with a weighted average interest rate of 1.29%. As of December 31, 2020, the Company had no borrowings under the Revolver. The Company also incurred interest expense in connection with unused capacity for the three months ended March 31, 2021 and 2020 of $0.2 million and $0.1 million, respectively.
The Company was in compliance with all of its debt covenants as of March 31, 2021 and expects to be in compliance for the following twelve-month period.
Debt Maturity
Payments on the Term Loan are interest only through maturity. All outstanding amounts on the Term Loan are due on December 23, 2024.
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Note 7 – Derivative Financial Instruments
The Company uses interest rate derivative contracts to manage its exposure to changes in interest rates on its variable rate debt. These derivatives are considered cash flow hedges and are recorded on a gross basis at fair value. Assessments of hedge effectiveness are performed quarterly using either a qualitative or quantitative approach. The Company recognizes the entire change in the fair value in Accumulated Other Comprehensive Income (“AOCI”) and the change is reflected as cash flow hedge changes in fair value in the supplemental disclosures of non-cash investing and financing activities in the consolidated statement of cash flows. Effective September 28, 2020, such derivatives were initiated to hedge the variable cash flows associated with Term Loan. Accordingly, the interest rate for the variable rate Term Loan is based on the hedged fixed rate (one-month) of 0.21% compared to the variable Term Loan one-month LIBOR rate as of March 31, 2021 of 0.11%, plus a margin of 1.15%. The maturity date of the interest rate swaps coincide with the maturity date of the Term Loan.
Amounts will subsequently be reclassified to earnings when the hedged item affects earnings. The Company does not enter into derivative contracts for speculative or trading purposes and does not have derivative netting arrangements.
The Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company evaluates counterparty credit risk through monitoring the creditworthiness of counterparties, which includes review of debt ratings and financial performance. To mitigate credit risk, the Company enters into agreements with counterparties it considers credit-worthy, such as large financial institutions with favorable credit ratings.
The Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (in thousands, except number of instruments):
| Number of Instruments | Notional | |||||||||||||||||||||||||
| Interest Rate Derivatives | March 31, 2021 | December 31, 2020 | March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Interest rate swaps | 4 | 4 | $ | 175,000 | $ | 175,000 | ||||||||||||||||||||
The following table presents the fair value of the Company's derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020 (in thousands):
| Derivative Assets | ||||||||||||||||||||
| Fair Value at | ||||||||||||||||||||
| Derivatives Designated as Hedging Instruments: | Balance Sheet Location | March 31, 2021 | December 31, 2020 | |||||||||||||||||
| Interest rate swaps | Other assets, net | $ | 2,577 | $ | 253 | |||||||||||||||
The following table presents the effect of the Company's interest rate swaps on the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2021 and 2020 (in thousands):
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| Amount of Gain Recognized in OCI on Derivative (Effective Portion) | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Amount of (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | ||||||||||||||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||
| For the Three Months Ended March 31 | ||||||||||||||||||||||||||||||||
| Interest Rate Products | $ | 2,290 | $ | — | Interest expense, net | $ | (34) | $ | — | |||||||||||||||||||||||
The Company did not exclude any amounts from the assessment of hedge effectiveness for the three months ended March 31, 2021 and 2020. During the next twelve months, the Company estimates that an additional $0.1 million will be reclassified as an increase to interest expense.
The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves.
To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2021, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The table below presents the Company’s derivative liabilities measured at fair value on a recurring basis as of March 31, 2021, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
| Fair Value Hierarchy Level | ||||||||||||||||||||||||||
| Description | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||||||||||||
| March 31, 2021 | ||||||||||||||||||||||||||
| Derivative assets | $ | — | $ | 2,577 | $ | — | $ | 2,577 | ||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||
| Derivative assets | — | 253 | — | 253 | ||||||||||||||||||||||
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Note 8 – Supplemental Detail for Certain Components of the Condensed Consolidated Balance Sheets
Other assets, net consist of the following (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Earnest money deposits | $ | 1,085 | $ | 634 | |||||||
| Deferred offering costs | 526 | — | |||||||||
| Deferred financing costs, net | 1,098 | 1,198 | |||||||||
| Accounts receivable, net | 2,110 | 1,489 | |||||||||
| Deferred rent receivable | 1,647 | 1,407 | |||||||||
| Fair value of interest rate swaps | 2,577 | 253 | |||||||||
| Other assets | 1,400 | 743 | |||||||||
| $ | 10,443 | $ | 5,724 | ||||||||
Accounts payable, accrued expenses and other liabilities consists of the following (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Accrued expenses | $ | 2,685 | $ | 2,035 | |||||||
| Accrued bonus | 450 | 1,561 | |||||||||
| Prepaid rent | 1,382 | 1,551 | |||||||||
| Accounts payable | 402 | 916 | |||||||||
| Other liabilities | 399 | 245 | |||||||||
| $ | 5,318 | $ | 6,308 | ||||||||
Note 9 – Shareholders’ Equity, Partners’ Capital and Preferred Equity
Common Stock
During the three months ended March 31, 2021, portions of restricted stock unit awards granted to certain of the Company’s officers and directors vested. The vesting of these awards, granted pursuant to the Omnibus Incentive Plan, resulted in federal and state income tax liabilities for the recipients. As permitted by the terms of the Omnibus Incentive Plan and the award grants, certain executive officers elected to surrender approximately five thousand shares of common stock valued at approximately $0.1 million, solely to pay the associated statutory tax withholding during the year ended December 31, 2021. The surrendered shares are included in repurchase of shares of common stock on the condensed consolidated statements of cash flows.
On January 30, 2020, the initial purchaser in the Private Offering exercised its over-allotment option to purchase 2,936,885 shares of the Company’s common stock, which were delivered on February 6, 2020. Net proceeds to the Company from the over-allotment option exercise were $54.6 million which was net of initial purchaser’s discount and placement fees of $3.4 million. The over-allotment option exercise resulted in the issuance of 2,936,885 shares of common stock. The Company contributed the net proceeds to the Operating Partnership in exchange for 2,936,885 Class A OP Units.
Preferred Equity
To maintain the Company’s status as a REIT, on January 27, 2020, the Company issued and sold 125 shares of 12.0% Series A Cumulative Non-Voting Preferred Stock, par value $0.01 per share, for $1,000 per share to accredited investors pursuant to Regulation D under the Securities Act. The shares of Series A Preferred Stock may be redeemed solely at the Company’s option for consideration equal to $1,000 per share, plus accrued and unpaid dividends thereon to and including the date fixed for redemption, plus a redemption premium as follows (i) until December 31, 2021, $100 and (ii) thereafter, no redemption premium. The Company redeemed all 125 outstanding shares of Series A Preferred Stock upon the completion of the initial public offering.
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Dividends
During the three months ended March 31, 2021, the Company declared and paid the following common stock dividends (in thousands, except per share data):
| Declaration Date | Dividend Per Share | Record Date | Total Amount | Payment Date | ||||||||||||||||||||||
| March 3, 2021 | $ | 0.20 | March 15, 2021 | $ | 5,687 | March 30, 2021 | ||||||||||||||||||||
The holders of OP Units are entitled to an equal distribution per Class A and B OP Unit held as of each record date. Accordingly, the Operating Partnership paid distributions of $0.3 million to holders of OP Units as of March 30, 2021. There were no dividends or distributions declared or paid for the three months ended March 31, 2020
Noncontrolling Interests
Noncontrolling interests represent noncontrolling holders of OP Units in the Operating Partnership. OP Units are convertible into common stock as the OP Units may be redeemed for cash or, at the Company’s election, exchanged for shares of the Company’s common stock on a one-for-one basis. As of March 31, 2021 and December 31, 2020, noncontrolling interests represented 5.0% and 5.9%, respectively of OP Units. During the three months ended March 31, 2021, OP Unit holders redeemed 253,344 OP units into shares of common stock on a one-for-one basis. There were no redemptions for the three months ended March 31, 2020.
Note 10 – Stock-Based Compensation
Under the NETSTREIT Corp. 2019 Omnibus Incentive Compensation Plan (the “Omnibus Incentive Plan”), which became effective on December 23, 2019, 2,094,976 shares of common stock are reserved for issuance. The Omnibus Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted shares, restricted stock units, long-term incentive plan units, dividend equivalent rights, and other share-based, share-related or cash-based awards, including performance-based awards, to employees, directors and consultants, with each grant evidenced by an award agreement providing the terms of the award. The Omnibus Incentive Plan is administered by the Compensation Committee of the Board of Directors.
As of March 31, 2021, the only stock-based compensation granted by the Company were restricted stock units. The total amount of stock-based compensation costs recognized in general and administrative expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss) was $0.6 million for the three months ended March 31, 2021. No stock-based compensation expense was recognized for the three months ended March 31, 2020. All awards of unvested restricted stock units are expected to fully vest over the next to five years.
Performance-Based Restricted Stock Units
Pursuant to the Omnibus Incentive Plan, the Company made performance-based restricted stock unit grants to certain employees and non-employee directors. The performance condition required the Company to effectively file a shelf registration statement. Up until the point of filing the registration statement, performance was not deemed probable and accordingly, no restricted stock units had the capability of vesting and no stock-based compensation expense was recorded. As a result of the Company's initial public offering in August 2020, the performance condition was satisfied and the Company recorded a stock-based compensation expense catch-up adjustment of $1.4 million. The vesting terms of these grants are specific to the individual grant and vest in equal annual installments over the next to five years.
The following table summarizes performance-based restricted stock unit activity for the period ended March 31, 2021:
| Shares | Weighted Average Grant Date Fair Value per Share | ||||||||||
| Unvested restricted stock grants outstanding as of December 31, 2020 | 207,803 | $ | 19.75 | ||||||||
| Vested during the period | (15,190) | 19.75 | |||||||||
| Unvested restricted stock grants outstanding as of March 31, 2021 | 192,613 | $ | 19.75 | ||||||||
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For the three months ended March 31, 2021, the Company recognized $0.3 million in stock-based compensation expense associated with performance-based restricted stock units. As of March 31, 2021 and December 31, 2020, the remaining unamortized stock-based compensation expense totaled $2.2 million and $2.6 million, respectively and as of March 31, 2021, these awards are expected to be recognized over a remaining weighted average period of 2.5 years. These units are subject to graded vesting and stock-based compensation expense is recognized ratably over the requisite service period for each vesting tranche in the award.
The grant date fair value of unvested restricted units is calculated as the per share price determined in the Private Offering.
Service-Based Restricted Stock Units
Pursuant to the Omnibus Incentive Plan, the Company has made service-based restricted stock unit grants to certain employees and non-employee directors. The vesting terms of these grants are specific to the individual grant and vest in equal annual installments over the next to five years.
The following table summarizes service-based restricted stock unit activity for the period ended March 31, 2021:
| Shares | Weighted Average Grant Date Fair Value per Share | ||||||||||
| Unvested restricted stock grants outstanding as of December 31, 2020 | 169,793 | $ | 18.00 | ||||||||
| Granted during the period | 161,185 | 17.47 | |||||||||
| Unvested restricted stock grants outstanding as of March 31, 2021 | 330,978 | $ | 17.74 | ||||||||
For the three months ended March 31, 2021, the Company recognized $0.2 million in stock-based compensation expense associated with service-based restricted stock units. As of March 31, 2021 and December 31, 2020, the remaining unamortized stock-based compensation expense totaled $5.4 million and $2.8 million, respectively and as of March 31, 2021, these awards are expected to be recognized over a remaining weighted average period of 3.5 years. Stock-based compensation expense is recognized on a straight-line basis over the total requisite service period for the entire award.
The grant date fair value of service based unvested restricted units is calculated as the per share price determined in the initial public offering for awards granted in 2020 and as the per share price of the Company’s stock on the date of grant for those granted in 2021.
Market-Based Restricted Stock Units
Pursuant to the Omnibus Incentive Plan, the Company has made market-based restricted stock unit grants to certain employees. These grants are subject to the participant’s continued service over a three year period with 40% of the award based on the Company’s total shareholder return (“TSR”) as compared to the TSR of 33 peer companies and 60% of the award based on total absolute TSR over the cumulative three year period. The performance period of these grants runs through March 8, 2024. Grant date fair value of the market-based share awards was calculated using the Monte Carlo simulation model, which incorporated stock price volatility of the Company and each of the Company’s peers and other variables over the performance period. Significant inputs for the calculation were expected volatility of the Company of 42.8% and expected volatility of the Company's peers, ranging from 28.7% to 90.7%, with an average volatility of 46.3% and a risk-free interest rate of 0.34%. The fair value per share on the grant date specific to the target TSR relative to the Company’s peers was $20.18 and the target absolute TSR was $16.46 for a weighted average grant date fair value of $17.77 per share. Stock-based compensation expense associated with unvested market-based share awards is recognized on a straight-line basis over the minimum required service period, which is three years.
The following table summarizes market-based restricted stock unit activity for the period ended March 31, 2021:
| Shares | Weighted Average Grant Date Fair Value per Share | ||||||||||
| Unvested restricted stock grants outstanding as of December 31, 2020 | — | $ | — | ||||||||
| Granted during the period | 135,766 | 17.77 | |||||||||
| Unvested restricted stock grants outstanding as of March 31, 2021 | 135,766 | $ | 17.77 | ||||||||
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For the three months ended March 31, 2021, the Company recognized less than $0.1 million in stock-based compensation expense associated market-based restricted stock units. As of March 31, 2021, the remaining unamortized stock-based compensation expense totaled $2.4 million and as of March 31, 2021, these awards are expected to be recognized over a remaining weighted average period of 2.9 years.
Note 11 – Earnings Per Share
Net income per common share has been computed pursuant to the guidance in the FASB ASC Topic 260, Earnings per Share. Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is similarly calculated except that the denominator is increased by using the treasury stock method to determine the potential dilutive effect of the Company’s outstanding unvested restricted stock units and using the if-converted method to determine the potential dilutive effect of the Company’s Class A and B OP Units. The Company has noncontrolling interests in the form of OP Units which are convertible into common stock and represent potentially dilutive securities, as the OP Units may be redeemed for cash or, at the Company’s election, exchanged for shares of the Company’s common stock on a one-for-one basis. The following table is a reconciliation of the numerator and denominator used in the computation of basic and diluted net income per common share for the three months ended March 31, 2021 and 2020.
| Three Months Ended March 31, | |||||||||||
| (in thousands, except share and per share data) | 2021 | 2020 | |||||||||
| Numerator: | |||||||||||
| Net income (loss) | $ | 741 | $ | (1,552) | |||||||
| Net (income) loss attributable to noncontrolling interest | (40) | 425 | |||||||||
| Cumulative preferred stock dividends and redemption premium | — | (4) | |||||||||
| Net income attributable to common shares, basic | 701 | (1,131) | |||||||||
| Net (income) loss attributable to noncontrolling interest | (40) | 425 | |||||||||
| Net income (loss) attributable to common shares, diluted | $ | 741 | $ | (1,556) | |||||||
| Denominator: | |||||||||||
| Weighted average common shares outstanding, basic | 28,348,975 | 11,797,645 | |||||||||
| Effect of dilutive shares for diluted net income per common share: | |||||||||||
| OP Units | 1,616,005 | — | |||||||||
| Unvested RSUs | 87,960 | — | |||||||||
| Weighted average common shares outstanding, diluted | 30,052,940 | 11,797,645 | |||||||||
| Net income available to common stockholders per common share, basic | $ | 0.02 | $ | (0.10) | |||||||
| Net income available to common stockholders per common share, diluted | $ | 0.02 | $ | (0.10) | |||||||
For the the three months ended March 31, 2020, diluted net loss per common share does not assume the conversion of the OP Units as such conversion would be antidilutive. Additionally, unvested RSUs for the three months ended March 31, 2020 are excluded as they were considered contingently issuable shares.
As of March 31, 2021 and December 31, 2020, there were 1,498,538 and 1,751,882 of OP Units outstanding, respectively.
Note 12 – Commitments and Contingencies
Litigation and Regulatory Matters
In the ordinary course of business, from time to time, the Company may be subject to litigation, claims and regulatory matters, none of which are currently outstanding, which the Company believes could have, individually or in the aggregate, a material adverse effect on its business, financial condition or results of operations, liquidity or cash flows.
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Environmental Matters
The Company is subject to environmental regulations related to the ownership of real estate. The cost of complying with the environmental regulations was not material to the Company’s results of operations for any of the periods presented. The Company is not aware of any environmental condition on any of its properties that is likely to have a material adverse effect on the condensed consolidated financial statements when the fair value of such liability can be reasonably estimated and is required to be recognized.
Commitments
In the normal course of business, the Company enters into various types of commitments to purchase real estate properties or fund development projects. These commitments are generally subject to the Company’s customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated or receives an option to purchase the properties. As of March 31, 2021, the Company had commitments to fund properties under development totaling $4.4 million, of which $1.3 million has been funded to date and the remaining is expected to be funded over the next twelve months.
As of March 31, 2021, the Company did not have any other material commitments for re-leasing costs, recurring capital expenditures, non-recurring building improvements, or similar types of costs.
During the period ended March 31, 2021, the Company executed the Alignment of Interest Program (the “Program”) which allows employees to elect to receive a portion of their 2021 bonus in unvested restricted stock units in the first quarter of 2022 and would vest over a four-year service period beginning April 1, 2021. The Program is deemed to be a liability-classified award which will be fair valued and accrued over the applicable service period beginning April 1, 2021. The total estimated fair value of the Program as of March 31, 2021 is approximately $1.0 million. The award will be remeasured to fair value each reporting period.
Note 13 – Related-Party Transactions
Effective with the Private Offering and commencement of the Company’s operations on December 23, 2019, the Company executed a facilities agreement with a subsidiary of EB Arrow. Under the facilities agreement, the Company shares in office rent and office related expenses primarily based on employee headcount. For the three months ended March 31, 2021 and 2020, the Company incurred less than $0.1 million in related expenses.
Note 14 – Subsequent Events
The Company has evaluated all events that occurred subsequent to March 31, 2021 through the date on which these condensed consolidated financial statements were issued to determine whether any of these events required disclosure in the financial statements.
Public Offering
On April 12, 2021, the Company completed a public offering of 10,915,688 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 1,423,785 shares of common stock. Upon closing of the offering, the Company issued 10,915,688 shares of common stock and received net proceeds of $194.3 million after deducting the underwriting discount and estimated transaction costs. The Company contributed the net proceeds of the offering and related underwriters’ option to the Operating Partnership in exchange for 10,915,688 Class A OP Units.
Debt Payment
On April 12, 2021, the Company used the net proceeds from the public offering to pay down $13.0 million of outstanding borrowings under the Revolver.
OP Unit Conversions to Common Stock
There were 22,605 OP Units redeemed for shares of common stock on a one-for-one basis subsequent to March 31, 2021.
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Common Stock Dividend
On April 27, 2021, the Company's Board of Directors declared a cash dividend of $0.20 per share for the second quarter of 2021. The dividend will be paid on June 15, 2021 to shareholders of record on June 1, 2021.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements concerning our business and growth strategies, investment, financing and leasing activities and trends in our business, including trends in the market for single-tenant, retail commercial real estate. Words such as “expects,” “anticipates,” “intends,” “plans,” “likely,” “will,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Quarterly Report on Form 10-Q may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. For a further discussion of these and other factors that could impact future results, performance or transactions, see the information under the heading “Risk Factors” Part I, Item 1A. in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (the “SEC”) on March 4, 2021 and other reports filed with the Securities and Exchange Commission from time to time.
Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report on Form 10-Q. New risks and uncertainties may arise over time and it is not possible for us to predict those events or how they may affect us. Many of the risks identified herein and in our periodic reports have been and will continue to be heightened as a result of the ongoing and numerous adverse effects arising from the novel coronavirus (COVID-19). We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.
Overview
We are an internally-managed real estate company that acquires, owns and manages a diversified portfolio of single-tenant, retail commercial real estate subject to long-term net leases with high credit quality tenants across the United States. Our diversified portfolio consists of 234 single-tenant retail net leased properties spanning 39 states, with tenants representing 59 different brands or concepts across 23 retail sectors. Our portfolio generates annualized base rent (“ABR”) of $48.0 million and is 100% occupied, with a WALT of 10.1 years and consisting of approximately 70% and 11% of investment grade tenants and investment grade profile tenants, by ABR, which we believe provides us with a strong, stable source of recurring cash flow. Our tenants operate in industries where a physical location is critical to the generation of sales and profits, with a focus on necessity goods and essential services in the retail sector, including home improvement, auto parts, drug stores and pharmacies, general retail, grocers, convenient stores, discount stores, and quick-service restaurants, which we refer to as defensive retail industries. We believe these characteristics make our tenants’ businesses e-commerce resistant and resilient through all economic cycles. We completed our initial public offering on August 17, 2020 and our common stock trades on the New York Stock Exchange under the symbol “NTST.”
ABR is calculated by multiplying (i) cash rental payments (a) for the month ended March 31, 2021 (or, if applicable, the next full month's cash rent contractually due in the case of rent abatements, rent deferrals, recently acquired properties and properties with contractual rent increases, other than properties under development) for leases in place as of March 31, 2021, plus (b) for properties under development, the first full month's permanent cash rent contractually due after the development period by (ii) 12.
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COVID-19
We continue to monitor the global outbreak of COVID-19 and to take steps to mitigate the potential risks to us posed by the pandemic. In addition, we continue to stay in close contact with our tenants and monitor the timeliness of rental payments and any significant changes in our tenants' businesses. See “Note 2 - Summary of Significant Accounting Policies” to our condensed consolidated financial statements included herein. The Company’s operations and cash flows for the three months ended March 31, 2021 and 2020 were not materially impacted by COVID-19.
Recent Developments
We seek to maximize long-term earnings growth and shareholder value primarily through the acquisition of strategically positioned assets throughout the U.S., specifically focusing on properties with tenants which are considered essential businesses. We have deployed all of the $227.3 million from the Company's initial public offering to fund acquisitions through March 31, 2021 and to repay the $50 million of outstanding borrowings under our Revolver as of September 30, 2020. On April 12, 2021, the Company completed a public offering of 10,915,688 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 1,423,785 shares of common stock. Upon closing, the Company issued 10,915,688 shares of common stock and received net proceeds of $194.3 million after deducting the underwriting discount and estimated transaction costs. We intend to use the net proceeds to repay the $13.0 million of outstanding borrowings under the Revolver and use the remainder of the net proceeds for general corporate purposes, including the acquisition of properties in our pipeline.
Results of Operations
Overall
The Company continued to grow its assets held for investment by increasing its asset base from 203 properties as of December 31, 2020 to 234 properties as of the end of March 31, 2021. In addition, the Company has committed to one real estate development project with total projected capital spend of $4.4 million of which $1.3 million has been funded as of March 31, 2021. This growth was facilitated by successfully raising equity capital of $219.0 million and $227.3 million as result of the private offerings and initial public offering, respectively, totaling $446.3 million of net capital raised by the Company since December 23, 2019.
Acquisitions
During the three months ended March 31, 2021, the Company acquired 31 retail net lease properties for a total purchase price, inclusive of capitalized acquisition costs, of $88.2 million. The acquisitions were all accounted for as asset acquisitions. These properties are located in 19 states with a weighted average lease term of approximately 8.8 years. The underwritten weighted-average capitalization rate on the Company’s first quarter acquisitions was approximately 6.7%.
Development
During the three months ended March 31, 2021, the Company invested $1.3 million in a development project in Yuma, Arizona. The Company has a non-binding purchase option to acquire the property upon development. The Company’s total investment is expected to be $4.4 million with the sole tenant in the property commencing lease payments in 2022.
Dispositions
There were no dispositions for the three months ended March 31, 2021.
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Three Months Ended March 31, 2021 Compared with Three Months Ended March 31, 2020
The following table sets forth our operating results for the periods indicated (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenues | |||||||||||
| Rental revenue (including reimbursable) | $ | 11,932 | $ | 5,508 | |||||||
| Operating expenses | |||||||||||
| Property | 950 | 285 | |||||||||
| General and administrative | 3,137 | 1,886 | |||||||||
| Depreciation and amortization | 5,929 | 2,346 | |||||||||
| Provisions for impairment | 69 | — | |||||||||
| Transaction costs | 151 | 1,094 | |||||||||
| Total operating expenses | 10,236 | 5,611 | |||||||||
| Other income (expense) | |||||||||||
| Interest expense, net | (905) | (1,699) | |||||||||
| Gain on forfeited earnest money deposit | — | 250 | |||||||||
| Total other income (expense), net | (905) | (1,449) | |||||||||
| Net income (loss) before income tax expense | 791 | (1,552) | |||||||||
| Income tax expense | (50) | — | |||||||||
| Net income (loss) | 741 | (1,552) | |||||||||
Revenue. Revenue for the three months ended March 31, 2021 increased by $6.4 million to $11.9 million from $5.5 million for the three months ended March 31, 2020. This is primarily due to an increase in the real estate portfolio from 94 properties as of January 1, 2020 to 234 properties as of March 31, 2021. The increase includes an increase in cash rental receipts of $5.6 million with $0.8 million of combined net increases in straight-line rental revenue, property expense reimbursement, and amortization of above- and below market lease related to intangible assets.
Total Operating Expenses. Total expenses increased by $4.6 million to $10.2 million for the three months ended March 31, 2021 as compared to $5.6 million for the three months ended March 31, 2020. The increase in operating expenses is primarily attributed to the increase in the number of operating properties, increase in stock-based compensation, offset by prior period expenses associated with the consummation of the Company’s initial public offering in August 2020. Total operating expenses include the following:
•Property Expenses. Property expenses increased $0.7 million to $1.0 million for the three months ended March 31, 2021 from $0.3 million for the three months ended March 31, 2020. The increase is primarily attributed to the increase in the real estate portfolio from 94 to 234 properties. The largest increases are from reimbursable property taxes of $0.3 million and reimbursable maintenance expense of $0.2 million.
•General and Administrative Expenses. General and administrative expenses increased $1.2 million to $3.1 million for the three months ended March 31, 2021 from $1.9 million for the three months ended March 31, 2020. The increase is primarily due to payroll expense associated with the internalization of management and staff to support the Company as a newly public company of $0.4 million, an increase in stock-based compensation expense of $0.6 million, an increase to insurance related expenses of $0.2 million, net increases to professional and administrative expenses of $0.4 million, offset by a decrease in audit fees of $0.4 million.
•Depreciation and Amortization. Depreciation and amortization expense increased $3.6 million to $5.9 million for the three months ended March 31, 2021 from $2.3 million for the three months ended March 31, 2020. The increase in depreciation and amortization is proportionate to the increase in the size of the portfolio over the comparable period primarily with associated increases in building depreciation expense of $1.6 million, in-place lease amortization expense of $1.1 million, and building improvements depreciation expense of $0.8 million.
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•Provision for Impairment. For the three months ended March 31, 2021, we recorded a provision for impairment of $0.1 million on one property which was classified as held-for-sale as of December 31, 2020. The property was sold subsequent to March 31, 2021. No provision for impairment was recorded for the three months ended March 31, 2020. This impairment and subsequent disposal relates to our plan of strategically identifying properties that can be re-leased or disposed of in an effort to improve returns and manage risk exposure.
Transaction costs. Transaction costs decreased by $0.9 million to $0.2 million for the three months ended March 31, 2021 from $1.1 million for the three months ended March 31, 2020. The decrease in transaction costs includes a decrease of $0.7 million of expenses incurred in 2020 to facilitate the private and public offerings of common stock and a decrease of $0.2 million of expenses incurred for abandoned acquisitions and expenses associated with property acquisitions.
Interest Expense. Interest expense decreased by $0.8 million to $0.9 million for the three months ended March 31, 2021 from $1.7 million for the three months ended March 31, 2020. The decrease is primarily due to the decrease in the effective interest rate of the Term Loan.
Net income (loss). Net income increased $2.3 million to $0.7 million for the three months ended March 31, 2021 from a net loss of $1.6 million for the three months ended March 31, 2020. Net income increased primarily due to the growth in the size of our real estate investment portfolio, which generated additional rental revenues, and due to a decrease in interest expense and transaction costs, offset by the impact of increases in depreciation and amortization expenses related to our growth, and to increases in general and administrative expenses related to both our growth and the result of becoming a public company, as set forth above.
Liquidity and Capital Resources
Our primary capital requirements are to fund property acquisitions and required interest payments, as well as working capital needs, operating expenses, and capital expenditures. Our capital resources primarily consist of cash from operations, sales of equity securities (including private and public offerings) and borrowings under our Credit Facility. As of March 31, 2021, we had a $175.0 million Term Loan and $13.0 of borrowings outstanding under our $250.0 million Revolver. We believe that the net proceeds of $194.3 million from our April 2021 public offering of our common stock plus both our cash flows from operations and available borrowing capacity will be adequate to support our ongoing operations and to fund our debt service requirements, capital expenditures and working capital for at least the next 12 months.
Contractual Obligations
As of March 31, 2021, our contractual obligation include the maturity on our $175.0 million Term Loan with the scheduled principal payment due on December 23, 2024.
In addition, our contractual obligations include the repayment due on the Revolver. During the three months ended March 31, 2021, we borrowed $13.0 million on our $250.0 million Revolver at an effective interest rate of 1.29% to fund specifically identified property acquisitions. A portion of the net proceeds from our April 12, 2021 public offering were used to repay the borrowings in full.
The following table provides information with respect to our commitments as of March 31, 2021 (in thousands):
| Payment Due by Period | ||||||||||||||||||||||||||
| Total | From April 1, 2021 to December 31, 2021 | 1 – 3 Years | 3 – 5 Years | |||||||||||||||||||||||
| Contractual Obligations | ||||||||||||||||||||||||||
| Term Loan – Principal | $ | 175,000 | $ | — | $ | — | $ | 175,000 | ||||||||||||||||||
Term Loan – Variable interest (1) | 8,858 | 1,782 | 4,752 | 2,324 | ||||||||||||||||||||||
Revolver - Borrowings(2) | 13,000 | 13,000 | — | — | ||||||||||||||||||||||
Unutilized borrowing fees on Revolver (3) | 1,704 | 468 | 1,236 | — | ||||||||||||||||||||||
| Total | $ | 198,562 | $ | 15,250 | $ | 5,988 | $ | 177,324 | ||||||||||||||||||
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(1) Effective September 28, 2020, we entered into an interest rate hedge to fix the interest rate on our Term Loan. Accordingly, the projected interest rate obligations for the variable rate Term Loan is based on the hedged fixed rate (one-month) of 0.21% compared to the variable Term Loan one-month LIBOR rate as of March 31, 2021 of 0.11%, plus a margin of 1.15% based on the $175.0 million Term Loan outstanding through the maturity date of December 23, 2024.
(2) We intend to repay the outstanding borrowings under the Revolver in April 2021.
(3) We are subject to a variable unutilized borrowing fee on the unused portion of our $250.0 million Revolver. As of March 31, 2021, we had $13.0 million of borrowings outstanding on our $250.0 million Revolver, however we continue to incur the unutilized borrowing fee on the unused portion of the Revolver. This reflects our projected unutilized borrowing fee at 0.25% assuming repayment of the $13.0 million in April 2021 and as if the Revolver has no additional borrowing through the maturity date of December 23, 2023.
Additionally, in the normal course of business, the Company enters into various types of commitments to purchase real estate properties or fund development projects. These commitments are generally subject to the Company’s customary due diligence process and, accordingly, a number of specific conditions must be met before the Company is obligated or receives an option to purchase the properties. As of March 31, 2021, the Company had commitments to fund properties under development totaling $4.4 million, of which $1.3 million has been funded to date and the remaining is expected to be funded over the next twelve months.
Credit Facility
In December 2019, we entered into a Credit Facility consisting of (i) a $175.0 million senior secured Term Loan and (ii) a $250.0 million senior secured Revolver. Wells Fargo Securities, LLC is lead arranger and bookrunner and Wells Fargo Bank, National Association is the Administrative Agent.
The Term Loan matures on December 23, 2024 and the Revolver matures on December 23, 2023, subject to extension up to one year. The Administrative Agent released the collateral in connection with the Company’s satisfaction of the Collateral Release Requirements in the fourth quarter of 2020, therefore interest rates under the Credit Facility are based on the Company’s consolidated total leverage ratio, and are determined by (A) in the case of Term Loan either (i) LIBOR, plus a margin ranging from 1.15% to 1.60%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.15% to 0.60%, based on the Company’s consolidated total leverage ratio and (B) in the case of Revolving Loans either (i) LIBOR, plus a margin ranging from 1.20% to 1.80%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.20% to 0.80%, based on the Company’s consolidated total leverage ratio.
Prior to the collateral release, the Credit Facility was secured by a first priority perfected security interest in and lien on all existing and future equity interests of the Company’s direct and indirect subsidiaries of any Eligible Property (as defined in the Credit Facility) owned by the Company or any of the Company’s subsidiaries. The Credit Facility also provided that the Administrative Agent has the option to release the collateral securing the Credit Facility upon delivery of satisfactory evidence from the Company that Collateral Release Requirements (as defined in the Credit Facility) have been met, which requirements include, among others, conditions related to the unencumbered asset value and asset diversification of the Company.
The Company uses interest rate derivative contracts to manage its exposure to changes in interest rates on its variable rate debt. These derivatives are considered cash flow hedges and are recorded on a gross basis at fair value. Effective September 28, 2020, such derivatives were used to hedge the variable cash flows associated with the Term Loan.
Historical Cash Flow Information
Three Months Ended March 31, 2021 Compared with Three Months Ended March 31, 2020
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | (Unaudited) | ||||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | 4,270 | $ | 891 | |||||||
| Investing activities | (90,022) | (74,709) | |||||||||
| Financing activities | 6,825 | 54,376 | |||||||||
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Cash Flows Provided By Operating Activities. Net cash provided by operating activities increased by $3.4 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase was largely attributed to the increase in the size of the Company’s real estate investment portfolio with an increase in rental income, including reimbursable expenses of $6.2 million, offset primarily by increases in operating and general and administrative expenses paid associated with our larger portfolio of $2.7 million.
Cash Flows Used In Investing Activities. Net cash used in investing activities increased by $15.3 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase is primarily due to acquisition and development activity. The Company spent $88.2 million on the acquisition of real estate and $1.3 million was provided to fund real estate development during the three months ended March 31, 2021 compared to $74.2 million during the three months ended March 31, 2020.
Cash Flows Provided By Financing Activities. Net cash provided by financing activities decreased by $47.6 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease is primarily attributed to the exercise of the over-allotment option in the Private Offering of common stock of $54.6 million which occurred during the three months ended March 31, 2020. Additionally, the Company paid $5.7 million of dividends during the three months ended March 31, 2021 and none in the prior period. Lastly, the net decrease is offset by $13.0 million on borrowings under the Revolver during the three months ended March 31, 2021.
Income Taxes
The Company elected to be treated and qualify as a REIT for U.S. federal income tax purposes beginning with its short taxable year ended December 31, 2019 upon the filing of its U.S. federal income tax return for such taxable year. To qualify as a REIT, the Company must meet certain organizational, income, asset and distribution tests. Accordingly, the Company will generally not be subject to corporate U.S. federal or state income tax to the extent that it makes qualifying distributions of all of its taxable income to its shareholders and provided it satisfies on a continuing basis, through actual investment and operating results, the REIT requirements, including certain asset, income, distribution and share ownership tests. The Company intends to make sufficient distributions during 2021 to receive a full dividends paid deduction.
The Company made a joint election with NETSTREIT TRS for it to be treated as a taxable REIT subsidiary which may be subject to U.S. federal, state, and local income taxes on its taxable income. In general, NETSTREIT TRS may perform services for tenants of the Company, hold assets that the Company cannot hold directly and may engage in any real estate or non-real estate-related business.
During three months ended March 31, 2021, the Company recognized state and local and franchise tax expense which is included in income tax expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss).
Recent Accounting Pronouncements
A discussion of new accounting standards and the possible effects of these standards on our condensed consolidated financial statements is included in “Note 2 - Summary of Significant Accounting Policies” of our condensed consolidated financial statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
Our accounting policies have been established to conform with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may
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impact comparability of our results of operations to those of companies in similar businesses. A summary of the our critical accounting policies is included in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020, which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to these policies during the periods covered by this quarterly report.
Non-GAAP Financial Measures
Our reported results are presented in accordance with GAAP. We also disclose the following non-GAAP financial measures: FFO, Core FFO, AFFO, earnings before interest, taxes, depreciation and amortization (“EBITDA”), EBITDA adjusted to exclude gains (or losses) on sales of depreciable property and real estate impairment losses (“EBITDAre”), EBITDAre further adjusted to exclude straight-line rent, gains from forfeited earnest money deposits, non-recurring public company costs, representing consulting fees that we have incurred in preparing to become a public company and non-cash compensation expense (“Adjusted EBITDAre”), net operating income (“NOI”) and cash net operating income (“Cash NOI”). We believe these non-GAAP financial measures are industry measures used by analysts and investors to compare the operating performance of REITs.
FFO, Core FFO and AFFO
FFO is a non-GAAP financial measure defined by NAREIT as net income (computed in accordance with GAAP), excluding real estate-related expenses including, but not limited to, gains (losses) from sales, impairment adjustments, and depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of FFO is consistent with FFO as defined by NAREIT.
Core FFO is a non-GAAP financial measure defined as FFO adjusted for gains from forfeited earnest money deposits and non-recurring public company costs. We believe the presentation of Core FFO provides investors with a metric to assist in their evaluation of our operating performance across multiple periods because it removes the effect of unusual and non-recurring items that are not expected to impact our operating performance on an ongoing basis.
AFFO is a non-GAAP financial measure defined as Core FFO adjusted for GAAP net income related to non-cash revenues and expenses, such as straight-line rent, amortization of above- and below-market lease-related intangibles, non-cash compensation expense, and amortization of deferred financing costs.
Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. In fact, real estate values historically have risen or fallen with market conditions. FFO is intended to be a standard supplemental measure of operating performance that excludes historical cost depreciation and valuation adjustments from net income. We consider FFO to be useful in evaluating potential property acquisitions and measuring operating performance. We further consider Core FFO and AFFO to be useful in determining funds available for payment of distributions. FFO, Core FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. You should not consider FFO, Core FFO and AFFO to be alternatives to net income as a reliable measure of our operating performance; nor should you consider FFO, Core FFO and AFFO to be alternatives to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity.
FFO, Core FFO and AFFO do not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital improvements and distributions to stockholders. FFO, Core FFO and AFFO do not represent cash flows from operating, investing or financing activities as defined by GAAP. Further, FFO, Core FFO and AFFO as disclosed by other REITs might not be comparable to our calculations of FFO, Core FFO and AFFO.
The following table sets forth a reconciliation of FFO, Core FFO and AFFO for the periods presented to net income (loss) before allocation to noncontrolling interests, as computed in accordance with GAAP (in thousands):
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| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (Unaudited) | |||||||||||
| Net income (loss) | $ | 741 | $ | (1,552) | |||||||
| Depreciation and amortization of real estate | 5,852 | 2,272 | |||||||||
| Provision for impairment | 69 | — | |||||||||
| FFO | 6,662 | 720 | |||||||||
| Adjustments: | |||||||||||
| Gain on forfeited earnest money deposit | — | (250) | |||||||||
144A and IPO transaction costs(1) | — | 709 | |||||||||
| Core FFO | 6,662 | 1,179 | |||||||||
| Adjustments: | |||||||||||
| Straight-line rental revenue | (240) | (154) | |||||||||
| Amortization of deferred financing costs | 157 | 152 | |||||||||
| Amortization of above/below market lease intangibles | (190) | 8 | |||||||||
| Non-cash compensation expense | 557 | — | |||||||||
| AFFO | $ | 6,946 | $ | 1,185 | |||||||
(1) These expenses represent a subset of transaction costs as presented on the condensed consolidated statement of operations and comprehensive income (loss).
EBITDA, EBITDAre and Adjusted EBITDAre
We compute EBITDA as earnings before interest, income taxes and depreciation and amortization. In 2017, NAREIT issued a white paper recommending that companies that report EBITDA also report EBITDAre. We compute EBITDAre in accordance with the definition adopted by NAREIT. NAREIT defines EBITDAre as EBITDA (as defined above) excluding gains (or losses) from the sales of depreciable property and real estate impairment losses.
Adjusted EBITDAre is a non-GAAP financial measure defined as EBITDAre further adjusted to exclude straight-line rent, gains from forfeited earnest money deposits, non-recurring public company costs, representing consulting fees that we have incurred in preparing to become a public company and non-cash compensation expense.
We present EBITDA, EBITDAre and Adjusted EBITDAre as they are measures commonly used in our industry. We believe that these measures are useful to investors and analysts because they provide supplemental information concerning our operating performance, exclusive of certain non-cash items and other costs. We use EBITDA, EBITDAre and Adjusted EBITDAre as measures of our operating performance and not as measures of liquidity.
EBITDA, EBITDAre and Adjusted EBITDAre do not include all items of revenue and expense included in net income, they do not represent cash generated from operating activities and they are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures. Additionally, our computation of EBITDA, EBITDAre and Adjusted EBITDAre may differ from the methodology for calculating these metrics used by other equity REITs and, therefore, may not be comparable to similarly titled measures reported by other equity REITs.
The following table sets forth a reconciliation of EBITDA, EBITDAre and Adjusted EBITDAre for the periods presented to net income (loss) before allocation to noncontrolling interests, as computed in accordance with GAAP (in thousands):
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| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (Unaudited) | |||||||||||
| Net income (loss) | $ | 741 | $ | (1,552) | |||||||
| Depreciation and amortization of real estate | 5,852 | 2,272 | |||||||||
| Amortization of above/below market lease intangibles | (190) | 8 | |||||||||
| Non-real estate depreciation and amortization | 77 | 74 | |||||||||
| Interest expense, net | 905 | 1,699 | |||||||||
| Income tax expense | 50 | — | |||||||||
| EBITDA | 7,435 | 2,501 | |||||||||
| Adjustments: | |||||||||||
| Provision for impairments | 69 | — | |||||||||
| EBITDAre | 7,504 | 2,501 | |||||||||
| Adjustments: | |||||||||||
| Straight-line rental revenue | (240) | (154) | |||||||||
| Gain on forfeited earnest money deposit | — | (250) | |||||||||
144A and IPO transaction costs(1) | — | 709 | |||||||||
| Non-cash compensation expense | 557 | — | |||||||||
| Adjusted EBITDAre | $ | 7,821 | $ | 2,806 | |||||||
(1) These expenses represent a subset of transaction costs as presented on the condensed consolidated statement of operations and comprehensive income (loss).
NOI and Cash NOI
NOI and Cash NOI are non-GAAP financial measures which we use to assess our operating results. We compute NOI as net income (loss) (computed in accordance with GAAP), excluding general and administrative expenses, interest expense (or income), income tax expense, depreciation and amortization, gains (or losses) on sales of depreciable property, gain from forfeited earnest money deposits and real estate impairment losses. We further adjust NOI for non-cash revenue components of straight-line rent and amortization of lease intangibles to derive Cash NOI. We believe NOI and Cash NOI provide useful and relevant information because they reflect only those income and expense items that are incurred at the property level and present such items on an unlevered basis.
NOI and Cash NOI are not measurements of financial performance under GAAP, and our NOI and Cash NOI may not be comparable to similarly titled measures of other companies. You should not consider our NOI and Cash NOI as alternatives to net income or cash flows from operating activities determined in accordance with GAAP.
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The following table sets forth a reconciliation of NOI and Cash NOI for the periods presented (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (Unaudited) | |||||||||||
| Net income (loss) | $ | 741 | $ | (1,552) | |||||||
| General and administrative | 3,137 | 1,886 | |||||||||
| Depreciation and amortization | 5,929 | 2,346 | |||||||||
| Provisions for impairment | 69 | — | |||||||||
| Transaction costs | 151 | 1,094 | |||||||||
| Interest expense, net | 905 | 1,699 | |||||||||
| Income tax expense | 50 | — | |||||||||
| Gain on forfeited earnest money deposit | — | (250) | |||||||||
| NOI | 10,982 | 5,223 | |||||||||
| Straight-line rental revenue | (240) | (154) | |||||||||
| Amortization of above/below market lease intangibles | (190) | 8 | |||||||||
| Cash NOI | $ | 10,552 | $ | 5,077 | |||||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our future income, cash flows and fair value relevant to our financial instruments depends upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Based upon the nature of our operations, the principal market risk to which we are exposed is the risk related to interest rate fluctuations. As of March 31, 2021, we had total indebtedness of approximately $175.0 million under the Term Loan and $13.0 million borrowed under the Revolver, both of which are floating rate debt with a variable interest rate. For the three months ended March 31, 2021, we had average daily outstanding borrowings on our Revolver of $0.4 million.
On September 28, 2020 and effective through the maturity date of December 23, 2024, the Company entered into an interest rate derivative in order to hedge its market interest risk associated with the Term Loan. The interest rate derivative converts the variable rate debt on the Term Loan to a fixed interest rate of 0.21%, plus a margin of 1.15% as of March 31, 2021. Additionally, we occasionally fund acquisitions through the use of our Revolver which bears an interest rate determined by either (i) LIBOR, plus a margin ranging from 1.20% to 1.80%, based on the Company’s consolidated total leverage ratio, or (ii) a Base Rate (as defined in the Credit Facility), plus a margin ranging from 0.20% to 0.80%, based on the Company’s consolidated total leverage ratio. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control contribute to our interest rate risk. Based on the results of our sensitivity analysis and daily outstanding borrowings on the Revolver during 2021, which assumes a 1% adverse change in the interest rate as of March 31, 2021, the estimated market risk exposure for the Revolver was less than $0.1 million.
On March 5, 2021, the Financial Conduct Authority (“FCA”) announced that USD LIBOR will no longer be published after June 30, 2023. This announcement has several implications, including setting the spread that may be used to automatically convert contracts from LIBOR to the Secured Overnight Financing Rate ("SOFR"). Additionally, banking regulators are encouraging banks to discontinue new LIBOR debt issuances by December 31, 2021.
The Company anticipates that LIBOR will continue to be available at least until June 30, 2023. Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.
As of December 31, 2020, the Company’s Term Loan and Revolver, which mature on December 23, 2024 and December 23, 2023, respectively, are indexed to LIBOR. The Company continues to monitor and evaluate the related risks, including future negotiations with lenders and other counterparties. These risks arise in connection with transitioning contracts to an alternative rate, including any resulting value transfer that may occur, and are likely to vary by contract. The value of loans, securities, or derivative instruments tied to LIBOR, as well as interest rates on our current or future indebtedness, may also be impacted if
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LIBOR is limited or discontinued. For some instruments the method of transitioning to an alternative reference rate may be challenging, especially if we cannot agree with the respective counterparty about how to make the transition.
While we expect LIBOR to be available in substantially its current form until at least the end of June 30, 2023, it is possible that LIBOR will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified.
Alternative rates and other market changes related to the replacement of LIBOR, including the introduction of financial products and changes in market practices, may lead to risk modeling and valuation challenges, such as adjusting interest rate accrual calculations and building a term structure for an alternative rate.
The introduction of an alternative rate also may create additional basis risk and increased volatility as alternative rates are phased in and utilized in parallel with LIBOR.
Adjustments to systems and mathematical models to properly process and account for alternative rates will be required, which may strain the model risk management and information technology functions and result in substantial incremental costs for the company.
Off-Balance Sheet Arrangements
As of March 31, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements that have had or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures.
Item 4. Controls and Procedures
Disclosure Controls and Procedures. At the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that its disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
Changes in Internal Control over Financial Reporting. During the period covered by this report, there have been no changes in our internal control over financial reporting identified in connection with the evaluation described above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. We are not currently subject to any lawsuits, claims, or other legal proceedings.
Item 1A. Risk Factors
For a discussion of the most significant factors that may adversely affect us, see the information under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the risk factors disclosed in the Annual Report. These risk factors may not describe every risk facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Use of Proceeds
On August 17, 2020, we completed the initial public offering of our common stock pursuant to a Registration Statement on Form S-11 (File No. 333-239911) (the “Registration Statement”), which was declared effective on August 12, 2020. Under the Registration Statement, we sold 13,681,561 shares of our common stock at a price of $18.00 per share, including 1,436,829 shares issued and sold by us pursuant to the overallotment option granted to the underwriters, for total gross proceeds of approximately $246.3 million. The selling stockholders referenced in the Registration Statement sold 255,268 shares of our common stock for total gross proceeds of approximately $4.6 million. Wells Fargo Securities, LLC, BofA Securities, Inc., Citigroup Global Markets Inc., Stifel, Nicolaus & Company, Incorporated and Jefferies LLC acted as joint book-running managers for the offering. BMO Capital Markets Corp., BTIG, LLC, Capital One Securities, Inc., KeyBanc Capital Markets Inc., Regions Securities LLC, Truist Securities, Inc., Comerica Securities, Inc., Samuel A. Ramirez & Company, Inc. and Scotia Capital (USA) Inc. acted as co-managers for the offering. The offering commenced on August 13, 2020 and did not terminate before all of the securities registered in the Registration Statement were sold.
The proceeds that we received from our initial public offering were approximately $227.3 million, net of the underwriting discounts of approximately $14.8 million and other expenses related to the initial public offering of approximately $4.2 million. All of the underwriting discounts and other expenses were direct or indirect payments to persons other than: (i) our directors, officers or any of their associates; (ii) persons owning ten percent (10%) or more of our common stock; or (iii) our affiliates. The net proceeds from our initial public offering were contributed to our operating partnership in exchange for 13,681,561 Class A units of limited partnership of our operating partnership.
Through March 31, 2021, our operating partnership used all of the net proceeds as follows: (a) approximately $0.1 million to redeem the outstanding shares of our 12.0% Series A Cumulative Non-Voting Preferred Stock, (b) approximately $50.0 million to repay borrowings under our revolving credit facility that were drawn after June 30, 2020 to fund acquisitions of properties, and (c) $177.2 million to fund additional acquisitions of properties. None of the proceeds were used to make payments to: (i) our directors, officers or any of their associates; (ii) persons owning ten percent (10%) or more of our common stock; or (iii) our affiliates. There has been no material change in the use of proceeds as described in the final prospectus filed with the SEC on August 14, 2020.
Company Stock Repurchases
None.
Item 3. Defaults Upon Senior Securities
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Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
| Exhibit No. | Description | |||||||
| 10.1*† | ||||||||
| 10.2* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1* | ||||||||
| 32.2* | ||||||||
| 101.INS** | XBRL Instance Document. | |||||||
| 101.SCH*** | XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL*** | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.LAB*** | XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE*** | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 101.DEF*** | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 104** | Cover Page Interactive Data File. | |||||||
* | Filed herewith. | |||||||
** | The XBRL Instance Document and Cover Page Interactive Data File do not appear in the Interactive Data File because their XBRL tags are embedded within the Inline XBRL document. | |||||||
| *** | Submitted electronically with the report. | |||||||
| † | Management contract or compensatory plan or arrangement. | |||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
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| NETSTREIT Corp. | ||||||||||||||
| April 29, 2021 | /s/ MARK MANHEIMER | |||||||||||||
| Date | Mark Manheimer | |||||||||||||
| President, Chief Executive Officer and Director | ||||||||||||||
| (Principal Executive Officer) | ||||||||||||||
| April 29, 2021 | /s/ ANDREW BLOCHER | |||||||||||||
| Date | Andrew Blocher | |||||||||||||
| Chief Financial Officer, Treasurer and Secretary | ||||||||||||||
| (Principal Financial Officer) | ||||||||||||||
| April 29, 2021 | /s/ PATRICIA MCBRATNEY | |||||||||||||
| Date | Patricia McBratney | |||||||||||||
| Senior Vice President and Chief Accounting Officer | ||||||||||||||
| (Principal Accounting Officer) | ||||||||||||||
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