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Here we offer readers a first look at a brand-new REIT, NetSTREIT (NTST). Shares will become available for purchase on or about August 17, 2020.
This article is based on the Prospectus dated August 13, 2020. Every number included here comes from that document, or from simple calculations using numbers in that document
NTST aspires to be a triple-net-lease REIT with investment-grade tenants. They want to be seen as the next Realty Income (O). Or perhaps the next Spirit Realty Capital (SRC), as SRC also has the same aim.
SRC is relevant. Read on.
NTST has been a private REIT for a few years as they built a portfolio of leased assets with a value approaching $500M. They hope to obtain more than $200M in their IPO.
One of the NTST properties. Source.
This will, if successful, get them out just of the microcap REIT category and into the small cap REIT category. Even so, they will remain small.
NTST is internally managed, so they check that box. Small, externally managed REITs definitely should be avoided.
Debt and Liquidity
NTST carries $174M in debt. This is 41% of undepreciated book assets. Since they are relatively new, their actual asset value may not be far off that number.
This leverage is not uncommon for REITs today, and is in fact small for such a small REIT. They also express an intent to stay lightly leveraged.
NTST has a well-structured debt maturity schedule. Their term loan is not due until the end of 2024. They have drawn nothing on their $250M revolver.
It seems likely that NTST intends to draw on their revolver and on their new capital to execute more purchases of property on a net-lease basis. Then they would find other debt to repay the revolver. This is standard and looks good.
A Small Operation
As yet, this is very small for a net-lease REIT. They only have 163 properties. What is more they report that:
“None of our tenants represent more than 12.7% of our portfolio by ABR, and our top 10 largest tenants represent in aggregate 56.8% of our ABR.”
Here ABR is Average Base Rent. These fractions are huge and likely unwise.
Even though these top tenants are quality companies, such companies do run into unexpected trouble. It seems that their focus on “high-quality” tenants has led to over-concentration. This is a negative.
Public companies carry large costs in order to be public. In the case of NTST, General & Administrative (“G&A”) costs were 44% of actual revenues in the first half of 2020. They are 35% of the projected Pro Forma stabilized revenues.
These G&A costs are far above typical fractions of revenue for REITs. This is a bit of a red flag.
The interest costs were nearly ¼ of revenue, leaving about ¼ of revenue as FFO (very roughly). This is a low number, but a consequence of the above.
In discussing their strategy, they describe their strengths as follows:
“Differentiated, Multi-faceted Investment Strategy to Drive Growth. We intend to grow our portfolio by acquiring properties occupied by high- credit quality tenants operating in defensive industries focused on necessity retail goods and essential services. In addition to acquiring single-tenant net leased retail properties subject to an existing stabilized long-term lease, we intend to grow our portfolio through a multi-faceted investment strategy, which includes “blend and extend” acquisitions, build-to-suit transactions, reverse build-to-suit transactions and sale-leaseback transactions. Each of these types of transactions or acquisitions offers unique benefits to our business.”
Here it is the “in addition to” that gives us pause. A small and expensive operation might better focus their aspirations more narrowly until they have grown quite a bit.
And then we meet the management, described as follows in the Prospectus:
“Mark Manheimer has served as our President and Chief Executive Officer since December 2019. … From April 2012 through September 2016, Mr. Manheimer was Executive Vice President — Head of Asset Management of Spirit (NYSE: SRC), a REIT that invests primarily in single- tenant net-leased real estate. Mr. Manheimer was a member of Spirit’s Investment Committee and Executive Committee.”
The translation here is that Mr. Manheimer was a key part of the management team that got SRC into deep trouble through allowing one tenant to become too large as a fraction of total ABR.
That tenant, Shopko, proceeded to have problems and ended up bankrupt. And they were not the only problem. Suffice it to say that Mr. Manheimer has not earned our trust.
He has been getting a salary of $550k on top of $3M of compensation in stock in 2019. He is being well rewarded for his efforts.
Our concerns are clear in the above. Small REITs are always risky. This one seems to be risky without clear evidence of a big upside.
NTST has not rolled out any material yet that might assuage our concerns. They do not even have an investor presentation up on their website.
It would be good if NTST shared with us their process for selecting tenants and locations, as other net-lease REITs do. We would also like to see other aspects of their plans. But they have not shared anything yet.
The timing of this IPO also seems strange. The net lease sector as a whole is depressed today. Why not wait?
It would be better for shareholders to wait, enabling the REIT to get more capital at a higher share price. The hurry into the IPO is thus concerning. It makes one worried that management may not have the interests of the public shareholders in the forefront where it should be.
We recommend passing on this one, at least for now.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.