NetSREIT (NTST) intends to raise $316 million for selling shareholders in an IPO of its common stock, according to an amended S-11 registration statement.
The firm owns and operates a diversified portfolio of single-tenant retail commercial real estate in the United States.
NTST will likely provide only a 3.8% distribution yield post-IPO and its portfolio is highly exposed to the uncertainties of the Covid-19 pandemic, so my opinion on the IPO is NEUTRAL.
Dallas, Texas-based NetSTREIT was founded to acquire, develop and own single tenant retail properties in the United States.
Below is a map of the firm’s current portfolio of 163 properties in terms of annualized base rent [ABR] contribution:
Management is headed by president and CEO Mark Manheimer, who has been with the firm since December 2019 and was previously Chief Investment Officer of EB Arrow and Fund Manager of EB Arrow’s Single Tenant Net-Lease Group.
Investors in the firm include Tilden Park, DK(2), Long Pond, Neuberger Berman and others.
The firm has received at least $219 million in investment to-date.
Below is a brief overview video of a discussion of the single tenant net lease market of just prior to the beginning of the Covid-19 pandemic:
(Source: America’s Commercial Real Estate Show)
According to a market research report conducted by Rosen Consulting Group, the U.S single-tenant net lease market grew steadily over the five years ending 2018 as investor demand continues to rise.
For the year ended June 30th, 2019, US employers created a total of 2.2 million new jobs for the year ended June 30th, 2019, and 2.7 million new jobs for the year ended December 31st, 2018.
Data from the US Census Bureau shows that the US population has reached 327 million in July 2018, which represents an increase of 11.1 million increase over the five years ended July 1st, 2018 and an average year-over-year growth of about two million people.
The Rosen Consulting Group anticipates that due to population growth and household formation, as well as job creation and wage growth, the US economy will keep growing and thus will demand for commercial real estate rentals.
Unlike a gross lease that places responsibility for many expenses with the owner of the property, the net lease model ‘shifts the majority or entirety of expenses’ for property-related taxes, insurance, maintenance as well as utilities and capital expenditures, to the lessee, in addition to rent payments.
NTST’s recent financial results can be summarized as follows:
- Growing topline revenue
- Increased adjusted FFO
Below are the company’s pro forma operational results for the past two and ½ years (Audited GAAP for full years):
Source: Company prospectus
Management said it ‘will target a conservative net debt to EBITDA leverage ratio of 4.5x to 5.5x at scale to best position the Company for growth.
As of June 30, 2020, the company had $8 million in cash and $191.8 million in total liabilities.
NTST intends to raise $316 million in gross proceeds from an IPO of its common stock, according to the following schedule:
Listed managers of the IPO are Wells Fargo Securities, BofA Securities, Citigroup, and Stifel.
Management’s presentation of its roadshow can be found here.
NTST is seeking public investment capital to pay to its existing shareholders.
The market opportunity for acquiring and owning single tenant net-lease properties is in flux, especially given the uncertain effects of the Covid-19 pandemic on such properties.
Additionally, the firm is focused on smaller markets and having a more decentralized rather than concentrated geographic approach.
NTST had acquired 71 properties during the first seven months of 2020 and is under contract or non-binding letter of intent to acquire a total of 128 other properties.
The firm’s pro forma financial statements assume the 71 closed deals and ‘seven probable property acquisitions.’
Wells Fargo Securities is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (71.0%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.
Based on the firm’s pro forma financials, the annual distribution after IPO will approximate 3.8%.
This is a reasonable but not outstanding figure. For example, compared to recently-public single tenant REIT Alpine Income Property Trust (PINE), which has a forward distribution yield of 5.41%, NTST’s 3.8% looks wanting.
Given these factors and uncertainties stemming from the Covid-19 pandemic, my opinion on the NTST IPO is NEUTRAL.
Expected IPO Pricing Date: August 12, 2020
(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)
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