New Investments At Attractive Yields Will Drive Future Opportunities In Retail REITs

Key Takeaways

• Strategic investments and improved operational efficiency suggest NETSTREIT is well-positioned for potential future revenue and earnings growth.
  
• Portfolio diversification and reduced tenant concentration could lead to improved net margins through a spread of risk.
  
• NETSTREIT faces challenges from tenant concentration risks, credit exposure, retail struggles, financial constraints, and limited liquidity, potentially impacting revenue and expansion opportunities.

Catalysts

An internally managed real estate investment trust (REIT) based in Dallas, Texas that specializes in acquiring single-tenant net lease retail properties nationwide.

• NETSTREIT has completed a record level of $195 million in gross investments during the quarter at attractive yields, which indicates potential future revenue growth as these investments start generating income.
  
• The development pipeline consists of 5 projects with a total estimated cost of $14.6 million, suggesting ongoing investment in growth initiatives that could contribute to higher revenue and earnings in the future.
  
• Efforts to diversify the portfolio by reducing tenant concentration and engaging in accretive property dispositions may lead to improved net margins as risk is spread across a wider array of tenants.
  
• Decreased G&A expenses as a percentage of total revenues indicate better operational efficiency, which could enhance net margins and overall earnings going forward.
  
• With new financing arrangements and an upsized revolving credit facility, NETSTREIT is well-positioned to exploit future growth opportunities without immediate pressure to raise equity, potentially enhancing future earnings growth through effective capital utilization.

NETSTREIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NETSTREIT's revenue will grow by 10.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -7.3% today to 16.0% in 3 years time.
• Analysts expect earnings to reach $35.4 million (and earnings per share of $0.38) by about March 2028, up from $-11.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $57.8 million in earnings, and the most bearish expecting $22 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 62.2x on those 2028 earnings, up from -105.5x today. This future PE is greater than the current PE for the US Retail REITs industry at 32.4x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.44%, as per the Simply Wall St company report.

NETSTREIT Future Earnings Per Share Growth

Risks

• NETSTREIT faces risks related to its tenant concentration, with an emphasis on reducing exposure to major tenants like Walgreens, CVS, and Dollar General. This focus on diversification indicates potential vulnerability to tenant-specific downturns, which could impact lease revenue if not managed effectively.
  
• The company's strategy to pursue non-investment-grade opportunities due to more attractive risk-adjusted returns suggests exposure to potential credit and default risks. This could affect net margins if any acquired tenants underperform or face financial difficulties.
  
• NETSTREIT's significant exposure to tenants like Family Dollar and Big Lots, who are closing stores amid wider retail struggles, underscores the risk of operational disruptions and potential rent loss, which could negatively impact future earnings.
  
• With a net loss reported for both the quarter and the full year 2024, alongside a larger focus on accretive dispositions over growth, there are signs of financial constraints that could limit expansion prospects and revenue growth moving forward.
  
• The company's reliance on 1031 buyers and lack of forward equity settlements could suggest limited immediate liquidity or capital flexibility, which could impede acquisition capability and strategic initiatives, thus impacting overall financial performance.

Valuation

• The analysts have a consensus price target of $17.267 for NETSTREIT based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $220.6 million, earnings will come to $35.4 million, and it would be trading on a PE ratio of 62.2x, assuming you use a discount rate of 8.4%.
• Given the current share price of $15.42, the analyst price target of $17.27 is 10.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.