NETSTREIT's ESG Journey Supported by Sustainability-Linked Credit Facility

NORTHAMPTON, MA / ACCESSWIRE / December 19, 2022 / PNC Financial Services Group

The real estate sector has always been a leader in sustainability efforts to reduce carbon emissions. It is responsible for almost 39% of all global carbon emissions. As a way to address environmental responsibility, the industry established LEED-certified buildings over 20 years ago. These building specifications are now the industry standard for all new commercial realty construction in the country. [2]

Companies are now looking for unique ways to reduce carbon footprints and achieve their environmental, governance, and governance (ESG), goals. Many companies, whether they are in the realty industry or not, choose strategic, sustainable finance as a way to achieve these goals.

NETSTREIT is a PNC Bank client that specializes in the acquisition of single-tenant retail properties on net lease. Recently, it decided to double down on its sustainability goals by setting aggressive goals which go further than any of its competitors.

Engagement in Sustainability

Although the Dallas-based company had an established corporate ESG strategy prior to and after its initial public offering, it realized that there was more to be done.

"As a young company we wanted to be deliberate about our ESG goals. Andy Blocher, NETSTREIT’s chief financial officer, and treasurer, says that while we have achieved good results in social and governance, we wanted to do more in the environmental area. We can pretend carbon emissions don't have an effect on our daily lives, but they do, and companies should address them.

NETSTREIT has a small corporate footprint, as with many real estate investment trusts. Its headquarters was renovated in 2016 and made more sustainable. The site was awarded a LEED Gold certification in operations and management, and an Energy Star rating. It also provided walking options and close access to public transport for its employees, reducing their carbon footprint. NETSTREIT also installed a rooftop honeybeehive to preserve bee habitats.

Blocher states that optimizing our headquarters was previously the biggest opportunity we had for sustainability. "But, we realized that our headquarters only represents a small percentage of our overall environmental impact. This includes our portfolio emissions. There was a way to make a bigger impact.

NETSTREIT saw an opportunity to make a greater environmental impact through its tenants when it recently recast its credit facilities. As part of its recent closing of a $600 million sustainability-linked senior unsecured credit facility that includes term and revolving loans, the company also announced its efforts to identify opportunities to reduce greenhouse gas emissions.

PNC assisted the company in structuring the larger financing as lead arranger and administrative agent. NETSTREIT also created metrics that would encourage the company to assess the carbon footprints its tenants under the Sustainability Structuring Agency program of PNC Capital Markets.

The Metrics of Success:

PNC Capital Markets' Sustainable Finance team worked with NETSTREIT in developing a sustainability reporting system that included key performance indicators (KPIs). These indicators were centered on leveraging Science-Based Targets Initiative (SBTi) metrics. SBTi is a partnership of CDP, the World Resources Institute, the World Wide Fund for Nature and United Nations Global Compact. This initiative is a partnership between the private sector and climate action. It identifies best practices for emissions reductions, assists companies in setting science-based goals that are consistent with current climate science, and works with them to accelerate climate action.

18 of NETSTREIT’s top 20 tenants have made their ESG commitments. [3] The new KPI allows NETSTREIT to have more strategic discussions about emissions with prospective and current tenants. It also gives NETSTREIT more control over its emissions portfolio through the incorporation of SBTi in their property buying and leasing decisions.

Blocher states, "We hadn't considered using the SBTi framework before PNC presented the idea to us." "It was obvious from the beginning that PNC was willing to assist us in creating something innovative, impactful and new that our industry hadn't seen before."

SBTi doesn't allow companies to rely on carbon offsets to achieve their science-based targets. Instead, it requires companies to reduce their emissions by taking direct action within their boundaries or value chains. [4]

Evan Matzen, director for PNCCM's Sustainable Finance Practice, says that what impresses him about NETSTREIT are its willingness to think creatively and consider its footprint as well as the levers it has available to make an impact. "NETSTREIT is the owner of the properties, but it doesn't usually pay the utilities bills of tenants or manage tenants' operations. The company does not have any direct control over its tenants' carbon footprint. SBTi preference is a company approach that helps to address this through incentives, which sets it apart among other REITs.

Blocher said that the aggressive approach was the "line in sand" that his company wanted to take for a greater impact.

NETSTREIT chose the SBTi reporting platform as a key component of its KPIs for its credit facility. This is a clear indication of the company's commitment to making an impact in the environment. It also shows its commitment to leading the realty industry into an era of ESG- and sustainable efforts.

The power of relationship banking

Blocher was previously employed by other Mid-Atlantic REITs, which were banked and managed by PNC before joining NETSTREIT. Over the years, Blocher's relationship grew and he continued to be involved in NETSTREIT.

"PNC is a relationship bank at its core. We were able show NETSTREIT we could provide strong coverage as well as all the financial solutions they required," Katie Chowdhry (senior vice president and relationship manager, PNC Real Estate Greater Washington Area Market), says. Andy told me that sustainability was a major focus of NETSTREIT. We included members from our sustainable finance practice into discussions as early as possible."

Blocher was grateful for the teamwork that was evident in the work.

"The PNC team was willing to have a conversation about our goals. We don't have sustainability officers so we listened a lot. Blocher says that there were many internal discussions and questions that enabled PNC to effectively advise us and understand our goals." "It was amazing how we collaborated to find a mutually beneficial solution."

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SOURCE: PNC Financial Services Group

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