Sustainable Finance practice helps real estate investment trust deliver creative approach to greenhouse gas emission reductions among its tenants.
Submitted by The PNC Financial Services Group
The real estate industry consistently has been a leader in sustainability efforts that seek ways to reduce its current carbon emissions, which account for nearly 39% of global carbon emissions. The industry introduced Leadership in Energy and Environmental (LEED)-certified buildings more than 20 years ago as one means of addressing environmental responsibility, and those building specifications have become the industry standard for most new commercial real estate construction across the nation.
Today, companies are looking to find unique ways to reduce their carbon footprints and meet their environmental, social and governance (ESG) goals. One of the principal ways that many companies choose to accomplish these goals – whether in the real estate industry or not – is through strategic, sustainable finance efforts.
PNC Bank client, NETSTREIT, specializes in acquiring single-tenant net lease retail properties and recently made the decision to double down on its sustainability commitments by setting aggressive goals that go further than any of its current competitors.
Commitment to Sustainability
The Dallas-based company, whose tenants include national discount retail, auto parts, pharmacy, grocery stores and convenience store chains, already had a fairly robust corporate ESG strategy leading up to and following its initial public offering but realized there was room to make more of an impact.
“As a young company, we wanted to be intentional with our ESG goals. We have done well with the social and governance aspects, but we had been trying to figure out what more we could do in the environmental space,” says Andy Blocher, NETSTREIT’s chief financial officer and treasurer. “We can pretend that carbon emissions aren’t having an impact on our way of life, but problems do exist, and it should be important for companies to address them.”
As with most real estate investment trusts (REITs), NETSTREIT’s corporate footprint is rather small, consisting of its headquarters location that already had been renovated and optimized from a sustainability perspective in 2016. The location received a LEED Gold certification for operations and management and achieved an Energy Star rating. The company also addressed the carbon footprint of its employees by providing walkable options with close proximity to public transportation. Additionally, NETSTREIT installed a rooftop beehive this year to help preserve bee habitats.
“Previously we felt optimizing our headquarters was the largest opportunity that we had from a sustainability perspective,” Blocher says. “But we realized that our headquarters actually represents a very small portion of our overall environmental impact, including our portfolio emissions, and there was an opportunity to create a larger impact.”
When NETSTREIT recently decided to recast its credit facility, it saw the opportunity to take action and make a bigger environmental difference through its tenants. 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 helped the company not only structure the upsized financing as administrative agent and lead arranger, but also helped NETSTREIT create metrics that incentivize the company to evaluate the carbon footprints of its tenants as Sustainability Structuring Agent under PNC Capital Markets.
Developing the Metrics for Success
PNC Capital Markets’ Sustainable Finance practice worked alongside NETSTREIT to develop a sustainability reporting system with key performance indicators (KPIs) centered around leveraging Science-Based Targets initiative (SBTi) metrics. The SBTi is a partnership between CDP, which runs the global environmental disclosures system; United Nations Global Compact; World Resources Institute; and the World Wide Fund for Nature. The initiative works with the private sector to drive climate action by defining best practices in emissions reductions and aiding companies in setting science-based targets in line with the latest climate science.
NETSTREIT’s new credit transaction contain sustainability-linked pricing terms that allow NETSTREIT to receive interest rate adjustments determined by performance against the KPI based on SBTi standards. Currently, 18 of NETSTREIT’s top 20 tenants, have their own ESG commitments. However, the new KPI opens NETSTREIT’s door to facilitate more strategic conversations about emissions with its current and prospective tenants, as well as more control of its own emissions portfolio by incorporating SBTi into their property purchasing and leasing decisions.
“We’d never considered leveraging the SBTi framework until PNC brought the idea to us,” Blocher says. “It was clear from the beginning that PNC was fully willing to help us create something new, innovative and impactful that our industry had not seen before.”
Viewed as the most aggressive and rigorous sustainability-focused performance reporting system, SBTi helps companies identify a path to reduce their greenhouse gas emissions through a regimented five-step process to align a company’s emissions trajectory with the Paris Agreement goals. SBTi does not allow companies to lean on carbon offsets in achieving their science-based target. It, instead, requires companies to reduce emissions through direct action within their own boundaries or their value chains.
“What impresses me about NETSTREIT is its willingness to think creatively about its footprint and what levers they have available to drive impact,” says Evan Matzen, director of PNCCM’s Sustainable Finance practice. “NETSTREIT owns the properties but generally doesn’t pay the utility bills of its tenants and doesn’t manage the tenants’ operations. So, the company has very little direct control over the carbon footprint of its tenants. The company’s approach with SBTi preference helps address that through incentives that sets it apart from other REITs.”
Blocher says the aggressive approach is the “line in the sand” his company was looking to draw for a deeper impact.
NETSTREIT selected the SBTi reporting system as a central piece of its credit facility’s KPIs. The move underscores the importance the company has placed on making an aggressive impact in the environmental space. This also demonstrates its focus on leading the real estate industry into a new era of ESG and sustainable efforts.
Power of Relationship Banking
Prior to joining NETSTREIT in 2020, Blocher worked for other Mid-Atlantic REITs that were banked by PNC. The relationship grew over the years and continued after he took on his role at NETSTREIT.
“At its core, PNC really is a relationship bank, and we were able to show NETSTREIT that we could provide strong coverage and bring them all the financial solutions that they needed,” says Katie Chowdhry, senior vice president and relationship manager with PNC Real Estate in the Greater Washington Area Market. “From talking to Andy, I knew that sustainability was a big focus for NETSTREIT. So early on, we included members of our sustainable finance practice in discussions.”
Blocher appreciated the collaborative nature of the work.
“The PNC team was really willing to enter into a conversation with us about what we wanted to accomplish. We don't have a sustainability officer, so we did a lot of listening. There were a number of internal discussions and questions that allowed PNC to effectively advise and understand our objectives,” Blocher says. “It was incredible how we worked together to come up with a mutually beneficial solution.”
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