Q4 2023 Netstreit Corp Earnings Call

Participants

Amy An

Mark Manheimer; President, Chief Executive Officer, Company Secretary, Director; Netstreit Corp

Daniel Donlan; Chief Financial Officer, Treasurer; Netstreit Corp

Haendel Juste

Ki Bin Kim

Smedes Rose

Todd Thomas

Greg McGinniss

Alex Fagan

Linda Tsai

Joshua Dennerlein

Presentation

Operator

Greetings, and welcome to the Net street Fourth Quarter 2023 earnings conference call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Amy on Investor Relations. Thank you.
You may begin.

Amy An

We thank you for joining us for net streets Fourth Quarter 2023 earnings conference call.
In addition to the press release distributed yesterday, after market close, we posted a supplemental package and an updated investor presentation both can be found in the Investor Relations section of the Company's website at w. w. w. dot net. Street.com.
On today's call.
Management's remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today.
For more information about these risk factors.
We encourage you to review our four on 10 K for the year ended December 31st, 2022, and our other SEC filings.
All forward-looking statements are made as of the date hereof, and that's Street assumes no obligation to update any forward-looking statements in the future.
In addition, certain financial information presented on this call includes non-GAAP financial measures.
Please refer to our earnings release and supplemental package for definitions of our non-GAAP measures.
Reconciliations to the most comparable GAAP measure and an explanation of why we believe such non-GAAP financial measures are useful to investors.
Textron's Chief Executive Officer, Mark Mannheimer and Chief Financial Officer, Dan Dan, on the prepared remarks, and then we'll open the call for your questions.
Now I'll turn the call over to Mark.
Mark.

Mark Manheimer

Good afternoon, everyone, and welcome to our fourth-quarter and year-end 2023 earnings conference call.
First, I want to highlight our recently completed forward equity offering, which raised 191 million of net proceeds.
Given how volatile the capital markets have been since the Fed began their rate hike campaign in early 2022, we thought it was best to take advantage of the support of issuance window.
This January.
As it stands today, we have all of the equity capital that we need to execute our 2020 for growth plans while still ending the year around the low end of our targeted leverage range of 4.5 times to 5.5 times.
Additionally, this well-timed capital raise, which was done on a 100% port basis, allows us to remain opportunistic and thoughtful and today's increasingly attractive investment environment.
Next, I want to thank the necessary team for their efforts in executing our investment strategy in 2023, which required investment fresh professionals to be nimble and creative in the face of volatility, inflation and rising interest rates.
Despite the transaction market experiencing a roughly 70% decline in volumes versus previous years, we managed to acquire high-quality net lease assets at favorable pricing throughout the year.
With that in mind, cap rates move sequentially higher again in the fourth quarter as evidenced by the 7.2% initial cash yield on $119.1 million of investments, which brought our 2023.
These investment activities to $480.5 million, with nearly all of our fourth quarter investments being leased to investment-grade tenants are investment-grade tenancy has now reached 70.5%, which is a record high for the Company.
Since our last call, we have seen no shortage of investment investment opportunities, specifically within the Dollar Store and grocery sectors.
Our relationships with tenants and developers, which includes a focus on solving problems for all parties, including U.S., has allowed us to negotiate many win-win outcomes that were not previously available to us due to prior strength of the transaction market.
As such, we have deliberately pushed our investment volume with certain tenants to higher levels in order to achieve longer lease terms and better rent escalations will set tenants at the same time, please.
These same tenants where the leases are flatter and shorten duration.
Due to the credit of these tenants and fungible nature of the real estate, we have recycled these assets at a positive spread to our recent purchase prices, which we expect to continue.
Furthermore, given our various investment sourcing channels and the opportunities we see with other tenants who do not expect to see these concentrations to rise much higher than they are today.
As a testament to our disciplined underwriting and focus on high-quality real estate, we have identified and acquired multiple Winn-Dixie locations over the past few years that we believe were high performing locations with underappreciated intrinsic real estate value.
Last year, it was announced to Aldi will acquire the brain and which is a substantial credit upgrade for us.
We have already been in contact with all these was expressed interest in converting stores to the LD brand.
Since inception, we have actively called the portfolio to avoid avoid potential risk.
This is evidenced by our declining Big Lots exposure, which is now down to eight properties or 1.5% of ABR.
Our initial focus has been to sell assets that generated the lowest foot traffic within our portfolio.
These assets garnered interest from real estate investors due to their look below market rents and strong real estate fundamentals, which bodes well for our remaining exposure.
While we are comfortable with the assets we still own, we will still continue to look for opportunities to do to decrease our exposure.
Turning to the portfolio, we have 598 investment.
I'm pleased to 85 tenants that operate within 26 retail industries.
The gross 45 states.
Our ADR grew 33% to $131.9 million at 2023 year end from 99.2 million the previous year.
84.6% of our portfolio.
Abr is leased to tenants with an investment grade rating for investment grade profile, and nearly 88% of our ABR is derived from tenants and defensive retail sectors.
Our occupancy remains at 100% and our weighted average remaining lease term to 9.5 years.
Our proactive approach to lease expirations leaves us with an enviable lease expiration schedule with only $84,000 of rent expiring in 2024 and 2% of total ABR expiring through 2025.
We believe our high credit quality and minimal lease expiration risk adds stability to our underlying cash flow, which will be providing a consistent and growing earnings stream to investors.
With that, I'll turn the call over to Dan to discuss our fourth-quarter financial results and subsequent capital raising activities.

Daniel Donlan

Thank you, Mark, and thank you, everyone, for joining our call today.
Turning to our fourth-quarter earnings, we reported net income of $2 million, or $0.03 per diluted share in tune in for $0.3 per diluted share, and AFFO was $21.6 million or $0.31 per diluted share, which represented 7% year-over-year growth.
For the full year, we reported net income of $0.11 per diluted share, core FFO of $1.19 per diluted share and AFFO of $1.22 per diluted share, which represented 5% growth year over year in 2023.
Total G&A expense, excluding one-time items, was 4.8 million for the quarter, which was down 5.5% sequentially.
In addition, total G&A for the quarter represented 13% of total revenues prior year quarter event for rapid fashion as a company has reached proper scale to effectively operate our business on a go-forward basis.
Moving onto the balance sheet $0.4 million at quarter end and our weighted average interest rate was 4.3%.
In addition, when including the impact of extension options which are sold at our discretion, I have no debt maturing until January of 2027.
In terms of future debt issuance.
Please note that in early March, we plan to draw the remaining 100 million of our 2029 term loan, which has been swapped to fixed 5.13% interest rate.
We do not anticipate rate as our 400 full capacity fill our 2020 for decades.
With regard to the fourth quarter, capital markets activities raise 76.7 million of equity through our ATM program.
In terms of forward agreements, we had 98.6 million of unsettled forward equity at 2023 year end.
As Mark mentioned earlier, subsequent to year end, we raised just over 11 million shares of common stock in January of this year, which resulted in $190.8 million of net proceeds to the Company.
The offer was completed on 100% for basis, and we haven't sort of January ninth, 2025 to settle all shares under the forward sale agreement.
With that in mind, we now have the necessary equity capital to fund our 2020 for external growth objectives without the need for any additional equity issuance.
At quarter end, our liquidity was $548.4 million for us because the price of EUR29.999 forward equity and 100 million of remaining available principal on our 2029 terminal, including the net proceeds from Waha from our January follow on offering, our pro forma liquidity at year end was 739,100,000.0.
From a leverage perspective, our adjusted net debt to annualized adjusted EBITDA three was 4.1 times at quarter end, which compares favorably to our targeted range of 4.5 to 5.5 times.
Furthermore, when including the net proceeds from our foreign offering, this January, our quarterly pro forma leverage declined to 2.5 times.
Moving on to guidance, we are reaffirming our 2020 for AFFO per share guidance range of $1.24 to $1.28, and we continue to expect cash G&A to range between 13.5 and 14.5 million, which is exclusive of transaction costs and one-time severance payments.
Lastly, on February 13th, the Board declared a quarterly cash dividend will be payable on March 28th to shareholders of record as of March 15th, the dividend amount or a fuller picture pit area.
Ffo payout ratio for the fourth quarter was 66%.
With that, operator, we'll now open the line for questions.

Question and Answer Session

Operator

Thank you.
We will now be conducting a question and answer session.
If you would like to ask a question, please press star one on your telephone keypad.
A confirmation tone will indicate your line from the question queue, you may press star two.
If you would like to remove your question from the queue For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
one moment, please.
While we poll for questions.
Thank you.
Our first question comes from the line of Haendel St. Juste with Mizuho.
Please proceed with your question.

Haendel Juste

Hey, good afternoon.
Good morning to you guys.
I guess I'm curious on what the messaging here on acquisitions and capital deployment.
On the one hand, as you point out, you have black and liquidity following the recent equity raise.
But on the other hand, the cost of debt from Kathy, there's a bid-ask spread out there and of your peers seem to be taking more reserved approach to capital deployment.
So I'm curious, what's what's your or maybe the messaging or perhaps what sort of pace of capital deployment could be expecting over the near term?

Mark Manheimer

Sure.
So I mean, I would expect overall, at least for the first quarter, that's really all we've got visibility into.
We closed this 430 million or so met last year.
And I would assume a somewhat similar pace for the first quarter of things are pretty choppy out there.
We're seeing some movement in pricing cap rates and want to make sure that we're going to maximize the proceeds strength from our equity raise earlier this year.

Haendel Juste

Okay, fair.
And you also mentioned the focus on selling flatter lease assets reflecting the positive spread.
I guess I'm curious how much opportunity there what type of spreads can you generate?
And just to be clear, this is investment grade neutral or resell the investment grade in backfilling with non-rig non investment grade.
Thanks.

Mark Manheimer

Yes, sure.
So I mean a lot of it's related with the with the same tenants.
So, you know, we've seen some opportunities where some tenants have moved to a longer lease terms with better escalations.
And so where we've been able to take advantage of some good assets for the cell flatter leases with but less lease term and then turn around and use that capital to buy longer lease term assets with better escalations.
You've seen kind of a little bit of a move from with our concentration with with Dollar General, that particular tenant, we've really moved the escalations from what was essentially flat before or two, about seven-tenths of one of 1% to 70 basis points of escalations and went from about eight years, the lease term to over 12 years.
So some pretty substantial moves there.
And then as it relates to that particular tenant is obviously the concentration has moved up.
We're going to have tried to get that, that tenant in that portfolio of those assets and as good a shape as we can.
And then I think you can start to see that concentration migrate downward.

Haendel Juste

Wonderful.
Thank you.
Thank you.

Operator

Our next question comes from the line of Ki Bin Kim with Truist.
Please proceed with your question.
Thank you.

Ki Bin Kim

I was wondering how much credit losses embedded in your guidance.
Yes.
And a key benefit is some ranges, obviously from the from alluded to the high end, but you should expect a fairly de minimus amount it at the at the high end of guidance in a fairly material amount at the low end, certainly north of 100 basis points on the low end.
Okay.
And I was wondering if you can remind us of how you're thinking about your Walgreens exposure and any kind of tail risks that might be within that tenant.

Mark Manheimer

And I mean, certainly, you know, Walgreens and pharmacies in general have been topical.
Yes, there's been some some pressure on the consumer that's kind of hit their front end sales a little bit.
But that's really not no new news that the front ends always kind of been an area that that Walgreens and CVS have had travel them.
But yes, look, I mean that they're they're split rated right now.
They're installed the fixed charge coverage ratio of north of two times in out.
So we don't really see any near-term risks associated with the yes, with credit.
And we don't have any leases with them coming due until August of 2028.
So yes.
And then just a little bit around how we select asked, why or any, Adam, we're talking to corporate and getting an understanding of how they think about the location, whether it's a good idea that trying to hone that location long term.
And then consistently, we went out and met with them last year and went through a portfolio review.
And they indicated there was there were one or two locations that, you know that were not performing as well worn on a closure list, but they weren't performing well and we elected to sell those assets and kind of in the mid-6 cap rate range.
So there is for those assets in the event that we start to see deterioration at the unit level.
But we don't really see much risk as it relates to their arm to their ability to pay rent.

Ki Bin Kim

Okay, great.
Thank you.
Thanks, Kevin.

Operator

Our next question comes from the line of Smedes Rose with Citi.
Particularly with your question.

Smedes Rose

Hi, thanks.
I just wanted to go back a little bit to kind of your are your thoughts around acquisition volume this year?
It sounds like you have a fairly good from the line of Craig, I guess, in the near term.
And just as you're thinking about spread your cost of capital, I think you said on your last call, it's kind of around 100 basis points, which was below the longer-term hundred and 50 to 175 basis points.
And is that kind of changing at all?
And could you also just kind of speak to is competition kind of competing offer you more competitive maybe relative to other sources of capital?
I kind of what are you seeing on that front?

Mark Manheimer

I'll let Dan cannot tackle the first part of your question.
Then the second part of your competition has a question as it relates to competition.
The competition is diminimus.
You know, the 1031 market we know as even we've got to sell assets yet historically we had a, you know, a property that with an investment grade rating and some lease term went out and tried to get bids would get five or six bids in the first week now now takes a little bit more time.
So we see that certainly on the acquisition side, where we're not really competing with, you know, a large family offices as much the private equity business gone again, not much from the 10, 31 market historically in a fragmented market where we really weren't running into the larger public release unless it was a large portfolio, which we've always had trouble competing with them.
And I tried to match, I tried to make those work.
So yes, I mean, the competition is really yes.
So it's gone away significantly.
And mostly what were you competing with is the seller and their need to sell the property.
So if they don't have a gun to their head and don't have a reason to have to sell the property than they probably not going to sell, which is why you've seen transaction volume is down north of 70% over the over the past year.
So fewer injections to will gone across the industry.
There's even less competition.
So that's yes, allowing cap rates to migrate upwards.
Yes, reasons in terms of loan investment spread, the meaning of the mom, our equity price as well as interest rates been fairly volatile just over the last 45 days.
If you kind of look at that and you think about the average, we're probably right now somewhere around 110 basis points in terms of investment spread, just on an average basis in the first 45 days of a year.

Smedes Rose

Great.
Thank you.
Thank you.

Operator

Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets.
Please proceed with your question.

Todd Thomas

Hi, this is in cardiac surgery on for Todd Thomas.
Just a quick one from me.
So I know you have a lot of unsettled equity in the quarter.
So at what point would you consider issuing forward capital through the ATM to keep funding intact?
Yes.

Mark Manheimer

I mean, look, we are right now we can basically and as we've talked about in her prepared remarks, we can essentially XY. or 2020 for external growth plan, um, with the existing existing equity we have in the year at the low end of our new target leverage range of 4.5 to 5.5 times.
So I think to read the opportunity set became more attractive.
I mean, we were able to achieve spreads that were certainly in line with not better than where we're seeing right now.
I think you could see as access the equity markets via the ATM.

Todd Thomas

Okay.
Perfect.
And one more on I started at Big Lots exposure decreased during the quarter.
So was that an asset sale or did something else happen?
And what are your plans to further reduce exposure?

Mark Manheimer

Good question.
I guess we should have made it clear that we that we sold an asset that there wasn't anything negative that happened.
But yes, so what we're down to eight stores and 1.5% of rent, I mean, we've seen pretty good interest inbound interest for those locations more from us, that types of buyers that, you know, you have a value of the real estate and below market rents.
And so unfortunately, that's really kind of what we're left with Westfield good performing assets for Big Lots ceiling in terms of foot traffic, but locations that we think would be very attractive to other buyers.
So it was so we're open to potentially moving more assets out of the portfolio.
But the process to be right.

Todd Thomas

Perfect.
Thank you.
Thank you.

Operator

Our next question comes from the line of Greg McGinniss with Scotiabank.
Please proceed with your question.

Greg McGinniss

Hey, good afternoon.
I'm just trying to reconcile a few comments I've made so far.
So you mentioned increasingly attractive market and the opening remarks and spoke about seeing some movement on cap rates.
So does that mean that cap rates are moving higher than if that's the case?
How much and why the hesitance to provide some guidance party under negotiation?
Is there just greater capacity, the usual into the future potential pipeline?
And if so, what's what's driving that?

Mark Manheimer

Yes, sure.
So on the I mean, yes, I think we are seeing cap rates move up.
I would expect another 20 basis points or so with what we are planning on closing time, the first quarter, some of that may slip into the second quarter.
So that could move things around a little bit on the margins.
But, you know, I think we're hesitant to kind of really give you concrete guidance on what we plan to acquire because we are seeing cap rates move around a little bit.
And we just want to make sure that the case capital that we raised from investors that were that we're using that wisely and and trying to maximize the returns that we can get from that from that capital.
Are you comfortable maybe completely pulling back from market, not doing any acquisitions if it means you're not hitting some target investment spreads.
And based on what you've said before, I kind of on 100 plus M&A.
I think that's unlikely for us to completely pulled back if we couldn't find anything that was worth buying.
And then that would be on the table.
But really what we're seeing currently is a very attractive acquisitions market.
Is it kind of point in terms of more or less versus last year at this point, the Your guess is as good as mine.
Okay.
Does that complete your question?

Greg McGinniss

oh, sorry.
Thank you.
Yes, that's right.

Operator

Our next question comes from the line of Alex Fagan with Baird.
Please proceed with your question.

Alex Fagan

Hey, thanks for taking my question.
Just one quick one for me.
What type of tenants are in the held for sale category?
And do you have visibility to win those deals might close?

Mark Manheimer

It's going to be the first half.
Yes.
I mean, it's a pretty big mix.
I mean, yes, we mentioned some of the assets that were potentially looking at some point that we're looking at potentially Tom recycling out of this with the same tenants.
And then yes, there are no tangible and the convenience store and paint supplies industries.

Alex Fagan

Got it.
That's it for me.
Thank you.
Thank you.

Operator

As a reminder, if you would like your telephone keypad.
Thank you.
Next question comes from the line of Linda Tsai with Jefferies.
Please proceed with your question.

Linda Tsai

Have you now rely on that?
Ms. Fry, your line is live and the charge for the last several recent term CRE homing in on top of my questions have answered.
Thanks to our pipeline.
Thanks, Linda.

Operator

Our next question comes from the line of Josh Dennerlein with Bank of America.
Please proceed with your question.

Joshua Dennerlein

Hi, this is found on behalf of cash on your line.
I'm just wondering what the implied growth for your current 2020 for guidance, how much of that is being driven off of internal versus external diners?

Mark Manheimer

Yes, hey, stand down as most of these companies, the most of the growth is coming from external growth as well as a reduction in cash G&A.
But you know, our from our internal growth is typically just a little bit less than 1% in any given year free and ensuring flow where and how much of that would be of the mix of cash flow?
Do you feel comfortable in terms of like Carrier, Nike and a 5% and 55% debt?
And thank you for us right now.
Though we have over $450 million of pre-funded equity before we would need to tap the revolver.
That consists of $100 million of available principal into 2029 term loan.
That's $290 million of unsettled forward equity.
That's $30 million or north of 30 million of free cash flow after dividends.
And then about another 30 million of cash on hand.

Joshua Dennerlein

And if I could just ask one more in terms of kind of targets of acquisitions going salary.
I noticed there's a slight uptick in investment grade and also within the dollar store area, this is more strategic and I guess plan going forward to be targeting these or is this a better pricing opportunity that you're seeing in the market?
Yes.

Mark Manheimer

I mean, we saw a good opportunity come with the dollar stores.
My and more recently say there's been an uptick.
Obviously, both of the two tenants that we have in that category are investment grade.
So I think that kind of drove it up a little bit on as we recycle out of some of those assets that make it ticked down a little bit weak historically guided people to between 60% and 70% investment grade, although it's not, yes, we're not really that dogmatic about, yes, whatever its investment grade or investment grade profile or even a strong performing sub-investment grade tenant.
So I would expect it to likely gravitate slightly downward, but not to not too far off and where we are today.

Joshua Dennerlein

We appreciate it has a great day.
Thank you, Tim.
Thank you.

Operator

We have no further questions at this time.
Mr. Naylor, I would now like turn the floor back over to you for closing comments.

Mark Manheimer

Thank you for joining today.
We'll look forward to continuing the dialogue at the upcoming at upcoming conferences and how to get it.

Operator

Ladies and gentlemen, this does conclude today's teleconference.
You may disconnect your lines at this time.
Thank you for your participation, and have a wonderful day.
Thanks.