Q4 2020 Netstreit Corp Earnings Call
[music].
Greetings and welcome to the net Sri Corporation fourth quarter, 2020 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.
And he wants you to require operator assistance during the conference. Please press Star Zero on your telephone Keypad. Other reminder, this conference is being recorded and it is now my pleasure to introduce your host Amy on Thank you Amy you may begin.
We thank you for joining us for net strength fourth quarter and full year 2020 earnings Conference call and addition to the press release distributed yesterday after market close we posted a supplemental package and an updated investor presentation, which can be found and the investor Relations section of the company's website at Ww Dot net street Dot 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.
More information about these risk factors, we encourage you to review our prospectus dated August 13, 2020 and our other SEC filings, including our form 10-K for the year ended December 31st 2021 available on.
All forward looking statements are made as of the date hereof and net street assumes no obligation to update any forward looking statements and the feature and.
Additionally, certain financial information presented on this call includes non-GAAP financial measures. Please refer to our earnings release and supplemental package for definitions and GAAP reconciliations and and explanation of why we believe such non-GAAP financial measures are useful to investors.
<unk> Conference call is hosted by net streets, Chief Executive Officer, Mark Manheimer, and Chief Financial Officer, Andy Blocher, They will make some prepared remarks, and then we will open the call for your questions now I will turn the call over to Mark.
Good morning, everyone and thank you for joining us today for net street's fourth quarter and full year 2020 earnings call. We hope this call finds you and your families well and we are pleased to be here with you today.
I'll start with a brief overview of our accomplishments over the last year, and then I'll discuss our acquisition and portfolio management activity and close with a few comments on ESG related efforts.
Andy will then provide more detail on our fourth quarter and full year results balance sheet and outlook for 2020 one.
We will then both on the call for questions.
Since our inception net street strategy has been to create a high quality diversified and fortress and net lease retail portfolio, where they conservatively capitalized balance sheet and scalable platform to support and accretive and consistent long term cash flow growth.
And as many of you are aware, we spent the first half of 2020 deploying capital raised from our private role and $1 44, a offering.
We built a portfolio that was e-commerce resistant and recession resilience, which ultimately helped us that's significantly higher rent collections as compared to our net lease peers. During the second and third quarters of 2020 at the height of COVID-19 related closures.
Yes.
In addition, we built out our team from eight employees to 19.
And we made several executive hires, including Andy Blocher, Trish like Britney and Randy have or on this call with us today.
And also hired Chad Shafer, as our SVP of credit and underwriting.
We added three members to our board of directors Robin Ziegler, how do you ever it and Michael Christodoulou. We believe we have a best in class team in place to lead us forward.
We successfully cleanup and completed our IPO last August amid the COVID-19 pandemic raising a total of $227 million of net proceeds which included the over allotment option exercised by our underwriters.
I would like to pause here to take a moment to note that many of last year's accomplishments wouldn't have wouldnt have happened had it not been for every member of our team who worked diligently to get us to where we were where we are today.
I'm very proud of everyone and I look forward to sharing more successes with them on the future.
Moving on to our portfolio as of December 31, 2020. Our portfolio contains 203 properties comprising $3 7 million square feet and 38 states with a diversified tenant roster of 56 tenants and 23 industries.
Our weighted average lease term is 10 five years, and we are 100% occupied with no lease explorations until 2020, three and less than 1% of our leases expiring before 2025.
Based on ABR, our tenancy at 70 per cent investment grade with an additional eight per cent classified and unrated with an investment grade profile and over 90% of our industry exposure is what we refer to as defensive.
Put simply we focus on well positioned tenants, who have strong balance sheets and great access to capital and are focused on tenants for whom their physical locations are integral to their ability to generate cash flow for their business.
And just defining characteristic has proven to be a key protection against both ecommerce risks and COVID-19 related disruption.
As a result, our cash our collections have been extremely strong throughout the Covid pandemic, we collected approximately 97 per cent of our rents for the full year 2020.
And Andy will discuss further but we believe these results validate our strategic approach to portfolio construction, and resulting COVID-19 related rent payments disruptions are now and the rearview mirror.
Throughout 2020, we continued to grow our portfolio through disciplined acquisitions.
As a reminder, we underwrite and acquire properties with strong underlying tenant credit and seek fungible real estate with strong market fundamentals and locations that are highly productive for the parent and tenant.
In 2020, we completed $409 million of acquisitions.
The depth and breadth of our pipeline and met that we kept a steady pace of acquisitions throughout the year with no slow down due to COVID-19.
This activity included investments and stabilized assets blend and extend opportunities sale leaseback transactions and development projects, which demonstrates the depth of our opportunity set.
For the fourth quarter, we completed $81 million of acquisitions at an initial cash capitalization rate of six eight per cent.
These acquisitions had a weighted average remaining lease term of eight eight years with $68 seven per cent of the properties are occupied by investment grade rated tenants and in it and an additional 12% occupied by tenants with an investment grade profile.
Finally, with respect to timing these acquisitions were backend loaded and the quarter, which tends to be the case and most quarters.
During the fourth quarter, we added a few new tenants to work our portfolio roster, including best buy Sunbelt rentals and our first 15, your Chick Fil a ground lease.
We also added our first target and Massachusetts, just just south of Boston to the portfolio at a $6 four per cent cap rate subject to a seven year ground lease with rent of just $2.81 per square foot.
The adjacent the adjacent former Sears box has been demolished and Trammell Crow has begun construction on a luxury class a 282 unit apartment community and its place.
Not only are we encouraged by the new customers that will be moving and next door and the next couple of years, but also by the increasing land value that we expect on our three and a half acre parcel that we acquired at what we feel was a bargain price.
We also continue to consider strategic dispositions to improve portfolio quality and reduce the risk and 2020, we sold 15 properties for $50 million of which 12 properties and $37 $4 million per closed in the fourth quarter.
We felt that market conditions, and the fourth quarter presented and then attractive opportunity to eliminate or lessen our exposure to certain tenants geographies and industries and improve our overall credit quality. This.
And this drove our decision to sell these assets sooner rather than later, despite their near term impact on absolute earnings.
During the fourth quarter, we took an opportunity to reduce our exposure to casual dining which has been our stated goal of ours.
This exposure was reduced from $4 five per cent to two 2% during 2020.
We believe that we have now addressed the immediate potential credit risks and this category, but we will continue to decrease exposure and this category over time.
We also look to refine our geographic exposure and to date have done so and a way that has that was accretive.
During the fourth quarter, we sold and Ollie's and Texas at a $6 four per cent GAAP rate and replace it with and acquisition of another alleys and Indiana with similar remaining lease term and a seven 8% cash cap rate.
As a result of our active capital recycling and portfolio management, and 2020, we transformed our existing portfolio enhancing its credit quality and and improving diversity. We acquired 124 total assets, adding 23, new tenants 10, New states and four new industries and.
Importantly, our percentage of investment grade tenants grew from 63, 7% to 70 per cent and our weighted average lease term grew from $10 one to 10.5 years.
At the same time, we reduced ABR exposure to our largest tenant which was triple B rated C. B S. At 11, 8% of ABR on December 31, 2019 to double Ara double a minus rated 711 and at eight 9% as of December 31 2020.
We continue to evaluate future acquisitions, including with many of our top 10 top 10 tenants. However over time, we expect tenant concentration to decrease due to the due to the denominator effect as our portfolio continues to grow.
Finally, let me remind you that we have zero exposure to theater health club or early childhood education and tenants, reflecting our long held view that these tenants have generally weaker tenant credit profiles and a lack of fungibility of their underlying real estate.
And we look ahead, and we're targeting net acquisition activity inclusive of dispositions of $320 million in 2020 one.
And we expect that the bulk of this activity will be and mix of investment grade and high quality unrated tenants that is similar to our current portfolio mix and reflect the current mix of our industry concentrations.
Given the sheer size of the net lease sector and our deep industry relationships. We believe we have plenty of growth opportunities ahead of us.
And due to our relative smaller size, we know that future acquisitions can move the needle for us in terms of earnings growth and a meaningful way.
We continue to improve our portfolio quality and diversification with no erosion and going and cash cap rates or weighted average lease term. We are encouraged by our robust and growing pipeline of opportunities and we look forward to reaching our 2021 acquisitions goals with high quality properties.
And as this is our fourth quarter call. Let me take a brief moment to cover and important topic here ESG.
When we came to market at the time of our IPO, we indicated that ESG would be a part of our strategy and processes.
First we are committed to strong governance from the time of our IPO. We ensured that our board was designed to fit today's standards for governance, we have and independent and diverse board with a strong mix of backgrounds and expertise, including real estate financial markets and human capital.
These are the same three pillars that support net street and itself.
Second from the beginning employee well being and engagement has been and remains very important to Andy and me.
From a social perspective, we made sure that net straight off professional training, continuing education reimbursement and competitive benefits and flexible parental Brent parental leave to our employees.
We also survey employee satisfaction annually and I'm proud to say that every one of our employees is a shareholder and that street, meaning all of our employees have a personal stake and our collective success.
Finally, with respect to the environment 17 of our top 20 tenants have corporate sustainability sustainability programs and our acquisition due diligence process hasn't ESG and environmental component.
At the asset level, and we look to fund capital improvement projects with an eye towards sustainability.
We are very proud of all that we've accomplished in 2020, having significantly grown our portfolio why while improving its quality and built and on built on the operating platform designed for growth supported by a low leverage balance sheet.
Finally, our strong performance on collections and objectively proves that the durability of our strategy as we meaningfully outperformed our peer set and and unforeseen uncertain economic environment over the past year.
As a result, we believe we are extremely well positioned as we enter 'twenty 'twenty, one and we are excited for the future and that street.
And I'll turn the call over to Andy Andy.
Thanks, Mark and thank you all for your time with US this morning.
Yesterday, and our press release, we reported net income of 15 cents core episodes, 18th and and.
And I think I thought that was 20 cents per diluted share for the fourth quarter.
For the full year, we reported net income other pending core Africa was 65, and <unk> 69 cents per diluted share.
As of December 31, 2020 the in place portfolio was generating $41 $8 million of annualized base rent or ABR.
Which has a point and time metric reflects the effect of acquisitions and dispositions completed in the fourth quarter.
From a collections perspective, we're very pleased with our portfolio performance prior.
Prior to giving any consideration to deferral or abatement arrangements granted as a result of Covid. We collected 100 per cent of fourth quarter rent payments and for the full year collected $96 nine per cent per watt.
Further based on the payment history of our tenants. We currently have zero bad bad debt reserves and recognize zero bad debt and the fourth quarter and for the full year of 2020.
Finally, based on our 100% rent collections and the fourth quarter, we did not provide any deferrals or abatements and have not done so since August.
Turning to our balance sheet and other capital markets activity.
Work, we completed in 2020 with respect to our balance sheet was very important and set the stage from future growth for next week.
We access the equity markets and raised net proceeds of approximately $227 million through our IPO on August.
We repaid our apps and the underground and credit.
Tired or outstanding series, a preferred shares and completed a $175 million of LIBOR swaps to hedge floating rate exposure on the entire balance about her book.
As of December 31st we had $93 million of cash, which includes $14 million and restricted cash held in 10 31 exchange of cats and remains fully undrawn on our $250 million revolving line of credit we.
We have no debt maturities until the maturity of our revolver and December 2020, three which are subject to a one year extension option, which would match the December 2020 four and maturity of our fully drawn term loan.
In addition, our net debt to annualized adjusted EBITDA ratio of two eight times is well below our four and a half times to five five times long term target.
With respect to dividends and earlier this week the board declared a <unk> 20.
Greg you're a cash dividend to be payable on March 30 to shareholders of record on March 15th, reflecting an annualized dividend rate of 80 cents per share.
Let me now take a few minutes to discuss our outlook on a couple of guidance items and provide some forward looking perspective.
We're starting the year with $41 8 million of in place annualized base rent.
And as Mark mentioned, we expect to complete $320 million of acquisitions. This year net of dispositions backend weighted and each quarter and a cap rates comparable to our fourth quarter and full year of 2020 activity.
We expect cash interest expense to range from three to three and a half million dollars, depending on the timing of drops.
And on a revolving line of credit and expect an additional 600000 of noncash deferred financing fee amortization.
We expect to incur state and franchise taxes.
200, and $300000 and expect to report those amounts on their own line items in 2020, one, reflecting our growth and increasing geographic diversity of our portfolio.
We expect 2021 cash G&A and the range of $11 million to $12 million with an additional $3 million to $4 million and noncash compensation expense, which reflects executive compensation agreements that have been recently finalized through our compensation Committee profit.
And as we have largely stabilized the size of our team our overall compensation structure and our outside service requirements to efficiently and effectively executed our strategy and performance and public company. We expect that we will continue to gain the benefits of scale and a relatively fixed cost structure as we grow.
As a result, our G&A as a percentage of revenue and assets is expected to decrease overtime.
I would echo Mark's comments, and say that I'm grateful to our entire team for their exceptional contributions in 2020 and their hard work each day through a pandemic and the west allowed us to establish and build what we believe is a truly great platform and portfolio.
As we start 2021, we believe we have significant momentum to continue to grow both our portfolio and earnings and remain focused on creating significant shareholder value.
This concludes our prepared remarks, we'll now open the line for questions operator.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate that your line is and the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Okay.
Yeah.
Thank you. Our first question comes from Linda Tsai with Jefferies. Please proceed with your question.
Hi, good morning, and you've collected 100 per cent of rent payments for October November and December, but we Didnt see you mention of rent collections for January and February and your press release and is there anything to highlight here.
Hi, and thanks, Thanks, Linda and and good morning.
Yeah, we did collect 100 per cent of rent in January but just to preface that question.
As it relates to COVID-19 and or any tenant requesting any rent relief, we have not had a discussion with any tenants since the second quarter about paying rent as we had hoped and still believe that we are fully resolved and documented all COVID-19 impacts to the portfolio last year going back to the second quarter.
But this February we had an investment grade tenant Sandoz Sandoz, a rent check, but we never received it and so we had the cash we had the tenant canceled a check and then move that tenant to a C. H, so which we're trying to do with all of our tenants and we've got all the confidence that we're going to be receiving that rent.
From them on Tuesday, which is the day of the week that they released all their wires and we will continue to collect 100 per cent of a rent not only for February but for the rest of the first quarter, but we wanted to be really hyper careful when it comes to the transparency and maintaining our credibility so technically and we're waiting on one rent payment of $23000.
To get to 100% and February and.
And you know that would make our six consecutive months of receiving every every penny of rent and so hopefully that answered your question.
Thanks for that clarification and then we're also seeing a growing number of net lease transactions occur and the multi tenant shopping center space with you know with smaller shopping center REIT announcing yesterday, JV and acquire high quality investment grade net lease tenants and it sounds like your sandbox. How are you viewing the competitive landscape right now and should we be concerned about.
Greater cap rate compression or more difficulty sourcing deals in 2020 one.
Yeah sure. So yeah first I think it shows how attractive you know the spaces that we have seen a couple of more entrance and the lessons.
Last few years.
But I do think it bears mentioned that this particular, new entrant has a very specific acquisitions approach Ah that would make it very unlikely that we'd be competing directly with them.
And again, it's just a very very fragmented market, which was really a big topic are you know.
And when we raised capital and $1 44, a that we'd be able to deploy capital and not and the quality that we have and at the pricing that we have was also a topic.
And with the IPO and its and its still today.
But we think we just continue to prove our ability to compete and you know it still will be able to hit pretty pretty attractive yields for that for the quality of assets that we're bringing in and and in fact, you know as we look forward to.
The pipeline I think its more robust today than it really has been over the past few quarters.
Just one last one how are you approaching tenant concentration is this best addressed through dispositions or dilution through higher acquisition volume.
Yeah, No. That's a good question I mean, obviously, we're a smaller.
On a portfolio at this point and so you know the majority of that is going to come through.
And on the denominator, increasing in size and would.
But that being said if we have one particular outsized tenant you know we did sell a couple of 711 and assets you wanted a five cap and one of the 495 GAAP.
Back in the fourth quarter pretty Accretively.
And with which is great but we.
We will continue to selectively worked through dispositions, but you did see and the fourth quarter and little bit more dispositions that would then but I think you can typically expect from us on a go forward basis, we just had an opportunity to move some.
And at some jet at current tenant credits that we really thought it made sense to move out of the portfolio and some shorter term leases, where we felt like we were getting pricing similar to longer term leases. So we felt like that was a helpful for us to improve our lease expiration schedule.
Thank you.
Okay.
Yeah.
Thank you. Our next question comes from Nate Crossett with Bear and Baird. Please proceed with your question.
Hey, good morning.
I was wondering if you could comment on the activity you've had so far and Q1 since we're already kind of approaching the and this quarter.
And you mentioned that pipelines bigger than it's been and the last two quarters and I was wondering if you could just help us size that in terms of dollar terms and.
And within that pipeline is it mostly concepts you already own or and then a mix of new and current and <unk>.
Yeah sure so.
And again I'd say I think this quarter similar to the fourth quarter is likely to be a bit backend loaded.
It's closed and the neighborhood of $20 million.
Of assets, so far and I know Theres a couple that you should be clothing, either today or early next week, we have a little bit over $120 million of assets that are under contract and approved through investment committee and and moving through the closing process. So that it can take anywhere from 30 to 60 days. So some of that will be.
And the first quarter some of that will leak into into April and I think.
The good thing there is you know we will have probably a pretty robust.
And April as well, so that will kind of make the acquisitions, a little bit less backend loaded that we saw and the and the first quarter and likely to see and the first quarter, but yeah as it relates to.
And the tenants that were never seeing you know we did add a few new tenants as you heard in my prepared remarks.
No target being being one and we do have a couple more are new tenants that I think are pretty attractive investment grade tenants that will be adding to the portfolio here on the here and the first quarter, but it's going to look a lot like what you saw on the fourth quarter in terms of investment grade and and investment grade profile pretty.
Pretty high quality assets with a with an attractive weighted average lease term debt yields that you are pretty consistent with what we've done and are in 2020.
Okay. That's helpful.
You mentioned some ground leases you did in the quarter I was wondering if you could just.
Remind us how and.
How much and your portfolio is ground leases and.
Where is that gonna grow over time or kind of how did those opportunities present themselves to you.
Yeah sure. So yeah, I mean, I think you know grand leases to US are you know, they're not all created equal and you see you know wawa and sheets and some of those tenants out there.
And that our ground leases, but they're yeah.
Several million dollars to acquire so you know when you look at the rent on a fee simple versus ground lease there's really not much different and I don't really think you are picking up a much of an advantage and other than you know losing out on some depreciation.
But you know when we do see rents that are reflective of really just what the what the land is worth or less and you know those are those are very attractive and typically those are going to get me and we're gonna get priced out on a on a lot of those types of transactions I think the target if that was a more effective marketing of.
Of that asset I think that cap rate would be.
And if I can only inside of the $6 four you know going and cash cap rate and that'll be acquired those we do have a handful of our ground leases and the portfolio I mean, we've got a Lowe's, which as you know I think a real ground lease you know obviously, we mentioned I mentioned, the Chick Fil a and we've got a you know a few others, but it's inside five per cent of the portfolio I don't really think that's going to grow.
Thankfully, we don't really want to pay up for for ground leases, but and the event that we find them and they are priced similar to a fee simple deal and we're coming in at low rents those are going to be pretty attractive to us.
Okay.
Okay. That's helpful I'll leave it there thank you.
Thank you. Our next question comes from Greg Mcginniss with Scotiabank. Please proceed with your question.
Good morning.
And Andy I apologize if you covered this in your opening remarks, and the culture opt for a few seconds, but I'm just curious what prevented you from providing if for per share guidance. This year and whether you expect that to be and abnormality. This year kind of.
What we should be expecting going forward.
Yeah, and Greg and thanks for the question.
Yeah, I think look I think that it is a 2021 phenomenon and certainly you know at this point, but based on our current size you know the assumptions that we make around timing size pricing or additional capital raises.
Things that we talked about and the path and to a lesser extent expectations around our ordinary course business.
The range that we would have had to provide a would've been so wide it would've been meaningless to users.
So what we did is I think that we knew we provided guidance around the key operational items that we really expect are going to dictate our 2021 corporate performance right and left the capital raising.
To the side, knowing that we're going to be opportunistic with respect to work with respect to our us.
Access to capital as we move throughout 2021, but I mean for us to produce sales per share you know with the high Sixty's and then provide a 10 to 15 guidance range. You know as a result of those things. We just didn't think what's meaningful to users.
And I can I can appreciate that and regards to the capital raises though and are there any updates you can provide there in terms of kind of how you're thinking about funding acquisitions and this year.
Yeah, I mean, you know as I said talked about and my prepared remarks, I mean were you know we've got $93 million worth of cash on the balance sheet as of year and March got a very robust pipeline that we're working through we are fully undrawn $250 million credit.
Credit facility, we were at $2 eight.
<unk> eight times net debt to EBITDA. So we feel like we've got room and as a result, we have the ability to be opportunistic with respect to capital.
Okay, great. Thank you so much.
Thank you. Our next question comes from Todd Stender with Wells Fargo. Please proceed with your question.
Good morning, Thanks, you touched on your reduced casual dining exposure.
But when it comes to quick service, we don't see specific names and your top tenant list them and can you guys. Just comment on your appetite to buy portfolios of Qs Sars, it's not and the central alert and necessity bucket, but.
Sure seems that way during COVID-19.
Yeah, and I think that's a great question Todd I mean, you know going back to when Covid first hit we hit the brakes, you know entirely on and on acquisitions for a short period of time and similar to the great recession and see how the Covid disruption you saw quick service restaurants perform extraordinarily well I mean, we're still gonna be very focused on.
And on credit and there is really probably a list of about 10 name is that we're very comfortable with.
As it relates to quick service restaurants, and we want to make sure that we've got you know.
Drive through and we've got enough alerts and a parcel to accommodate.
Drive through is and we're even seeing some quick service restaurant operators that historically hadn't had a drive through or going to that model. So we want to make sure that that's going to be a very fungible box, but it is an area. I think you can expect to see us acquire some assets and the future and again as you mentioned and casual dining you know down to a little over 2% I think you are.
Likely to see that creep below 1% by year end.
Right that's helpful.
And best buys burlington's, and and some grocery stores and the quarter can you speak to these at first glance it doesn't appear or.
And with eats don't appear terribly fungible, but maybe like the credit and maybe like location and maybe just kind of touch on these things.
Yeah, absolutely I mean, I think you know the size boxes are specific to a burlington and bestbuy, they've been really kind of decreasing the size of their box. So we were and yeah pretty close communication.
And with the tenants on the on those particular assets and how committed today and you know how committed they are to those long term.
Generating very strong sales and each of them. So we are fairly confident that.
You know those are those particular tenants are likely to remain on those boxes beyond their initial lease term, but that being said you know there are a lot of tenants and kind of that 35 to 40000 square foot range and so you know we feel that those are actually fairly easy for us to to either either.
Replace the rent or increase the rent should we put in a position to replace the tenant.
Alright. Thanks last one from me just with this year kind of a backdrop, there's commentary out there just as it and increased M&A activity potential where do you guys stand on doing sale leasebacks do you think that'll be a part of your strategy or do you think youre going to be more on a highly widely marketed space.
Yeah, so hopefully not and the widely marketed space.
And I feel like the pricing gets awfully competitive and a little bit less and less attractive Ah yeah, but that being said you know our.
Last year, you know it was asked a lot of different questions related to how we source acquisitions. You know, we really do have a lot of different ways that we are.
Approached the acquisition side, whether they'd be blend and extends whether it's you know and partnering with a multi tenant buyer and where we pull out the net lease or are on the development side or even sale leasebacks I did not really expect at that time to be doing a mini sale leasebacks as you typically see those as being.
A tenant that doesn't have great access to capital resources selling their real estate to.
Two and a sale leaseback and really leverages themselves and and push that and maybe not a great position long term on a on a credit profile and that being said we've seen on a a large number of and other investment grade high quality tenants that just don't want to have their capital tied up and their real estate and have seen a you know and increasing Ah.
And a list of opportunities within some of those tenants that we that we like and you know think I really strong performers. So you know we have done a little bit more than what I think we expected and there's even some of that I and our go forward pipeline.
Alright, that's helpful. Thank you.
Okay.
Thank you. Our next question comes from Katy Mcconnell with Citi. Please proceed with your question.
Hey, guys. This is a pretty crazy on for Katy and I guess I was just curious about how you guys are thinking.
About inflation sort of I think it's been a key topic that's come up over the past few weeks and sort of keeping in mind, you know where your lease escalators are sort of at and just how you're thinking from a competitive standpoint versus some of your peers.
Yeah sure I mean, yeah, I mean, and I think you're right I mean, our leases as you'd expect with a you know a higher credit profile typically those leases are going to be a little bit flatter than maybe some of the other peers that are really kind of financing through sale leasebacks, you know kind of your kind of smaller smaller credits.
Yeah, but that that being said and I think we're also going to have a and we view. It is predictability of the cash flow should be.
On a little bit better on a go forward basis on maybe a little bit lesson and rent loss, but yeah. I mean I you know I think you know, we're getting close to 1% on our escalators within it within our leases.
And so you know.
I think inflation.
As you know maybe not going to be here and here permanently.
It could be a temporary situation.
Situations, where it comes into the portfolio if you listen to.
Mr. Paul, but yeah, I mean, I think that you know if you're from.
Anticipating a very high inflation markets on our leases are going to be a little bit less attractive.
Okay got it thanks, and and then I guess I have one other one just in terms of cap rates for this year, you know and and and sort of recently as well if you're seeing any sort of movement just within the sort of hygiene category that you guys are targeting.
Yeah, we really haven't I mean, I think there's a good advantage today as to the fact that we're only looking to acquire $80 million or so per quarter. So that allows us to really source significantly more than that and then focus really on on the assets, where we think the you know the pricing is a little bit less.
Less efficient and really kind of chop off that tail of that bell curve and has really allowed us to day, you know to get pretty attractive cap rates.
And we've shown that it was a private company and we've shown that as a public company and the last couple of quarters and.
And even into the first quarter, we're seeing similar types of cap rates.
Got it okay. That's all from me thanks.
Thank you our last question comes from Todd Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, Thanks, Good morning, Andy.
Andy I just wanted to follow up I think you said acquisitions would would be backend weighted was that for the quarter or for the year and and I guess it seems like the pipeline is growing so I'm. Just curious why you know deal flow would would sort of slow from the current pace I bet. If if that's the case.
Yeah, I didn't book I don't know the deal flow was going to slow and any material way I would just tell you that the nature of the Beast for US has been that you know on average you know if you look at a.
Since last year, if you look at it.
And look at the average timing of our execution of our acquisitions I think that there are like the second day of the third month of the quarter right and.
As Mark indicated in his and his prepared remarks, I think that that's just been somewhat typical to what it is and we've seen and you know.
From a modeling perspective, the impact of that for a company of our size can be meaningful.
But you know book.
And we're pushing as Mark indicated we're pushing as we go into <unk> and the first quarter and second quarter to try to change that but from a modeling perspective like I said it could be anything from what package.
Okay, and then Mark you talked a bit about the COVID-19 resistant nature of.
The company's tenants right, which benefited a bit during the pandemic you know some convenience auto drugstores and how are you thinking about tenant categories and credits moving forward as we hopefully continue to move away from the pandemic is there a little bit of froth in the market around the edges, maybe that could benefit the company from a.
Capital recycling standpoint would you would you potentially look to shift away from.
And from a central retail to some extent either you know in terms of some of the newer acquisitions youre looking at or assets that you might be looking to sell.
Yeah, and I think it's a good question and and you know when you think about you know and Andy and I first started you know.
Trying to raise capital.
For this for this venture back and I guess it was you know.
Back half of 2019.
<unk> was the same then is as it is today are very focused on the essential retailers. You know ones that are really you know, what's working and retail today was really what was working and pre COVID-19 as well.
And yeah.
And those sectors are really.
We're really where we focus on those defensive names and so it was a little bit less popular and when we were raising capital.
Back in late 2019, and and early 'twenty and into early 2020 pre COVID-19, but that being said and you know that's.
That's our strategy, we think retail is going to continue to evolve our we think having capital.
Available and management teams that have shown a propensity to continue to reinvest and their business are going to be the ones that are going to be left standing and.
And really that's what we think is the appropriate way to invest and and retail and so you know it shouldnt surprise you that you know that held up very well and the first bit of disruption and I think we're gonna see more disruption may come sooner and May come later, but we wanted to be prepared for that disruption is it as it comes over the next two.
And in 20 years.
And so I don't I would not anticipate us selling off our assets and go and buy any you know going buying movie theaters or are things that are really outside of our value. It but yeah on the margin. We will look to you know if the market is going to pay us at a very aggressive cap rate for a specific assets.
We're always going to be opportunistically, looking to recycle capital and but.
But I think we'd be redeploying into a back into you know what our bread and butter is which is which is essential retail.
Yes.
Okay got it and just last one from me apologies if I missed this but.
Can you just talk about that a development project that was disclosed and and the 10-K, you know what kind of asset and tenant credit is at and is that an area, where where you see some growth opportunities.
Yeah, and I I mean, I think we've got a few development projects and the <unk>.
Works.
It's something that we spoke a lot about really at the at the time, but the road show and that and the and the IPO is an area that we're really going to focus on and try to drive a little bit more yield that way, but really getting those go and take some time and now we're starting to see the fruits of the labor of the other acquisitions team. So I do think that is an area that you'll see us be a little bit more active.
And what what kind of yield expectations or are you targeting for that project or for for developments in general.
Yeah. So you know, we're not going to be spec developers and we're not going to go and buy.
Buy land and build a building and help someone comes.
You know, we're only going to get involved and they and the development process and the amount that we've got a lease in hand with the tenant. So we're gonna be pretty hard and you know and that shouldn't be too surprising pretty conservative with the way that we approach and development and I think he and I will pick up you know.
And maybe 50 basis points I don't think it's going to be.
Again, we're not going to take much risk and we need to look and we need the leasing and we need the tenant commit to the site and.
And we need that need to keep and developer and do it pretty tight box in terms of cost overruns and the like and so yeah. We think it's going on it could be a meaningful percentage of what we do because we're not really looking to you know to deploy several hundred million dollars a quarter. So if we can do 30 and $40 million a year and that area.
We think that can really help them move the needle on our yields.
Alright, great. Thank you.
There are no further questions at this time I would like to turn the floor back over to Mark Manheimer for closing comments.
All right well. Thank you everyone for joining and your interest and net Threep are again, if you were and if youre attending and the REIT Conference next week, hopefully, we'll get a chance to talk.
We're really excited about the gross opportunities ahead of us for net street, so take care everyone.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Yeah.