Q4 2022 Netstreit Corp Earnings Call
Ladies and gentlemen, greetings and welcome to the net Suite Corp, fourth quarter 2022 earnings Conference call.
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A brief question and answer session will follow the formal presentation.
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It is now my pleasure to introduce you to Randy Hawk capital markets. Please go ahead.
We thank you for joining us for <unk> fourth quarter and full year 2022 earnings conference call.
And to the press release distributed yesterday after market close and posted a supplemental package and an updated investor presentation, but it can be found in the Investor Relations section of the company's website at Www Dot <unk> 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 $19 95.
We're 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 Form 10-K for the year ended December 31, 2022, and our other SEC filings.
All forward looking statements are made as of the date hereof and that 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 and GAAP reconciliations and an explanation of why we believe such non-GAAP financial measures are useful to investors.
Today's conference call is hosted by net streets, Chief Executive Officer, Mark Manheimer, and interim Chief Financial Officer, Lori Wittman. 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 Mark.
Good morning, everyone and welcome to our year end 2022 earnings conference call.
We're pleased to share with you strong results <unk> achieved in 2022, despite an increasingly difficult macroeconomic backdrop.
High inflation and rising interest rates and prevailing recession concerns did not prevent us from executing our growth strategy.
Before I go any further I would like to say how proud I am of our team's commitment determination and ability to be nimble and creative during such macroeconomic volatility.
Despite this backdrop, we have had a very active year locking in significant portions of our capital structure.
I think the capital markets in a prudent manner when markets were support.
In 2022, we raised over $1 billion of capital providing the means for us to continue to grow through acquisitions and developments that meet our quality and return thresholds, which gives us confidence as we look ahead to 2023.
Laurie will discuss our capital raising activity in more detail later on the call.
During the quarter, we completed approximately $104 1 million of gross investments, bringing the year end total to $507 million.
Investments in the quarter, including one completed development had an average yield of six 9%.
Excluding development acquisitions completed in the quarter had an initial cash cap rate of 7% and had a weighted average remaining lease term of 11.2 years.
Notably over 97% of these acquisitions were with investment grade and investment grade profile tenants.
Importantly, our growth supported our ability to deliver best in class <unk> <unk> per share growth of 23, 4% during 2022.
As we previously indicated investment activity was lighter in the fourth quarter than earlier in the year as we took a more prudent approach to capital deployment due to the disconnect between capital markets and property markets created by the rapid rapid rise in interest rates in 2022.
We have and will continue to be disciplined on asset pricing and capital raising as our team continues to demonstrate exceptional ability to find acquisitions from a variety of sources at cap rates above those found in the broader market without compromising on credit and real estate quality.
It is important to highlight that we have proven that we can be very nimble and creative in sourcing opportunities through non traditional channels.
For example, we are looking at providing capital to tenants developers and other landlords in ways that take advantage of market dislocations, resulting in outsized risk adjusted returns.
While the overall number of transactions in the industry wide is likely to be significantly lower in 2023 similar to the back half of 2022, we're also seeing less competition and see a vacuum where other to other types of typically low yielding capital providers have historically operated.
While our main focus remains on well priced high quality acquisitions. We will also on occasion step in as a senior secured lender loans.
The loans will be backed by high quality investment grade properties at safe Ltvs and debt yields considerably higher than the cap rates required to acquire the assets.
This multi plant multi pronged approach has led to a very strong pipeline of opportunities at very attractive risk adjusted returns.
And our disciplined creativity and excellence in execution make us confident that we can continue to create meaningful a meaningful shareholder value for the foreseeable future.
Further we feel extremely confident in the stability of our portfolio. We have maintained proper risk management guardrails, including a stringent underwriting process and continuous credit monitoring. This has enabled us to curate a base of high quality properties leased to strong credit tenants and stable industry's best positioned to perform through any cycle.
We demonstrated the success of this strategy and diligent execution through Covid when our portfolio outperformed all publicly traded net lease companies, resulting in 100% rent collections from the time that we went public at the height of the pandemic. This rate of collections still continues today.
At year end 2022, our portfolio is comprised of 427 leases with 80 tenants contributing approximately $99 million of annualized base rent.
Our portfolio had a weighted average lease term remaining of nine five years with approximately 80% of ABR represented by tenants with investment grade ratings or in breast or investment grade profiles. The portfolio is 100% occupied.
A key part of our execution is selling assets, where the risk adjusted value no longer meets our criteria and in 2022, we accretively sold seven properties for over $25 million.
Turning to our lease exploration schedule, we have no lease explorations in 2023, and only 3% of total ABR expires in 2024.
As we look to 2023 and beyond I want to reaffirm our commitment to our growth strategy as we continue to focus on execution and scaling our high quality best in class portfolio.
We are seeing no shortages no shortage of opportunities and believe we will continue to prove our team's ability to source the best risk adjusted pricing of net lease assets in any market environment as we have over the past three years.
Before closing my remarks, I wanted to provide a provide a brief update on our CFO search we have continued to progress in our search for a permanent CFO . We have a number of strong candidates and are focused on finding the right person.
With that I'll turn the call over to Lori to go over our fourth quarter financial results and 2023 guidance.
Thank you Mark and thank you all for joining us on today's call.
In our earnings release published yesterday after market close we reported net income of five cents core S. F. O 28 cents and a S. S. L 29 cents per diluted share for the fourth quarter.
For the full year 2022, we reported net income of 16 cents core F. N O a a dollar churn and a S. That's all of the dollars 16 per diluted share as Mark said earlier asked I felt growth was 23, 4% year over year.
The portfolio's annualized base rent grew to over $99 million in the fourth quarter up from $71 $2 million at the end of 2021.
39% increase from the prior year.
Interest expense increased to $3 $5 million in the fourth quarter of 2022, and $9 $2 million for the full year up from $1 million and $3 $7 million, respectively. In the prior year due to higher borrowing costs and increased debt balances.
G&A increased to $5 $4 million in the fourth quarter and $19 $1 million for the year compared to $3 $9 million and $14 $8 million respectively. In the prior year, primarily due to the impacts of fully building out the team and the platform.
At year end, our balance sheet had total debt of.
$496 $5 million with a weighted average term of approximately three seven years, and our contractual interest rate, including the impact of fixed rate swaps, the 3.35% our net debt to annualized adjusted EBITDA after giving consideration to the settlement of shares pursuant to the forward sale.
Agreements executed during the year with 3.4 times, well below our targeted leverage range of four and a half to five and a half times X.
Leading our forward chairs, our net debt to annualized adjusted EBITDA was five times.
Moving on to our capital markets activity and as Mark mentioned in his opening comments, we had a very active year as we strengthen and fortify our balance sheet through a series of financing activities Janney.
In January of 2022 we entered a forward sale agreement.
10.35 million shares of common stock at a public offering price of $22 25 per share receiving total net proceeds of $216 million. He shares were all settled in 2022.
In August of 2022 we entered into another forward sale agreement of 10.35 million chance of common stock at a public offering price of $20 20 per share in 2022, we settled 3 million shares receiving net proceeds of $57 million at year end, we had seven 4 million.
Unsettled shares remaining.
So in August we closed on a $600 million.
Just say inability linked senior unsecured credit facility, which consisted of a $400 million senior unsecured revolving credit facility and a new $200 million senior unsecured term loan with an additional 400 million dollar accordion.
Barbara will mature in August of 2026 with the option to extend for an additional year of the term loan will mature in February of 2028.
The term loan is fully hedged at an all in rate of 3.88%.
The company's existing $175 million term loan, which at year end was fully hedged at an all in LIBOR best based rate of 1.36% has now been swapped to an all end sofa based rate at 1.37% and matures in December of 2024.
All of our term debt is now fixed at an average all in fixed rate of 2.74%.
During the year through our ATM program, we issued approximately 3 million shares of common stock at a weighted average offering price of $21.02 per share for net proceeds of approximately $5 $7 million. We believe this capital markets activity further demonstrates our reputation as a proven.
Prudent stewards of capital and sets us up with a strong liquidity and balance sheet position that will last well into 2023.
Regarding our dividend on February 21st the board declared a <unk> 20 regular quarterly cash dividend to be payable on March 30th to shareholders of record as of March 15th based on the dividend amount or as I felt payout ratio for the fourth quarter was 69%, which is well within our previously stated guidelines of two.
Third to three quarters I've asked that's all.
Turning to guidance for 2023, we expect <unk> per share will be in the range of $1 17 to $1 23 per share. This range assumes acquisition activity included completed development and net of dispositions to be at least $400 million in 2023.
And prudence exhibited in 2022, we believe we are extremely well positioned entering 2023.
At year end, we had almost $500 million of available liquidity, a conservative level of debt of which 77% was fixed rate and an acquisition team that has consistently proven its ability to source and close high quality assets at yields demonstratively better than our competition we.
We are in position to continue to execute our growth strategy Opportunistically and accretively as we drive shareholder value into the future.
With that we will now open the line for questions operator.
Thank you.
Ladies and gentlemen at this time, we will be conducting a question and answer session.
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Ladies and gentlemen, we will wait for a moment, while we poll for questions.
Our first question comes from the line of Nick Joseph from Citi. Please go ahead.
Thanks, maybe just starting on the transaction marketing or assumptions embedded in guidance you had mentioned.
The lighter activity in the fourth quarter. So as you enter 2023, maybe you could talk on the pipeline that you have today and then what guidance is assuming in terms of timing and cap rates.
Yes.
It's interesting I mean, I'd say, we're still in a world of pretty bifurcated sellers.
The larger group really doesn't have a need to sell at this point, which we kind of started to really see at the back half of last year. They really kind of waiting that maybe you see that the fed pivot or cap rates to come back down to 2021, which we don't really think is a likely scenario in the short term and then the second bucket really being a smaller group of sellers that have some pressure.
To transact. So we took a more opportunistic approach back in October and I would say that the bid ask spread is still there, but it has condensed a bit and we've started to see some slow movement of <unk>.
Some sellers moving from that first bucket into the second.
And it's allowed us to really assess the needs of the different different types of property owners.
And use our teams creativity to source acquisitions.
So pretty quickly after after our earnings call back last October we did did start to see that shift which is why I think we probably acquired a little bit more than what we thought we were going to at that point in time.
And we're really seeing that in 2023, as well, which gives us a lot of confidence that we're going to be able to find some very attractive opportunities.
Here in the first and second quarter.
Thanks, and so for guidance is it.
Kind of just across the board that at least 400 million or is it more back half loaded.
Yeah, I mean, we're kind of thinking about it.
Spread evenly throughout the year.
But we're feeling very strong about what we're seeing currently are that we should be able to close its hard to say what will close in March and what we close what we'll close in April .
So the first and second quarter look pretty strong.
Thanks, and then you had mentioned maybe stepping into some loans.
What's the opportunity set there how are you thinking about.
Maybe the different risk profile and how do you underwrite that relative to acquisitions.
Yes, so it's really interesting when you think about.
The different.
Types of capital that have exited.
The marketplace, whether they'd be lenders or even some buyers.
In the marketplace and so we've been able to work with our network and find some opportunities where there.
There could be like a developer that has.
The view that the 10 31 market is going to come back and they really want to take advantage of that so we've taken the approach of will loan you less than 100% LTV. So call. It 60 70, 80%.
Loan to value, but then sweep all of it all of the rent so that we're coming in at a safer position because we're under 100% LTV, but then getting an outsized yield in the short term, while they wait and see if the market comes back if the market comes back then yes. We may have these loans outstanding a little bit shorter if it doesn't come back as quicker.
As I think than we might have these loans outstanding for a little bit longer or potentially take those properties at.
Much more attractive cap rates.
Great. Thank you very much.
Thanks, Mike.
Thank you.
Our next question comes from the line of Josh <unk> from Bank of America. Please go ahead.
Yeah. Thanks for the time guys.
I just wanted to follow up on the opening remarks from our CFO search.
How far along are you in the process and is there any kind of color you can provide on maybe.
Timing.
The announcements.
CFO .
CFO .
Yeah, I mean, I'll, probably stop short of giving you a timing of when that announcement will will occur because we're not we haven't offered anybody yet but we are.
Pretty quickly hired ahead hunter back in November .
<unk> spent a lot of time going through exactly what we needed and what we wanted in a candidate.
And then hit the ground running in January .
<unk> talked to a very large number of of <unk>.
Potential candidates and have narrowed that field considerably and are making pretty good progress there and we're very optimistic about the candidates that we've got left but I'm Laurie I know if you can I think the other no I think.
The good news is it's a very desirable job and we had some great folks who are interested in the job and moving here and being in Dallas and so we're excited about what the future holds for the new CFO .
Thanks for that and then on the.
Acquisition side, just kind of curious if you're seeing any changes in the competition for assets that you're going after.
Is it more or less new players less players just kind of curious on the backdrop.
Yeah. That's a great question I mean, I think what we discovered with sellers kind of holding out.
That being the larger group.
<unk> seen a pretty large drop in the number of transactions in the back half of last year.
<unk> that to continue.
Into 2023, now what gives us comfort is exactly what youre hitting on which is there is a pretty pretty.
Big drop off in the competition and whether that'd be kind of leveraged private private equity buyers the 10th.
<unk> one market is significantly smaller than it was.
Which has allowed us to be a little bit more constructive.
Working with various groups that we've tried to build relationships with over the past several years.
And has resulted in actually a larger opportunity set for us.
Great. Thanks for the time.
Thank you.
Our next question comes from the line of Kevin Kim from <unk> Securities. Please go ahead.
Hi, Thanks, just to follow up on that previous line of questioning can you just comment further on the <unk>.
<unk> real estate that was acquired curious if the similar pasco vast as they historically have been acquiring yet.
If those cap rates are rising or if you're kind of slightly targeting a different basket of assets and assets because.
Even within IAG or IAG like assets I'm guessing, there's a spectrum of quality and risk. So just trying to better understand where your sweet spot is and if there's been any kind of incremental shifts.
Yeah, nothing really to speak of is as it relates to any real shift I mean, we've got pretty clear criteria that we look for on the real estate side as well as the credit side I know the credit side kind of gets a little bit more more of the focus but when you look at what we acquired.
Clearly the credit quality and lease term of what we bought during the quarter as nearest near the top of what we've acquired in.
In the past.
And then I think at some point, we're going to drill down a little bit more on our investment grade profile bucket just to kind of share a little bit more information because I think when you compare the metrics of that bucket that actually compares quite favorably to our investment grade bucket.
And so I think that could give a little bit more clarity as to the types of credits within the within the portfolio.
But as it relates to what we acquired in the quarter I mean, I'll give you a few examples.
We bought our first Dick's sporting goods, just outside of Pittsburgh, Pennsylvania, Dick's agreed to extend that property at beyond 10 years.
We added our first Rei another aggressive investment grade profile tenant in Tysons, Virginia, another Ross dress for less added another Kroger and.
And we did a sale leaseback with an investment grade profile grocer that was already in the portfolio and they agreed to add that to our <unk>.
Master lease that we have with that tenant.
And as you can see there is a.
A little bit of a pickup.
And with the dollar generals, which I think you'll probably see.
And several other Reits is the merchant developers are really starting to look more to the REIT rather than the 10 31 market because of the 10 31 market as.
As much shallower than it's been in the past.
And in terms of the.
Your comments about making loans, possibly.
You just provide some more color around that and if you have.
Make whole provisions and what that kind of total.
Scope or basket.
The universe looks like for you.
Yeah, no that's a good point.
We do have make whole provisions.
And the loans so that we don't just get completely financed out.
In the event that we are providing capital to a developer that thanks to the 10 31 market is going to come back more quickly than we do we do allow them to sell the properties without a penalty.
But if we get refinanced out then there is kind of that may call yield maintenance provision within the loans.
That being said I don't foresee that being a giant portion of what we're doing.
But it is something that we think is pretty attractive right now where we can come in at a lower than 100% LTV, which is essentially.
What youre doing when youre buying a property.
And getting in an enhanced yield.
Okay. Thank you.
Thanks Steven.
Thank you.
Our next question comes from the line of Greg Mcginniss from Scotia Bank. Please go ahead.
Hey, good morning.
Can you just talk a bit more about the relationships that youre building with these merchant developers now at the 10 31 market has cooled a bit and does the pullback in net acquisitions versus 2022 reflects fewer.
Fewer opportunities.
Complicated.
Fundraisings.
These days or any.
Any details you can provide there would be appreciated.
Yes, sure I mean, I think back in October .
We were having we just werent really seeing a lot of great opportunities at pricing that made a lot of sense.
Still acquiring kind of net $90 million or so in the fourth quarter and getting above the $480 million, which was the guidance that we pulled.
During that call.
It shows that it did come back.
Enough for us to be able to deploy that capital and we're seeing.
A better backdrop now.
And more sellers that are willing to kind of adjust their pricing to current market conditions and then as it relates to.
Merchant developers.
I think done a lot of the legwork over the past few years trying to build those relationships with all of those different developers they have just chosen.
To focus on the 10 31 market, where the pricing has been significantly more aggressive now that that's gone I think all of that legwork has really paid off where we're we've got a.
Really good line of communication with all of the major developers and even a lot of the smaller regional developers that focus on the tenants that we're trying to grow with.
Okay. Thanks, I appreciate that.
And then the second one for me.
Following up on the last question that was just asked in terms of the investment grade exposure, which has been kind of lowering in quarter over quarter. As you go towards more investment grade like acquisitions.
How much of that is diversifying the types of tenants that you can be acquiring.
Versus yields that you can achieve.
That made sense with purely investment grade tenants.
Yes, I think we have just.
Yes, it had a concerted effort to go out and try to find more investment grade profile tenants there a little bit off of the radar of most of the other Reits and institutional buyers.
And we feel like we're actually taking in a lot of cases less less risk with the with those tenants and in some cases being able to get a little bit more yield and some of those have been more apt to look for sale leaseback financing, which could be I think youll, probably see more sale leaseback done across the space from maybe some groups that havent done as.
<unk> sale leasebacks, including us over time, but it's really just it's not a conscious effort to increase or decrease our investment grade.
Concentrations, it's really just a byproduct of us trying to find the best risk adjusted returns that we can.
And that May go up that May go down I think you're likely to see that.
Stay somewhere in kind of the 60% to 70% range like it has since we went public.
Thanks for the color.
Thank you.
Our next question comes from the line of Wes Golladay from Baird. Please go ahead.
Hey, good morning, everyone. A question on the merchant builder deal flow that Youre seeing is this going to be like a onetime thing where you clear out their inventory or are they going to continue building and it's going to be more programmatic with you Im just trying to get a sense of how sustainable this is.
Yeah.
At least that if we have the current dynamics of the 10 31 market not being there I would expect it to be programmatic with not only us I would expect other reached a type a similar answer to that.
Because they continue to build you have seen the growth plans of various different <unk>.
Retailers that you see in our top 20.
We're continually looking for ways to continue growing there.
They're just.
We're just going to have to have their developers focused on institutional buyers a little bit more than the 10 31 market like they have in the past.
Okay, and then do you have a watch list at this point and do you embed any bad debt in your guidance and then can you also clarify what is the cash G&A assumptions for this year.
So we do assume some small net bad debt I think the way to think about it is is that we look at what are reimbursable.
Dr. Kam Reimbursable, it's versus our Reimbursable expenses as well as non recoverable expenses and <unk>.
Bad debt and that is historically been and continues to be what we project to be less than 2%.
So for G&A the way I would think about that is that we're pretty much fully staffed now so our cash G&A is going to is going to rise more consistently with what you think about in terms of <unk>.
Salary increases benefit this year, we have the difference of the full year of our fully built out team versus last year, where we were averaging into that full build out. So that's how I think about it a.
A little bit higher than inflation.
Okay. Thanks.
Thank you.
Okay.
Thank you.
Our next question comes from the line of Linda Tsai from Jefferies. Please go ahead.
Hi, good morning.
Dollar general stores purchased where any purchase on the secondary market person being purchased from the distress merchant builders and then how would you determine which offer the greater value.
Yes.
Were a few that we acquired really in the third party market. Those were some shorter term leases that we got extended.
By working with the tenant there were probably four or five of those more on the on the family dollar side.
And then the the ones that we acquired from merchant developers that was.
That was dollar generals and so that was probably 75% 80% of the of the dollar stores that we acquired in the quarter.
And then on the merchant developers I think you said that there are like four five that do a lot of the construction for dollar general are they the same four or five that would do building across.
Our other major retailers to just trying to get a sense of how fragmented the market is for this pipeline.
Yes, I mean, there are a few kind of the smaller ones that are a little bit yeah, a little bit smaller than the bigger four or five that focus exclusively on dollar general, but there are most of the larger developers will adult tractor supplies and some of the other tenants that we're trying to grow it so it's a little bit of a mixed bag.
Thanks, and then just one last one does the $401 million in acquisition type the low end of earnings guidance.
I think you can think about it more.
<unk> in the midpoint.
Clinton is how I think about it.
Okay. Thank you.
Alright, thank you.
Thank you ladies and gentlemen, we have reached the end of the question and answer session.
Now I would like to turn the conference over to Mark Manheimer, Chief Executive Officer for closing comments.
Thank you operator, and thanks, everybody for joining us today look forward to seeing you all in the coming weeks at the upcoming conferences. Thanks a lot.
Okay.
The conference of net suite call has now concluded. Thank you for your participation you may now disconnect your lines.
Okay.
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