NETSTREIT Corp. Q1 2023 Earnings Call
Good day and welcome to the net Street Corp, first quarter 2023 earnings Conference call.
Today, all participants will be in a listen only mode should you need assistance during todays call. Please signal for a conference specialist by pressing the Starkey followed by zero. After today's presentation, there will be an opportunity to ask questions. If you would like to ask a question you May Press Star then one on your telephone keypad.
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Please note that today's event is being recorded.
At this time I would like to turn the conference over to Amy on director of Investor Relations. Please go ahead. Thank you for joining us for <unk> first 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 Www 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 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 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 today's.
Conference call is hosted by net Street's Chief Executive Officer, Mark Manheimer, and Chief Financial Officer, Dan Donlan, They will make some prepared remarks, and then we will open the call for your questions.
Now I'll turn the call over to Mark Mark.
Good morning, everyone and welcome to our first quarter 2023 earnings Conference call.
Before we begin I am pleased to welcome our new CFO and Treasurer, Dan Donlin to the necessary team.
Dan brings strong corporate finance capital markets and operational REIT experience through our platform.
Committed to helping the company generates sustainable long term value for shareholders welcome aboard Dan.
Turning to our first quarter results.
Had an active start to the year, despite the volatile capital markets environment.
Uncertain macroeconomic backdrop.
Our best in class portfolio continues to perform exceptionally well in the face of persistent inflation recession concerns interest rate.
Increases in higher volatility.
We've maintained 100% occupancy, 100% rent collections and any disruption to our tenant sales and profitability has been minimal.
Having spent a good portion of 2022 locking in significant portions of our capital structure by prudently accessing the capital when conditions were supportive we started 2023 with ample dry powder to make investments that meet our quality and return thresholds.
During the quarter, we completed net investments of $112 $7 million, including the acquisition of 20 properties for $67 $7 million at a weighted average cash yield of six 9% to senior loan investments, which are secured by 49 properties for $46 $1 million at a weighted average cash yield of nine.
3% two completed development projects for $2014 8 million and $4 5 million of additional funding to support ongoing development projects and.
And <unk> dispositions for $15 $8 billion at a weighted average cash yield of six 8%.
Notably based on total ABR, 95% of these first quarter investments were with investment grade and investment grade profile tenants.
Overall, while the net lease industry transaction market remains less active today than this time last year, we are seeing a healthy pace of opportunities at attractive prices with better terms as financing contingent and levered buyers remained sidelined.
While our first quarter net investment activity has a slightly ahead of pace versus our 2023 target we have taken and will continue to take a judicious approach to the investments we pursue.
We're extremely mindful when it takes when it comes to capital deployment and we are staying disciplined in our credit underwriting standards.
<unk> of assets.
As we have demonstrated over the past three years through a variety of macroeconomic environment, we can be nimble and capitalize on opportunities as they arise.
Currently stress in the regional banking sector has created dislocations in the net lease transaction market, which has provided us with opportunities to maintain our growth strategy momentum.
We remain in constant communication with existing tenant existing tenants developers and other landlords to provide financing solutions, where we see the best risk adjusted returns.
This solutions based approach with a growing number of Counterparties has helped expand our industry relationships, while increasing the number of opportunities for <unk>.
With that in mind, we have seen an increase in alternative investment structures, including mortgage loans.
In the first quarter, we funded $46 million of loans for our borrowers purchase of 49 convenience stores leased to speedway a subsidiary of 711.
The loan to value of the underlying collateral is approximately 60%.
In first lien position with no capital ahead of us.
The loans have a three year term and a weighted average interest rate of nine 3%.
This is a larger loan exposure for us it provides outsized risk adjusted value to necessary. In addition to demonstrating our creativity and deploying capital.
At March 31, our 100% occupied portfolio was comprised of 488 investments with 83 tenants contributing $108 $9 million of annualized base rent.
Tenants with investment grade ratings were investment grade profiles represented 82% of ABR.
A key part of our execution is recycling capital where the risk value for return is no no longer meets our criteria and in the first quarter, we accretively sold eight properties for $15 8 million.
Excluding investments associated with mortgage loans receivable the portfolio has a weighted average lease term of nine four years with no lease explorations in 2023, and only <unk>, 3% of total ABR expiring through 2024.
As we look to balance itself out as we look to the balance of 2023, we will continue to focus on scaling our portfolio of high quality tenants, while prudently managing our balance sheet and liquidity position. Furthermore, despite ongoing economic uncertainty we continue to believe our durable cash flow stream and attractive growth profile offer compelling total return potential for investors with that.
I'll turn the call over to Dan to go over our first quarter financial results and 2023 guidance. Thank you Mark and thank you to everyone joining us today.
I'm incredibly excited about the opportunities that lie ahead for net street and look forward to spending more time with the broader investment community over the coming weeks and months.
Turning to our first quarter earnings we reported net income of <unk>.
Core <unk> of 28.
And <unk> 30 per diluted share.
As it pertains to our G&A expense with a fully built that executive and senior management team. Our G&A should continue to rationalize relative to our asset base as we grow the portfolio at March 31.
Our balance sheet had total debt of approximately $480 million with a weighted average contractual interest rate.
Putting the impact of fixed rate swaps of three 4%.
We are giving consideration to the settlement of all outstanding four chairs our net debt to annualized adjusted EBITDA was four one times.
Which remains well below our targeted leverage range of four five to 555 times.
Moving onto capital markets activities in the quarter, we used our ATM to issue 147000 shares at a weighted average net price of $19 96.
Which generate $2 $9 million of net proceeds.
In addition, pursuant to a forward equity offering in August 2022, we settled $2 6 million shares in the quarter, which generate approximately $50 million of net proceeds.
As of March 31, 2020, 348 million shares for approximately $91 million remained unsettled under the August 2022 forward sale agreement regarding our dividend on April 25.
The board declared a <unk> 20 regular quarterly cash dividend to be payable on June 15 to shareholders of record as of June 1st base.
Based on this dividend amount, our <unk> payout ratio for the first quarter was 67%.
Turning to 2023 guidance, we are maintaining our <unk> per share range of $1 17 to $1 23.
This range assumes investment activity, including acquisitions completed developments and mortgage loans receivable net of dispositions of at least $400 million.
In 2023.
With that we'll now open the line for questions.
Operator.
We will now begin the question and answer session. As a reminder to ask a question you May Press Star then one on your telephone keypad.
If you are using a speaker phone please pick up your handset before pressing the keys.
I would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Eric Wolfe with Citi. Please proceed.
Thanks, Good morning, it's actually Nick Joseph here with Eric.
I'm wondering if you could walk through kind of your appetite or preference between the loans versus.
On balance sheet acquisitions, and how you think about underwriting those differently as you look to do deals.
Yes.
And I think the.
Speedway alone was maybe a little bit of a one off as it relates to not only the risk return there where we really saw what we felt like it was an outsized return for the risk that we're taking kind of stepping in at.
A 60% LTV.
Yes position ahead of all of the equity.
And getting a nine 3%.
Interest rates, I think thats, probably not likely to to appear again in the future. So.
I think I would think about it as being maybe a smaller piece of what we're going to be doing in the future certainly a little bit outsized in the first quarter I think it will probably be doing somewhere in the neighborhood of 5% 10% of volume on a go forward basis of course that can kind of move up and down quarter by quarter.
And I would expect those yields to be a little bit closer to where.
Where were buying properties.
Right now the transaction market as is.
Certainly in flux from sellers that.
This time last year, we're eager to sell their properties too.
Typically needs to be a reason for them to have to sell their properties or to.
Okay with the pricing that we're seeing today. So this was kind of an avenue of US building our relationships with a lot of those.
Future sellers as well as sprinkling in a little bit of really strong risk adjusted returns, but I think we are.
A little bit hesitant to make that a huge part of what we do just as we start to think about eventually those loans are going to get paid off and want to minimize any replacement risk down the road.
Thanks, that's helpful.
Are you thinking about current.
Yes, the equity cost of capital, but even if you if you wanted to and a weighted average basis there.
Versus acquisition cap rates and are you comfortable with the current investment spread or would you need cap rates to expand to really do more accretive deals.
Yeah, Hey, Nick it's stand on outlook first and foremost I think you should expect us to continue to prudently manage our balance sheet.
And maintain leverage within our targeted range of four five to five five times.
Given where our leverages today at $4, one using the impact of the Ford.
We can be judicious with how we deploy equity capital as we are highly mindful of investment spreads today.
Relative to our weighted average cost of capital.
When you look at our current cost of equity you think about the impact of our free cash flow and where we believe we can source debt in excess of five years, we're getting to anywhere from 100 to 130 basis points of investment spread.
Relative to where we can deploy capital today.
Thanks, and you're comfortable with that 100 to 130, how's that compared to history.
Yes, I think historically, that's been a little bit higher when we are certainly where we were in a much lower interest rate environment and.
And of course, we want that to be closer to the norm, but we're comfortable deploying capital with that type of spread.
Thank you.
The next question comes from Todd Thomas with Keybanc capital markets. Please proceed.
Hi, Thanks. Good morning, just wanted to circle back to the loan investments. So you have other loans on the book as well.
To the extent that additional opportunities arise is there a threshold I think you said, 5% to 10% maybe.
Volume going forward might.
It might be sort of the right way to think about it but is there a threshold for loan investments relative to the balance sheet, our portfolio that would govern how large that book might might be overall.
As in the future.
Yes, and I think right now we're in a position in a situation where.
There is heightened opportunities.
On the loan side, which I don't think is going to necessarily be the case long into the future. So.
In the short term I think thats, probably a good barometer, we don't want we don't want to let our loan book get north of 10%, although they're not all created equally so looking back at the loans that we've done in the past I think those are either going to end up where those will convert into us having a fee ownership of those assets. So there wouldn't be any disruption.
To the income.
Or are we get paid off.
At rates that are I think pretty easy for us to take that capital.
And redeploy accretively and so those are kind of a little bit less of a risk.
In my mind, as we kind of think about.
The reinvestment risk.
Yes, I think the typical type of loan.
In the future is likely going to be kind of you've got a group that.
Historically had relied on regional banks.
It's harder to get Ltvs higher harder to get that at all for a lot of lot of these types of developers in and other types of Counterparties and so right now there is an opportunity for us to kind of step in and provide 100% of capital and own the property to provide 100% of or 90% of the capital or 85% of the capital and collect all of the cash flow for you.
A period of time.
Where we get <unk> on each of those transactions. So there is there is some nuance to each of these and we're really trying to balance.
We don't want to take on.
25% of.
Our of our book the loans that are going to get paid off and then we can't redeploy the capital Accretively. So that's really kind of the way that we're thinking about it but if youre looking for just a threshold for for modeling purposes, I don't think were going to let it get north of 10%.
Okay got it and then.
In terms of the reinvestment risk there and I guess just for modeling purposes in general do you plan to provide some additional disclosure around the loan portfolio.
As that grows in order to.
Sort of.
Detail some of the maturity dates loan rates and some other terms it might be important for underwriting purposes.
Yes, I mean, we'll kind of have to evaluate.
As we start adding loans into the into the portfolio. If we feel like that is helpful to investors to understand.
The story, certainly something something that we would consider.
But I think we've added that into.
Some of our disclosure already in this quarter, which I think should give a clearer picture as it relates to the credit risk.
And then.
As it relates to loan maturities, we've kind of taken maybe a different tact than others as we think about.
Having two year loans three year loans versus 10, 15 year loans, which we've seen.
Some peers kind of take more of more of the latter approach, we kind of like to be able to be back at the negotiating table, a little bit sooner and reassess whether we'd like to be paid off or if we want to extend alone maybe get some extension fees and things like that.
If thats prudent at the time so.
We'll evaluate but certainly I think you can rely on us to provide disclosure to make sure that investors understand how we're deploying capital and what exactly the risks are within the portfolio.
Okay, and then in terms of the guidance I'm. Just curious was that was that loan or are those two loans almost $50 million at call. It 200, 250 basis point premium yield to your acquisition yields was that contemplated in the guidance and just as it pertains to the guidance than that.
Which you maintained is there anything.
Sort of offsetting.
Some of that premium investment yield.
That is impacting that.
The guide on the <unk>.
Syed.
Hey, it's Dan Donlan look yes. This.
One was contemplated in guidance.
And look given that we only set guidance two months ago and.
And Theres a lot of volatility out there in the world right now, we just thought it prudent to wait a few months before revisiting our guidance range.
Okay, Great alright, thank you.
Hi.
Our next question comes from Greg Mcginniss with Scotiabank. Please proceed.
Hey, good morning.
And thinking about the opportunity set for normal course acquisitions, where we had the speedway loan that helped to offset lower acquisition volumes. In Q1, what are you seeing in the transaction market, that's giving you confidence to maintain net investment volume.
Our guidance and when thinking about that 5% to 10% range on the secured mortgage loan investment going forward.
Yeah sure so yeah.
Yes.
We've seen a continued migration from late last year.
Of sellers that did not want to sell or having trouble, believing that cap rates had moved as much of that even though obviously interest rates.
Have moved and how they've seen enough comps out there where they've got some debt coming due or various other reasons why they are coming to the table, but we're seeing that bucket that we talked about on the last call of people really trying to hold the line as much as they can and then the second bucket of either sellers that need to sell or the ones that say, okay I need to transact.
Sure.
I don't foresee cap rates dropping like a rock anytime soon and so that second bucket continues to grow and we've seen the opportunities.
Increase in we've just had to be extraordinarily selective.
As it relates to the loans because I think that opportunity is certainly there for us, but we're seeing a lot more opportunities on the fee simple side than we had earlier in the year.
Great. Thanks, and then looking at the development pipeline.
Looks like you Havent had added any projects there I think in a couple of quarters can you give us some sense of how you're viewing developments today or partnering with with merchant builders, what that opportunity might look like at.
As compared to other uses of capital.
Yeah. So we saw certainly.
Some stress coming to merchant developers for quite some time.
We've acquired some properties from them when they were when they were willing to kind of come to cap rates that we thought.
It made sense, but when you think about the ones that are going out developing a lot of stores for some of the tenants that we're trying to grow with and have historically relied on regional banks and <unk>.
Selling the properties into the end of the 10 31 market.
Which historically has been much more aggressive on a cap rate basis than the institutions are willing to go that pressure has continued to build and we made the decision that there are other ways to partner with the developers than just funding development.
And so we've been working on a number of transactions.
Either providing equity takeouts at the end or buying some of their properties.
A couple of those will likely be some of the loans.
We do.
And I think in the next quarter will likely be providing a little bit more disclosure on some of those transactions. After they come to fruition, but I think they should be viewed pretty favorably by the market as I think we got pretty creative like we have in the past.
Should yield pretty pretty positive results.
Thanks, Mark and just to clarify on that so we should probably expect to see the development pipeline come down as other investments offset that that capital use.
Not necessarily.
A lot of our character.
<unk> Counterparties right now our developers and that's just going to be how we end up structuring those investments whether they are typical equity takeouts funding the development.
Some loans that could potentially convert into fee ownership just regular loans are just equity takeouts are they at the end of construction there.
There is a number of types of transactions that we're working on right now some of which have closed already but some of which are still in the pipeline are being negotiated.
Alright, Thank you very much I appreciate the time.
Thank you.
The next question comes from Josh <unk> line with Bank of America. Please proceed.
Hi, This is Josh.
Josh.
And so I just wanted to ask about as you've been increasing your.
Investment grade tenant base, what is the competition for these assets been looking like.
Yeah sure so I mean I'd say.
Overall, the competition is very much muted versus what we've seen in the past I mean, the leveraged buyer, whether that'd be private equity firms or even some larger family offices that have relied on using that capital is a big part of their capital stack.
They are largely out of the market, it's become very difficult for 1031 buyers.
To achieve the yields that they that they need.
When they go out and try to source. Some of these transactions and then go to their community banking and try to get some debt. So we've really.
Not only seeing the opportunity set pick up and I think transaction volume pick up industry wide in the second quarter versus the fourth quarter and first quarter, but were operating in an environment with significantly less competition.
Great. Thank you.
Our next question comes from Alex Fagan with Baird. Please proceed.
Hey, guys and welcome to the team Dan I have a <unk>.
<unk> if you can provide some more color on external growth opportunities and maybe any more detail about what's in the pipeline and Scott that youre seeing.
Yes, I mean, I think what youll see us acquire a lot of the tenants will be similar I think there will be a couple of new names that we've tried to get in our portfolio for a long period of time.
That may come in some smaller portfolio. So we're certainly excited about the credit quality of.
What youll see us buy a little bit a little bit in the in the grocery sector. Some of the discounters and dollar store.
And quick service restaurants is another area that we've seen a little bit more opportunity than we had in the past at cap rates that makes sense for us typically that's the ones that we really have tried to do business with the cap rates historically had been a little bit too aggressive for us, but we've seen some movement there.
So I think youll see it likely won't deviate much from where we've been in the past other than other than a few new names.
Yeah.
Yeah.
Yeah.
Our next question comes from Linda Tsai with Jefferies. Please proceed.
Hi, good morning from evaluation perspective, what kind of multiple would you assign to the loans versus the rest of your portfolio.
Yes, and yes.
It's a certainly a smaller portion of the portfolio.
And a lot of it certainly what I think we will be doing in the future.
We will be pretty similar cap rates I don't think they're necessarily needs to be.
Too much of a differentiation there.
Thank you.
Okay.
As a reminder, if you do have a question. Please press Star then one on your telephone keypad.
The next question comes from Kevin Kim with Truest. Please proceed.
Thanks, Good morning.
Just wanted to go back to the loans that you made this quarter.
What is the interest coverage look like from Speedway.
Yes, so we're essentially taking all of the rent.
And that nine 3% so.
The cap rate on the transaction from the buyer's perspective, it was about a $565 seven cap rate.
And then we collect all of the cash flow I think what's interesting for the borrower and the reason why if this was an interesting opportunity for them.
Is that they have uncapped CPI bumps, which should be hitting in about two and a half years and so when those increases hit.
That could be a good opportunity for them to either refinance us out or we could extend terms depending on what we want to do.
At that point in time, but Thats, certainly there will be a lot of value creation associated with those properties when the CPI.
CPI bumps hit and the borrower is a large 711 developers so they've got a really strong relationship directly with the tenant.
Which is how they were introduced to this opportunity.
And have really good insight as to the performance of the locations. So.
Strong portfolio, we would certainly like to own them, but just not at the cap rate that the that the borrowers paying.
And just to clarify.
I was asking about the four wall coverage for the entire interest payment.
What does that look like.
Yes. So they are it's north of that north of three times.
Okay, and can you remind us like what types of tenants make up the sub investment grade profile group within your portfolio and if any of those tenants are you seeing any kind of incremental pressure from the banking changes that we've seen.
Yeah. So I mean, a lot of that is going to be quick service restaurants.
And that was a big part of what we did to the portfolio before we went out and tried to raise capital both privately and publicly going back to 2019 is getting all of the all of the tenants and locations out of the portfolio that we did not want to Ireland, we did not want to own long term and so what we're left with.
As in general.
Quick service restaurants, and a lot of locations that had that generate the extraordinarily high rent.
Rent coverages.
I think higher than what you'd see from maybe some of the sub investment grade peers with what we're left with in those in those.
In that portfolio and locations that we feel like the best risk adjusted return.
Yeah for us was to hang on to those properties.
And thank you and congrats Dan.
Thank you thank you Kevin.
At this time there are no further questioners in the queue and this does conclude our question and answer session I would now like to turn the conference back over to Mark Manheimer for any closing remarks.
Thank you all for joining US today, we look forward to speaking with you all again very soon.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Yeah.
Yes.
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Okay.
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