Q2 2024 NETSTREIT Corp Earnings Call
Speaker Change: [music].
Greetings and welcome to the Vets first Corp, second quarter 2024 earnings call.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
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Speaker Change: It is now my pleasure to introduce your host.
Amy urn.
Thank you you may begin.
Well. Thank you for joining us for <unk> second quarter 2024 earnings Conference call. In addition to the press release distributed yesterday after market close we posted a supplemental package and an updated investor presentation, which can be found in the Investor Relations section of the company's website at Www Dot net street Dot com on today's call.
<unk> remarks, and answers to your questions may contain forward looking statements as defined in the private Securities Litigation Reform Act of 1995 forward looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today for more information about these risk factors. We encourage you to review our Form 10-K.
For the year ended December 31st 2023, 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.
For definitions of our non-GAAP measures, we considerations to the most comparable GAAP measure and an explanation of why we believe such non-GAAP financial measures are useful to investors today.
Today's conference call is hosted by net streets, Chief Executive Officer, Mark Manheimer, and Chief Financial Officer, Dan Donlan.
He 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.
Thank you Amy and thank you all for joining US this morning on our second quarter 2024 earnings call.
We had a steady second quarter completing over $116 million of gross investment activity at a blended cash yield of seven 5%.
A larger portion of our acquisitions this quarter were sale leaseback transactions as we have seen more attractive risk adjusted returns from our opportunity set in that area.
Due to the difference in sourcing channels this quarter, our acquisitions had an attractive rent growth profile with longer lease terms at $16 seven years average remaining lease term.
We have a new top 10 tenant this quarter after two property additions with lifetime fitness, a premier health club provider, whose operations have proven resilient in the current economic climate due to the change focus on the more affluent customer.
This direct sale leaseback was part of a larger package, which allowed us to select the two best assets from the group at highly attractive price points.
One of the assets is a former United States Tennis Association location in the northern suburbs of Atlanta.
Which has been expanded and upgraded by lifetime over the past few years.
The other asset there's another infill location in Austin, Texas, which consistently performs as one of the top five most profitable locations and the lifetime chain.
While we have seen a number of sale leaseback opportunities with lifetime over the past few years. This was the first opportunity that they gave us access to some of their most attractive real estate at accretive cap rates.
Appropriate basis.
We may selectively add to this tenant concentration if we can continue to acquire top performing assets at favorable pricing with a reasonable basis.
On the development front, we commenced rent on six projects totaling $12 million.
Our current development pipeline consists of 12 projects with a total estimated cost of $39 $6 million, which includes estimated remaining funding of $12 million.
Moving on to dispositions, we continued to execute on strategic asset sales to recycle the capital into investments with longer leases and better rent escalations and decreasing our exposure to certain times.
We completed six dispositions in the quarter for total proceeds of $13 million at a blended cash yield of six 8%.
At quarter end, our portfolio consisted of 649 investments with an ABR of $148 million. Our 90 tenants operating in 26 industries across 45 states with 83% of our portfolio leased to investment grade our investment grade profile to us.
Our weighted average lease term remaining on the portfolio was $9 five years with less than 4% of leases expiring through 2026.
As we look to further improve the diversity of our portfolio. We will continue to explore all acquisition sourcing channels, where we can get the best risk adjusted returns, including sale leaseback opportunities that give us access to well located real estate, where the tenant generate significant cash flows at a very high rent coverage.
Speaker Change: Well, having a large number of publicly traded companies in our portfolio has created headline noise for us. Most recently, we believe the economic impact to our cash flow generation should be negligible over the long term.
As a reminder, we do not only rely on corporate credit of our tenants, but also the unit level performance of our assets and the quality of our real estate collateral.
The two most topical tenants in the news had been Walgreens and Douglas as it relates to Walgreens.
We have just one lease expiring before 2029 and it has a high performing asset with a de minimis renewal risk as mentioned in the past, we maintain an ongoing and constructive dialogue with Walgreens, which allows us to proactively asset manage our stores and real time.
That said, we continue to believe we own some of the better performing stores, which would limit our downside risk.
With regard to big lots, they recently announced the closure of more than 10% of their stores. We have one location on that list and based on our assessment of the market. We are confident in our ability to re tenant the location with potential upside in rent.
The remainder of our big lots stores generate better than average foot traffic with the rents that we believe are at or below market with attractive real estate fundamentals.
As we look at look out to the remaining your half of the year. We were focused on further enhancing our portfolio's diversification with tenants that have strong management teams and hop right in defensive industries.
Before I hand, the call over to Dan I want to discuss the fraud incident that occurred during the quarter. The company was the victim of a criminal scheme involving a business email compromise of an employee that led to two fraudulent transfers totaling $3 $3 million to a third party in person, adding one of our development partners.
The result was a $2 8 million dollar loss net of insurance recoveries.
When we learned of the issue we took immediate action, including blocking access to the compromised accounts and launching a review with the assistance of third party experts.
Investigation has determined this isolated event poses no further threat to the company or its partners and we believe we have taken the appropriate steps to prevent that from occurring again.
With that I'll hand, the call to Dan to go over our second quarter financials, and then open up the call for your questions.
Thank you Mark.
Looking at our second quarter earnings, we reported a net loss of $2.3 million or three cents per diluted share.
Core for phone for the second quarter was $23 $4 million or <unk> 31 cents per diluted share and <unk> was $23 $8 million or 32 cents per diluted share, which was over a 6% increase versus last year.
Turning to the expense front total recurring G&A declined 8% year over year to $4 6 million, while recurring cash G&A declined 13% year over year to $3 3 million and.
In addition, with our total recurring G&A, representing 12% of total revenues in the quarter versus 16% of total revenues in the prior year quarter. Our G&A continues to steadily rationalize relative to our revenue base.
Turning to the balance sheet, our total adjusted net debt, which includes the impact of all foreign equity as of quarter end was $464 million. Our weighted average debt maturity is three six years and a weighted average interest rate was 4.43%.
Clearly an extension options, which can be exercised at our discretion, we have no debt maturing until January 2027.
During the quarter, we sold 1.6 million shares on a forward basis from our ATM program for net equity value of $29 million.
At quarter end, our liquidity was 569 million, which consisted of $14 million of cash and 302 million available on our revolving credit facility and $254 million of onset of afford equity.
To leverage our adjusted net debt to annualized adjusted EBITDA was three four times at quarter end, which remains well below our targeted leverage range of four and a half to five five times.
Onto guidance, we are maintaining our 'twenty 'twenty four F O per share guidance of $1 25 to $1 28.
We also continue to expect cash G&A to range between 13, and 14 and a half million dollars, which is exclusive of transaction costs and one time severance payments.
Lastly on July 23rd the board declared a quarterly cash dividend of 21 cents per share, which represents a two 4% increase from the prior quarter, but David will be payable on September 13th to shareholders of record as of September 3rd.
Based on the dividend amount or if a payout ratio for the second quarter, 66%.
With that operator, we will now open the line for questions.
Thank you <unk>.
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One moment, please while we poll for questions.
The first question is from Wes Golladay with Baird. Please.
Please proceed with your question.
Hey, Good morning, guys can you talk about what categories are in the acquisition pipeline and the held for sale assets.
Yeah sure. So yeah. It is.
Pretty big mix of different types of transactions that we're looking at there are some sale leaseback.
Still some yeah, we're finishing up some more developments so I have a handful of dollar stores left left to close.
But quick service restaurants.
Speaker Change: Tracker and supply kind of pretty pretty typical from what from what you've seen in the past.
Okay and then when you go back to the Big lots comment you mentioned potential upside in rent I know you have a low rent overall for the big lots can you talk about where the rent is for the asset that was I guess close and are you looking for term income and any capex needed.
Yeah sure. So the the rent on that location is $5 29, a foot so pretty low rent pretty attractive.
Real estate and it has not closed yet and maybe they came out with the closure list are indicating 149 stores that will close that in but that is on that list. So they are likely to going to start some going out of business sales et cetera. So that's going to take a little bit of time and then we would just look to re tenant the asset in the event that we'd take it back up there.
You know if they filed bankruptcy at some point in time, but theres still seven years of lease term on there. So if they if they were to reject the lease we would get some we'd get a lease termination payment and then.
And then we would look to three times the assets, but we've already been out in the market talking to some tenants as well as a broker that's pretty familiar with the location and there is already some interest in that location.
Okay, and then stop and shop has been in the news how do you feel about your exposure there and are there any other tenants on your watch list.
Yeah sure. So yeah stop and shop, you know, we've got two locations, which is a little bit less than 2% of revenues.
Speaker Change: I think they announced 32 closures are that they're going to be going through none of ours.
Are affected by that and you know, we don't really see any Arista Eric to our locations are we have one in Beekman, New York that is currently getting extended and they're taking their five year option and then one in the summer Ah New York as well that's one of their top performing assets. Some term on it so really don't see any risk associated.
With that tenant and then of course, you know big lots, yeah, we certainly are paying attention to what's going on with them.
Okay. Thanks, I'll hop back in the queue.
Thanks, a lot.
Thank you. The next question is from Smedes Rose with Citi. Please proceed with your question.
Hi, Thank you.
Wanted to ask you a little bit just about overall acquisition activity, because I guess at least relative to our expectations, but we were surprised to see the pace of activity slowed them kind of sequentially and it seemed I.
I was just trying to square some of your remarks in the first quarter, where you kind of thought activity would be in line or ahead of I just kind of wondering maybe what were some of the dynamics that you saw during the quarter that caused overall activity to slow.
And just wondering if you could maybe provide an update on what you've seen or you know kind of your pipeline thus far in the third quarter.
Yeah sure Anna.
The pace has been pretty similar I think maybe slowed down a little bit on the margin.
But we've just been very selective in terms of what assets, we're willing to take into the portfolio and just trying to be prudent with our capital.
We've raised back in January.
But I would expect us to have a similar pace that we did last year.
This year, it's kind of as we look out for the next 60 90 days.
Okay, and then could you just maybe talk a little bit more about the lifetime assets, obviously brought the overall investment grade.
Profile of your investments down would you expect over time, you know that that's going to move back into the low to mid 80% of your total investment activity or.
Yeah, I mean, I think we're maybe a little bit less dogmatic about whether something is investment grade or not investment grade or investment grade profile. If we're kind of looking at not only the corporate credit what industry that tenants and what headwinds or tailwind that might be affecting.
That individual tenant or that industry.
How profitable the locations are and then of course in the event that we ever have to take a property back like you're saying with big lots that we're gonna be able to backfill that location.
And replace the rent so it's.
You know kind of you know a lot of different factors that kind of go into what we're looking at buying right.
Right now we're seeing more on the sale leaseback side, which is gonna be typically some investment grade profile. Some sub investment grade occasionally an investment grade tenant there's kind of a large transaction right out in the market right now that's with an investment grade tenant.
And so yeah, I think it really had more to do with our sourcing channels, where we were getting the best risk adjusted returns last year.
Which was we did a lot of blend and extends two years ago, and then last year, we're doing more on the development side. Those just happened to be more with investment grade tenants and so you know from.
From the time of our IPO, we came out and said we're you know we'll use it as a guidepost for investors, saying will be between 60, and 70% actual investment grade, which we've kind of kept to that we kind of clipped over 70% there for a little while but I think we're likely to stay somewhere around that range.
Okay. Thank you I appreciate it.
Thank you. The next question is from Handel St Juste with Mizuho. Please proceed with your question.
Hi, Good morning. This is Ravi here again the line for Bell Whats the bad debt Reserve. That's currently embedded in your guide right now and why not raise the guide at this point given that it seems that youre above pace from an acquisition standpoint versus last year.
Yeah, Hey, Ravi.
Good question on the on the credit loss as we started the year, we sit at the low end of guidance, we were modeling 100 basis points and at the high end of guidance, we were modeling basically nothing.
As we've gotten through six months, we're now modeling 50 basis points at the low end and essentially nothing at the high end as far as the decision not to raise guidance with five months left in the year, we were comfortable leaving the midpoint at 126 five.
Mainly because with almost 15 million shares.
Unsettled through our forward sale agreements the dilution associated with those depending upon our stock price can have a meaningful impact.
On the share count and therefore, our earnings per share. So we just wanted to see a couple more months of trading as well as a couple more months of activity before revisiting our guidance.
And in October.
Got it that's helpful and just one more here would you say that your acquisition strategy has shifted now more of a focus on experiential real estate, rather than and the dollar stores and pharmacies that currently make up a large part of the portfolio.
No I wouldn't say that our strategy has really shifted at all in fact, we looked at a number of lifetime fitness sale leasebacks over the past.
Speaker Change: Call it three or four years.
Those trade at one traded at a $5 nine and the other traded in the sixes. So we just felt like the pricing was a little bit more aggressive in the in the us.
That didn't perform quite as well as the assets that we're able to get here. So this was just a unique opportunity I think.
To grow with a tenant that we think is.
Yes.
<unk> center with very high quality with high quality real estate.
And yes, I mean, the Austin location consistently generate topline of cash flows across their entire chain and then the Atlanta asset is somewhat unique in that it's you know just you know in the Peach Peachtree corners suburb just north of in just north North of Atlanta, We acquired that for about $800000 an acre so and it is.
Zones that you could convert it to residential so even if we ever took that asset back.
We would actually make money on that asset so somewhat unique.
Characteristics about the about that transaction.
But we are always looking at the quality of the real estate unit level performance as well as the corporate credit.
And felt like that fits very well within within our portfolio. We were just priced out on the last several transactions with lifetime in the past.
Got it that's helpful. Thank you.
Thank you. The next question comes from Greg Mcginniss with Scotiabank. Please go ahead.
Oh, hi, good morning.
What do you think changed at lifetime or on the demand side. So those are assets that the boxes are now pricing at an attractive basis for you and are there other non I G operators are that you're now looking to pursue so it might see it.
The historical bias towards investment grade or equivalent acquisitions start to shift.
Speaker Change: Yes, I mean, I would say what has changed with lifetime is really just what has changed across the entire market.
Yes.
Interest rates have an impact there, but there's just.
Such a little competition out in the market versus where we were two three years ago, where there was a private equity there was a lot of 10 31 buyers. Some large family offices that could rate really big checks. Most of those are completely sideline. So you have you know a handful of public Reits that are that are still active but you know.
I think that is really the the demand side, it has kind of fallen off whether or not not as many buyers on the competition side. So I think that's really what's driving the situation with lifetime.
Yeah, I mean, I think you know, we're always looking for new tenants or open to sale leaseback opportunities. We're up into really every different channel that we acquire assets through.
And right now it does seem to be that the sale leaseback channel is a little bit more attractive where we're getting very high quality real estate at a very low basis with high rent coverage with tenants that are growing that we.
Think of it.
Blue skies ahead of them, so certainly looking at.
Number of those types of opportunities, but then we're also looking at a lot of grocery store.
Transactions and other investment grade type tenants that you've seen us acquire in the past.
Okay and on those lifetimes or you're getting p&l's on those and can you disclose the rent coverage.
We do get unit level coverage I will just say that.
They are very high.
Okay. Thanks, and one more just on the balance sheet, so given the increasing expectations.
We will see hopefully that Ah that costs are coming down with rate cuts. How are you thinking about the $150 million accordion remaining on the term loan versus just issuing a new loan and if you were to tap the accordion do you plan on on swapping that.
Yeah.
Yeah, Hey, Greg we would look at doing both it kind of just depends on you know where bank demand is.
The five year swap rate today is around 380 basis points are spread over that swap rate is about 125 basis points. So you know.
All all in you're looking at very low 5%.
I think.
I don't think we're looking at doing anything though it on that front until we get out to 2025, you know our credit facility.
Comes due in August of 2026, and typically you start to look to recast that and look at the rest of your term loan debt at the same time. So that's probably in early 2025 events. So it's a little too early to say, what we may or may not do but our preference certainly is to continue to push out our debt maturities.
Throughout the course of the next few years.
Okay. Thank you.
Okay.
Thank you.
The next question comes from <unk> with Keybanc capital markets. Please go ahead.
Great. Thanks for taking my question I'm, assuming you have largely completed <unk> investment pipeline and wanted to get your sense of where cap rates and volumes are trending so far in and are you seeing the early indication of where cap rates could shake out for your <unk> pipeline.
Yeah always difficult for us to project too far out, but yeah, I mean, I think third quarter likely to see cap rates I think they've really flattened out and so you saw us.
Posted a similar cap rate second quarters will be the first quarter.
We don't think they're necessarily going up here in the short term, but you know these things can certainly change.
He quickly.
Speaker Change: Okay got it. Thank you and then could you provide some color on the current in place rents on the 27 Walgreens. So you have and what do you think the market is that for those properties.
Yes, so we're about $21 a foot on average and I think they're all a little bit different but I think we're probably slightly above market.
Okay got it thank you.
Thank you.
Joshua <unk>: The next question is from the line of Joshua <unk> with Bank of America. Please go ahead.
Hi, Good morning. This is farrell granted on behalf of Josh.
I just wanted to ask I guess in terms of the spread that you're seeing between I G and non AG I'm curious if you can comment on that and if youre seeing any shift at all in terms of cap rates and pricing.
Yeah, No that's fair.
Really good question, so historically, what we've seen in.
And the difference between non investment grade versus investment grade and what we've acquired is it's really only been a 40 or 50 basis points, though.
Pretty tight.
But what we're currently seeing and of course, there's a lot of factors that influence.
The cap rate is not just the you know whether it's investment grade or not but we're seeing that a little bit wider than what we saw over the past four years.
Great and I guess also just kind of thinking bigger picture I'm, giving the consumer being under pressure are you seeing this.
Specifically impact the stores in your portfolio and are you ceding financials for a certain percentage of your portfolio that you been monitoring.
Yeah, no that's it.
A great question, so that's really where you're seeing any level of distress as is the lower income consumer combined with anything that's discretionary so where people are getting squeezed with inflation, they're kind of looking at their their monthly budgets and saying to make this work I can't spend money on the discretionary items.
I have to you know obviously you have to buy what you need so and that's really a big loss there.
They are consumers kind of kind of the mid to lower income consumer a lot of what they sell is discretionary.
You have seen them really struggled since inflation started really kicking in and Thats really the big driver with with Walgreens.
Is that their their.
Their consumer is looking around the store and saying I don't really ended the I don't need to buy a lot of what you happier and they're pushing back on pricing and so you've seen the margins as it relates to the Walgreens shrink from 23%, which was a pretty steady for a long period of time down to 18% and that's you know a heavily inflation driven with a lower income consumer.
Okay. Thank you so much.
Thank you.
We have a follow up question.
Sorry. The next question comes from Keybanc, Kim with <unk> Securities. Please go ahead.
Thank you good morning under lifetime assets can you just talk about the average age of those assets.
Yeah, I mean, they're there.
Yes fairly new are the one in Atlanta.
Kind of getting redone I used to be the United States Tennis Association location. So that's gotten a pretty big makeover. So it's essentially a pretty new building and then often is only three years old.
Okay great.
And on your cost of capital.
I mean, obviously you guys are having a great balance sheet and an excellent position, but your equity price isn't quite efficiently priced how should we think about this going forward I know you have some runway to continue to buy but thereafter and how do you think about funding your next round of deals.
Yeah, he keybanc with their leverage at three four times, we can execute on our plan for the rest of the year and still in the year at or below.
The low end of our targeted range of four five to five five times so.
So we do have plenty of runway as you know but.
Right now we can achieve spreads just slightly north of 100 basis points, which means we can probably grow earnings year over year somewhere around 2% to 3%.
I don't think we are in a rush to raise equity, but we're confident that as we continue to execute our plan that our cost of equity will start to improve.
Particularly relative to the peer group given the embedded cash flows that we have and the strength of our portfolio.
But for now you know where.
We're being very very judicious with how we manage our equity capital.
Okay. Thank you guys.
Thank you. Thank you. The next question is a follow up question from Wes Golladay with Baird. Please proceed with your question.
Wes Golladay: Thanks for taking the follow up if we're to look at your Walgreens exposure of five 9% of ABR. How much do you think is at risk of closing just being dark and paying and then how much term would you have on those leases and do you have an estimate of.
I E.
I guess, the net value at risk of those Walgreens would be.
Yeah.
Tough to predict you know what.
What they're going to do they definitely have mentioned they're taking.
A look at a large swath of their of their properties and that theyre going to try to turn them around I think it's.
Prudent for them to do portfolio reviews, I think you know quite honestly, it's a little bit overdue.
But yeah I mean, we're in constant conversations with Walgreens.
And they give us pretty good insight as to what Theyre thinking as it relates to their source.
If they are generating positive cash flow and if there are locations that are committed to long term a large number of the transactions that we did with Walgreens if you recall.
Our blend and extend opportunities so where we would go out and buy a short term lease and get it extended before we close so showing that they are committed to the location of the long term, obviously things have gotten a little bit worse for them. As you know we just discussed their margins. So that I think that that list has probably grown in with their new CTO I think.
Hi.
Speaker Change: Looking at a larger portion of the source.
Which I think which I think it's fair, but that being said, we've got nine years weighted average lease term.
Locations that generally do pretty well and we know the location that's coming up in 2028 is one of the better performers in the chain and not not something that they're considering so yeah. I mean, I think it could be ratable over time, where we could take a store or two you know over the past over the next six or seven years, but it's just not going to have.
A meaningful impact on earnings.
Okay. Thanks for that and then just one last one on the the fraud issue and just the last we're gonna here, but is there anything changing on the internal controls or is it just a one time event.
When we get to third quarter everything will be just in the in the rearview.
Yeah, that's that's exactly correct.
Immediately rectified the situation reiterated the importance of falling our existing processes and how not to deviate from the preset procedures. Secondly, we enhance our peers, our procure to pay procedures bad in certain redundancies to the process and lastly, this was companywide we stress the importance of remaining very vigilant and sketch.
Nickel potential fraud in the workplace. So we would have 100% would tell you that we view this as a onetime event and we've done everything we can to prevent it from occurring in the future in our view.
Okay. Thanks, everyone.
Thanks, a lot. Thank you.
Before we take the next question a reminder to all participants that you May press star one to ask a question.
The next question comes from Greg Mcginniss with Scotiabank. Please proceed with your question.
Hello again.
Given the two lifetimes at around $70 million I guess, we were somewhat surprised by overall acquisition volume. This quarter were there deals that fell through or pushed out and what gives you the confidence transaction volume going forward will be in line with what we've seen historically absent these larger deals or.
Are there other higher ticket assets you're pursuing.
Yeah and to be clear, what it wasn't $70 million is less.
No less than that but but yeah, I mean, it's pretty normal for us to have quarters, where we do a lot of onesie Twosies small portfolios and then we've had you know portfolio is larger than that where we did some sale leasebacks with 711 in the past.
A little bit more than $70 million.
So we're just kind of looking at what's our opportunity set what can be closed in the quarter and then we try to chop off the.
At least sufficiently priced assets and get the best risk adjusted returns we can.
And we kind of have an idea of where we sit at all times during the quarter. So we're very comfortable that we can continue the same pace that we have for the first four years.
Okay. Thank you.
Speaker Change: Okay. 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.
Thanks, everybody for joining us today I hope you have a great rest of your summer and we look forward to speaking again in the future.
Thank you. This concludes today's teleconference. You may now disconnect your lines at this time.
Thank you for your participation.
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