Q1 2025 NETSTREIT Corp Earnings Call
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Greetings welcome to net Street Corp, first quarter 2025 earnings conference call. At this time, all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce Amy on Investor Relations. Thank you you may begin.
Speaker Change: We thank you for joining us for metrics first quarter 2025 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 Ww does not state Dot com.
Speaker Change: On today's call management's remarks, and answers to your questions may contain forward looking statements as defined under private Securities Litigation Reform Act of 1995 forward looking statements address matters that are subject to risk and uncertainties that may cause actual results to differ from those discussed today.
Speaker Change: Information about these risk factors, we encourage you to review our Form 10-K for the year ended December 31st 2024, and our other SEC filings. All forward looking statements are made as of the date hereof and that street.
Speaker Change: No obligation to update any forward looking statements in the future.
Speaker Change: 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.
Speaker Change: Conciliation 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 <unk>, Chief Executive Officer, Mark Manheimer, and Chief Financial Officer of fandom. 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.
Mark Manheimer: Thank you Amy and thank you all for joining US. This morning on our first quarter 2025 earnings call. During the quarter, we made additional progress on reducing our top five tenant concentrations and we continue to see healthy performance from the stores that we own.
Mark Manheimer: On the external growth front, our team continues to source attractive investment opportunities, but our investment pace remains more measured versus prior years.
Mark Manheimer: Liberate stance is rooted in our desire to maintain a low leverage balance sheet and our view that our cost of capital needs to better reflect our portfolio strength and best in class operating performance, which I will discuss later in my prepared remarks.
Mark Manheimer: During the quarter, we completed $97 million of gross investments at a blended cash yield of seven 7%.
Mark Manheimer: Weighted average lease term for these investments was 9.2 years with investment grade and investment grade profile tenants, representing 66% of ABR. Additionally.
Mark Manheimer: Additionally, more than half of our activity. This quarter was accretively funded with loan pay offs and disposition proceeds the latter of which totaled $43 million across 16 properties at a seven 3% blended cash yield.
Mark Manheimer: Well, we have and will continue to maintain a measured approach towards another net investment activity. We are currently seeing no shortage of great investment opportunities across various capital deployment strategies.
Mark Manheimer: As such we stand ready to accelerate our investment pace to levels that are similar or above where we have acquired in the past.
Mark Manheimer: We see a more sustained improvement in our cost of equity.
Mark Manheimer: Turning to the portfolio, we ended the quarter with investments and 695 properties that were at least a 101 tenants operating in 26 industries across 45 states.
Mark Manheimer: From a credit perspective, 71% of our total ABR is leased to investment grade or investment grade profile tennis.
Mark Manheimer: Our weighted average lease term remaining for the portfolio was $9 seven years, let's just one 3% of ABR expiring through 2026.
Mark Manheimer: Our focus on granular and fungible assets has led to continued demand for our properties when we decided to decrease our concentrations.
Mark Manheimer: This strong level of demand resulted in our top five tenant concentration declining 70 basis points to 28, 2% of ABR, including a 50 basis point reduction in our top tenant dollar general to eight 1% of ABR.
Mark Manheimer: While we have made tremendous strides towards our diversification goals, we are not slowing our efforts as evidenced by our expectation for strong disposition activity at lower cash yields in the second quarter.
Mark Manheimer: We remain confident that we can achieve our previously articulated diversification goals and we continue to see these cells being completed at accretive spreads to where we can invest which is something we have done every quarter in our history.
Mark Manheimer: From a tenant perspective, we continued to add new high quality and low risk tenants to our roster, including Gerber collision, who is now a top 20 tenants as well as many other large grocers convenience store operator is quick service restaurants, and auto service strengths.
Mark Manheimer: We continue to avoid specialized real estate and large less fungible boxes, given their limited reuse potential inexpensive nature of Repurposing the real estate.
Mark Manheimer: Similarly, we continue to have limited exposure to the sectors that are more susceptible to distress when the economy slows and.
Mark Manheimer: In short, we believe our portfolio, which drives 88% of ABR from necessity discounters and service oriented industries can weather any economic environment and avoid large losses should credit events tests, our real estate underwriting.
Mark Manheimer: With that in mind, we were the only net lease REIT to report zero credit losses during Covid and we have maintained best in class performance in this regard since coming public nearly five years ago.
Mark Manheimer: Our credit underwriting continues to prove out despite various negative headlines and store closure announcements.
Mark Manheimer: As an example, our loan credit event with Big lots resulted in just 20 basis points of credit loss with seven of our eight locations being assumed by variety of wholesalers were ollie's bargain outlet.
Mark Manheimer: Well, we have always taken a less hyperbolic approach at that street I'd be remiss to point out that our outcome as it relates to our big lots exposure draws a stark contrast to the impact felt by other landlords are big lots that can only be explained by our strong underwriting and attentive asset management.
Mark Manheimer: Yes.
Mark Manheimer: Well, we have had some of our larger tenant concentrations experienced negative headlines in the past we have had virtually no impact to our in place cash flow since the since inception.
Mark Manheimer: And while we expect this positive performance to continue despite two of our tenants family dollar in Walgreens being subject to going private transactions based on our understanding of the deal structures and associated EBITDA standalone entities, both companies intend to operate with low leverage.
Mark Manheimer: Similarly, given that both companies closed a large number of stores well in advance of these announcements. It is our understanding that neither company intends to close many additional locations beyond what has already been announced.
Mark Manheimer: Lastly, we see reasons for optimism on the operations front as the new leadership at family dollar plans to return the brand to the roots that made the brand successful prior to the merger with dollar tree well Walgreens stands to benefit from a more focused team with a broader understanding of retail.
Dan: Before handing the call over to Dan I wanted to reiterate a message that we have consistently provided in the past.
Dan: We will not sacrifice our balance sheet for growth nor will we grow for the sake of asset growth without not appropriate level per share earnings growth.
Dan: We will remain opportunistic as it pertains to new investments and we are more than capable of ramping our investment pace should our investment spreads turned more favorable.
Dan: Given the high quality and resilient nature of the portfolio that we own and manage and the various catalysts, we see materializing from completing our tenant diversity goals as well as achieving an eventual investment grade credit rating. We are confident that our growth from a small base narrative and gain further traction as we execute our strategy with that I'll hand, the call though.
Dan: So Dan to go over our first quarter financials, and then open up the call for your questions.
Dan: Thank you Mark.
Dan: Looking at our first quarter earnings we reported net income of $1 $7 million or two cents per diluted share.
Dan: For the quarter was $24 six nine or 30 cents per diluted share and <unk> was $26 two nine or 32 cents per diluted share, which is a three 2% increase over last year.
Dan: Turning to the expense front, our trouble recurring G&A in the quarter increased 5% year over year to $5 1 million, which is mostly the result of increased staffing and further investment in our team that sat with our total recurring G&A, representing 11% of total revenues this quarter versus 13% in the prior year quarter. Our G&A continues to rationalize relative to our revenue base.
Dan: Turning to the capital markets on January 15th 2025, we closed on a $275 million of additional financing commitments.
Dan: A new fully drawn $175 million senior unsecured term loan, which we swapped to an all in fixed rate of 5.12% through final maturity in January of 2030, and an upsized $500 million revolving credit facility, which was increased from $400 million.
Dan: We also extended the maturity date of our existing $175 million term loan to January 2030 from January 2027, and then in all of our existing credit agreements to remove various financial covenants that provide for improved pricing when we meet certain investment grade rating and leverage targets.
Dan: Turning to the balance sheet, our adjusted net debt, which includes the impact of all foreign equity was 724 million our weighted average debt maturity was four one years and a weighted average interest rate was 4.57% and.
Dan: Including extension options, which can be exercised at our discretion. We have no material debt maturing until February 2028. In addition, our total liquidity was 584 million at quarter end, which consisted of 14 million of cash on hand, 385 million available on our revolving credit facility and $184 million a bunch that are afford equity.
Dan: From a leverage perspective, or just a net debt to annualized adjusted EBITDA was four seven times at quarter end, which remains well within our targeted leverage range of four and a half to five and a half times.
Dan: Moving onto guidance with no credit loss events realized this quarter, we are increasing the low end of our <unk> per share guidance to a new range of $1 28 to $1 30, which continues to assume 2025 net investment activity of 175 million to $125 million and recurring cash G&A of 14, and a half to 15 and a half million dollars.
Dan: From a rent loss perspective, our guidance now assumes roughly 75 basis points of unknown rent loss at the mid point of our range, which is like recent macro uncertainty should prove conservative as the year unfolds.
Dan: Lastly on April 25th the board declared a quarterly cash dividend up 21 cents per share the dividend will be payable on June 16th to shareholders of record as of June 2nd based on the dividend amount Arnie if a payout ratio for the first quarter was 66%.
Dan: With that operator, we'll now open the line for questions.
Thank you if he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star keys. Please ask one.
Speaker Change: Good question and one follow up question, one moment, while we poll for questions.
Speaker Change: Our first question is from handheld C. Just with Mitsui Securities. Please proceed.
Speaker Change: Hey, guys good morning.
Speaker Change: What does it talk about the.
Speaker Change: The appetite you're seeing out there for the pharmacy and dollar stores it looks like your <unk>.
Speaker Change: <unk> been able to make some continued progress here and sell it some pretty decent cap rates. So maybe some color on the appetite the pricing youre getting and maybe a sense of timeline to get to your dollar general Cvs or Walgreens exposures down to your target levels.
Speaker Change: Yeah sure handle yes, I mean, I think we on the last call I mentioned that the timeline for all tenants would be to get them below 5%.
Speaker Change: By 12, 31, which we continue to have to.
Speaker Change: To be able to hit that hit that timeline, a walgreens as maybe a little bit different I think we'll try to get that below 3% at three 7%. Currently there continues to be a pretty robust amount of interest from institutions and from 10 31 buyers on the dollar store side. So you know I would expect us to.
Speaker Change: To make a lot of progress both.
Speaker Change: Both with dollar general and even with the new with family dollar we've got a number of those <unk>.
Speaker Change: Properties are in the pipeline to sell.
Speaker Change: And then we do have a a few pharmacy is also that we expect to sell here before our next earnings call.
Speaker Change: Walgreens with the with the news of second more you know, we do have a pretty good idea of what that balance sheet is going to look like which I think is gonna be yeah, a little bit lower levered than than what I think some people may fear. So once that information gets out I think thats certainly going to help but we continue to see interest from the 10 31 market.
Speaker Change: It relates to Walgreens.
Speaker Change: That's great color appreciate that maybe a follow up on the the debt side, Dan I think you mentioned Oh, I think you have an expectation of or pursuing a ratings upgrade here. So maybe some color on what you're hearing from the agencies a potential time timing of a potential.
Speaker Change: Great and any sense of what the estimated savings on the debt side could be thanks.
Speaker Change: Yeah, Hey, and out so we we haven't started our preliminary discussions yet you know where we're preparing for that we don't have a rating as it sits today.
Speaker Change: Been through this process before at other companies, both Mark and I. So we have a pretty good understanding of what it would entail.
Speaker Change: As we sit here today, we're kind of targeting going out to certain rating agencies in and are in the latter half of this year.
Speaker Change: And if you just look at kind of the the covenants as well as the terms that we received in our newest credit agreement as well as across the term loans that should result in about 20 basis points of savings on top of that there are the other industry.
Speaker Change: Things occurring that probably will result in us receiving another 10 basis points of savings. So I think all in.
Speaker Change: Now where he gained a investment grade credit rating for one of the three major radar major radian. She's we're looking at it at least a 30 basis points reduction across.
Speaker Change: Not only the there are term loans and the credit facility as well.
Speaker Change: Thank you guys.
Greg Mcginniss: Our next question is from Greg Mcginniss with Scotiabank. Please proceed.
Speaker Change: Hey, good morning.
Speaker Change: I want to clarify make sure I understand your initial comments on the net investment activity. So if nothing were to change from Q1 you'd be in a position to exceed the net investment guidance range.
Speaker Change: A follow up to that is whether or not the transaction market has changed much following April 2nd.
Yeah, No I think what we are we would not look to increase our all of our acquisitions, if nothing changes related to our equity prices. So.
Speaker Change: The good news about us being in capital recycling mode.
We have continued to be very active on the acquisition side, yes matched up with a lot of dispositions. So in the event that our stock price improves from here, we'd be in position to be able to hit the gas pretty quickly.
Speaker Change: Okay.
Speaker Change: Has there been much of a change in the transaction market since April 2nd.
Speaker Change: No not since April 2nd So you know we continue to see just a lot of great opportunity and so whether that be with convenience stores quick service restaurants.
Speaker Change: You know a lot of a lot of different sectors.
Speaker Change: Auto service amongst others, where we've got a lot more opportunity than we do capital right now, but we're hopeful that that changes.
Speaker Change: Okay last one for me.
Speaker Change: The the bad 75 bps of bad debt expense built into guidance. At this point is there does that include any allotment to specific tenants or is it more of a safety margin catch all.
Speaker Change: Yeah, I mean, there really isn't any specific in there it's really solely for unknown events you know based upon what we see here today.
Speaker Change: Okay. Thank you Beth.
Speaker Change: Thanks.
Speaker Change: Our next question is from John Keller Task <unk> with Wells Fargo. Please proceed.
Speaker Change: Good morning, Thank you.
Speaker Change: Maybe first one for me could you give us an update maybe on the progress around the re leasing of your big lots as of the Maryland.
Speaker Change: Yeah, absolutely. So we've had a lot of interest from a number of retailers are there is a competing shopping center that's being built.
Speaker Change: Down the street and so you know the current dynamic.
Speaker Change: You know, we'd like to kind of really see that play out a little bit more of Theres a lot more demand than there are opportunities and so we have some retailers chasing that location as well as ours and so I think that it may take a few months just to kind of see how that how that plays out but we were in possession of a handful of L. O I's that are that are pretty attractive and we're actively negotiate.
Speaker Change: But we think if we take our time a little bit we may get a better outcome here in the next few months.
Speaker Change: Okay and just to confirm that's not included at the high end of God.
Speaker Change: No we don't have anything in 'twenty 'twenty five for that.
Speaker Change: Okay.
Speaker Change: You're right that the law.
Speaker Change: Last one for me is just how do you think about the Walgreens take private and does that change the risk profile of those assets to you.
Speaker Change: Yeah no. It does not you know I think the fact that you now have a company solely focused on the retail operations rather than a very complicated business. I think that's helpful. Sycamore has proven you look at what they did with staples really over the past decade, Yeah that was a company that I think you know a lot of people did.
Speaker Change: I think very highly of yeah, a decade ago when they when they acquired them and they've done really an outstanding job with that.
Speaker Change: And we are you know the fact that they're not going to lever it up and focus on the operations. Yeah, Yeah really speaks to our confidence that it should continue to to be a going concern and we have locations that do really well so even in the event that they decided to close some more stores beyond what we're expecting we don't expect those to be our stores.
Speaker Change: Got it thank you.
Speaker Change: Thank you.
Michael Goldsmith: Our next question is from Michael Goldsmith with UBS. Please proceed.
Michael Goldsmith: Good morning, Thanks, a lot for taking my questions. In your prepared remarks, you mentioned that youre going to see some strong dispositions of look at low cash yields in the second quarter.
Michael Goldsmith: In your guidance you only provide the net number so maybe you could provide a little bit more clarity around the expectations of.
Michael Goldsmith: How the portfolio should change over the next period.
Michael Goldsmith: Yeah.
Michael Goldsmith: From a volume from a tenant perspective, and also from a cap rate perspective. Thanks.
Michael Goldsmith: Yeah sure and so it's it's always a little bit tricky because.
Michael Goldsmith: Because we don't control whether the dispositions close we know you know what LOI is we've signed that we know what's under contract and we know whose hard on their on their deposit. So as you as you progressed through that timeline, obviously, you get more confidence that the buyers are going to close.
Michael Goldsmith: And so we've got you know some advance autos are we have some dollar generals we've got some family dollars and we have some some pharmacies all all in that mix and then we'll also look to sell assets that aren't in those categories. If we feel like the performance of that particular asset isn't doing as well I mean, you saw that we sold a lowe's in the quarter that was due to.
Michael Goldsmith: Having conversations with a tenant and understanding that of our four locations going into the year that was the weakest location. So we were able to sell that at a six 5% cap rate. So I would expect that you know that to be the mix there maybe kind of one or two assets here or there that kind of fit that lowest type profile, where the asset isn't doing as well and the rest of those other categories. The cap rate on the dispositions is <unk>.
Michael Goldsmith: Gonna be kind of mid to high 6% cap rate depending on what closes.
Michael Goldsmith: And then we're going to try to match fund as best we can on the acquisition side and you know that's where we'll continue to stay within the acquisition guidance on a net basis, but I would expect it to be somewhat similar to what you saw in the first quarter.
Michael Goldsmith: Alright, and then on the camera and the cap rate on alright.
Michael Goldsmith: Alright.
Michael Goldsmith: And you can read on the acquisition.
I think youll continue to see that yes, north of seven and a half.
Michael Goldsmith: Got it and.
Michael Goldsmith: On the other side of the coin your exposure to grocery was up 150 basis points, but maybe not in the <unk>.
Michael Goldsmith: 2010, and so maybe you could talk a little bit about where you are stepping into where you're leaning into is just better understand you know.
Michael Goldsmith: The portfolio is changing in the underlying tenants within the grocery category. Thanks.
Michael Goldsmith: Yeah, No. That's a great question. So you know we added a one of the largest lease ups in.
Michael Goldsmith: In the country.
Michael Goldsmith: Focused on larger grocers that.
Michael Goldsmith: Generate a lot of cash flow within the four walls.
Michael Goldsmith: We're buying and strong retail corridors and so now where we can find yo yo tenants that may or may not have an investment grade rating, where we're getting attractive economics.
Michael Goldsmith: Good growth in the lease those are the types of acquisitions that we're looking to do.
Michael Goldsmith: Frankly, we don't have a ton of grocers in the second quarter like we did in the first quarter.
Michael Goldsmith: But that is a sector that we like a lot.
Michael Goldsmith: Thank you very much good luck in the second quarter.
Mike: Thanks, Mike.
Speaker Change: Our next question is from Smedes Rose with Citibank. Please proceed.
Mike: Alright, thank you.
Smedes Rose: I just wanted to ask you as.
Smedes Rose: As you reduce your exposure to the dollar stores in general and you think about where Theres a dollar tree and family dollar combined stores are those targets for.
Smedes Rose: Dispositions are kind of what happens with those as those two brands.
Smedes Rose: Separate.
Smedes Rose: Yeah, no. It's a great low yeah, yeah, no absolutely. So there is going to be a little bit of movement, where a few may go to dollar tree. They you know most of those are going to go with family dollar. We do have a handful of those under contract to sell just to reduce exposure to family dollar.
Smedes Rose: And so I'd expect most of what you see in the supplemental for the combo stores to go over to family dollar.
Smedes Rose: Okay.
Smedes Rose: Both family dollar locations and and combo stores.
Smedes Rose: Okay. Okay.
Smedes Rose: And then I think last quarter, you talked about in your guidance Youre anticipating settling the forward equity in the second half of the year or is that still the case or would you anticipate maybe extending that depending upon your acquisitions or.
Smedes Rose: Oh, Yeah, I mean, I think right now smedes there there could be some in the second there could be some in the third I think the bulk of it probably comes in the fourth we could always extended if if we wanted to you know we're optimistic that you know based upon you know catalysts that we see you know propelling our shares further this year that we'll be able to get out and and.
Smedes Rose: And raised a little bit of equity to you know to increase potentially our net investment activity, but as we sit here today, if we hum.
Smedes Rose: If we don't do anything I think you're likely to see us.
Smedes Rose: You can take down most of it by year end.
Smedes Rose: Okay. Thank you.
Michael Gorman: Our next question is from Michael Gorman with B P. I G. Please proceed.
Michael Gorman: Yeah. Thanks, Good morning, Mark you talked a bit about how there's a lot of opportunities in the marketplace versus where you are with your cost of capital, which I completely understand at this point I'm just curious internally when you look at that and when you screen. These opportunities and decided on what is going to close on the transaction pipeline what are you <unk>.
Michael Gorman: I'm really solving for here is it is it 10 is it a tenant that's not in the top 20 is it yield is it credit rating of the tenant kind of what what are you triangulating for as you pick the best deals out of the investment volume that you're seeing.
Michael Gorman: Yeah, no. It's a good question Michael Yes, I mean, we're obviously trying to diversify the portfolio. So there we've got a handful of tenants, where we're really not trying to add to our currently but we're looking at.
Michael Gorman: Pricing as well as where we're getting the best risk adjusted returns and so we've been somewhat agnostic as to whether it's an investment grade rated tenant if it's investment grade profile. If we've got a lot of belief in that management team and it's got a strong balance sheet and that generates a lot of cash flow both at the corporate level and within the four walls that were buying.
Michael Gorman: And that's really how we triangulate our way to risk adjusted returns in.
Michael Gorman: That's where we're going to deploy capital, where we can get the best risk.
Michael Gorman: The risk adjusted returns and we've been pretty pleased I mean, a seven 7% blended cap rate for the quality of assets that we're adding to the portfolio I think is really encouraging, especially if we get the opportunity to hit the gas.
Michael Gorman: Yeah.
Speaker Change: Great. That's helpful and then Dan I won't I won't ask how close we are to the inflection point on the cost of capital side, Although certainly theres been progress year to date.
Speaker Change: I was wondering if you could just kind of walk us through the strategy again on the forward equity, though you've got about 185 million or $184 million of unsettled versus the midpoint of net investment guidance of $100 million.
Speaker Change: How how far out can you extend some of that unsettled equity if if as we go through the year.
Speaker Change: Yeah, I mean, we could look we could have already extended it once.
Speaker Change: Now I don't think we'd get much push back if we extend it another six to 12 months beyond you know kind of year end.
Speaker Change: And you know look I'm happy to answer the question I mean, as we sit here today, you think about or implied cap rate, we have a positive spread I mean, we look at our implied cap rate relative to where we are buying if you look at our whack you know as of today spot whack, where 120 basis points when.
Speaker Change: When you think about the 707 cash yield that we achieved in the first quarter, which we think you know.
Speaker Change: Again, we can we can potentially achieve that again in the second quarter. So we do have a 120 basis points of spread but so I would say that the lightest green, but it's languish green right now and we just want to be patient and that's why we didn't take up our net investment activity guidance, despite having capability to do well north of what we're doing as we've shown historically so.
Speaker Change: We do think Theres a value disconnect. We think there is.
Speaker Change: Positive news to come out on our story that will continue to drive the shares higher and so we're just being patient.
Speaker Change: With our cost of capital and.
Speaker Change: And you know that's that's really where we are and we look forward to kind of you know updating you guys on everything you know next quarter and throughout conferences coming up here shortly.
Speaker Change: Great I appreciate the time guys.
Speaker Change: Our next question is from Wes Golladay with Baird. Please proceed.
Wes Golladay: Good morning, everyone on that comment about potentially being able to hit the gas you have it sounds like you have a decent pipeline just need the cost of capital to improve if you were to do more volume would you still be able to maintain a seven seven cap rate, where do you think it will go down maybe mid to low sevens.
Wes Golladay: Yeah, No I think we'd likely if we were to do similar volumes to what we did in.
Wes Golladay: In the fourth quarter, I think we're probably about a seven 5% cap rate. So it would come down a little bit.
Wes Golladay: But I think there's enough.
Wes Golladay: And what we're looking at right now where it wouldn't come down.
Wes Golladay: More than 20 basis points.
Wes Golladay: Okay and then when you look at your held for sale or your opinion disposition pipeline is that mostly tenet youre looking to pair back exposure to do you have any opportunistic sales in there and it would you provided seller financing for any deal.
Wes Golladay: We have not provided seller financing yeah recently, but when you look at what we're what we're selling there is one opportunistic sale that I expect to close in the second quarter and then the rest of what we're looking at selling is gonna be family dollar dollar General just our read is that exposure as well as pharmacy.
Sure.
Wes Golladay: Okay. Thank you.
Wes Golladay: Thanks, a lot.
Speaker Change: Our next question is from keeping Kim with cruise Securities. Please proceed.
Kim: Thank you and good morning.
Kim: I was curious if you could comment on new store opening appetite, especially from those tenants that from those tenants that might be more essentially exposed to tariffs.
Kim: Yeah.
Kim: Yes.
Kim: Stores are opening stores or would we look to acquire some of the source just making sure I understood just overall kind of.
Kim: More new store opening appetite.
Kim: Yeah, now look I mean, we're seeing.
Kim: A lot of our tenant roster are still in growth mode.
Kim: So you know we've got healthy operators that continue to do well some of them are subject to subject to tariffs aren't I do think you've seen that muted a little bit.
Kim: It's very difficult for you know for companies to make decisions right now with all the uncertainty but.
Kim: But the ones that had been growing historically over the past 12 months payout, we expect to continue to grow and they've reiterated some of that on their earnings calls.
Okay and on the acquisitions. This quarter, you were able to achieve a seven 7% yield which was nice to see you I'm sure. It is a range of some deals in the sevens and maybe some other than the eight I was just curious if you could provide some commentary on the types of assets, you're buying at the higher cap rates and the kind of.
Kim: Credit quality. Thank you.
Kim: Yeah sure I mean, I I mean, you know two thirds of what we bought was investment grade or investment grade profile, which.
Kim: Honestly, we don't really see a big difference between an investment grade profile and investment grade in fact, I'd say that that's a great profile typically.
Kim: It has a better balance sheet and stronger financial statements than what you'd see with a triple b.
Kim: Company the ranges what wasn't that wide this quarter.
Kim: I think you kind of cut the rates pretty accurately.
Kim: The acquisitions that we've acquired at the at the higher end Theres, maybe some C store sale leaseback sweater and pretty heavy growth mode, but they're larger operators that are where we're getting unit level financials that have rent coverage of north of three and a half times in some cases north of four times. So.
Kim: Very attractive real estate at a at a replaceable basis.
Kim: So we don't really feel like we're.
Kim: We're taking on much more risk in fact, I'd say the risk adjusted returns for what we're acquiring at the at the higher cap rate range is certainly stronger than a lot of what we're seeing on the investment grade side, where we continue to not see a ton of movement.
Kim: With cap rates for an aggressive investment grade retailers, unless you're willing to take on yeah. What we call really hidden risk, which is gonna be you get more of a shopping center type lease where you have got.
Kim: Yeah, you've got co tenancy and you've got you use restrictions and things like that that don't show up for a long time, but when they do show up there they buy pretty hard.
Kim: Okay. Thank you.
Speaker Change: Our next question is from Linda Tsai with Jefferies. Please proceed.
Linda Tsai: Hi, albeit not where you want it to be your stock has done really well year to date.
Speaker Change: The extent the environment doesn't get better how comfortable are you continuing on this path of capital recycling mode with acquisitions funded by dispositions or you know how do you think about capital allocation over the next 12 to 18 months to the extent market volatility continues.
Speaker Change: Yeah sure. That's a it's a good question. The day I mean, you know we think we have a lot of work still to do we've obviously accomplished a lot here in the last few quarters, but.
Speaker Change: We'd like to get the concentrations inside of what we're what our long term ranges where.
Speaker Change: We've told investors for for the last several years, we're just kind of expediting that a little bit.
Speaker Change: And Fortunately I think we're going to continue to be able to make progress on that and once we really gotten to our goals if were still not if.
Speaker Change: If we're still not trading you know where we need to be then I think the others. There's other alternatives for us to explore.
Speaker Change: Yeah, and Linda I'd say keep in mind that you know are comfortably in terms of Leverages, four and a half to five and a half times. If we hit the high end of our net investment activity guidance, we'd probably be in the air right around five times. So you know we can still operate well into next year within our comparability range that we provided to.
Speaker Change: The company or to the street.
Speaker Change: Thanks.
Speaker Change: Okay.
Yeah.
Speaker Change: Our next question is from Daniel.
Speaker Change: Hello with capital one Securities. Please proceed.
Daniel: Hi, everyone. Thank you for taking my question.
Daniel: I think it was last call, where you offset it seemed harder for private buyers to get bank financing for leases with non investment grade tenants have you seen that continue to play out. These last few months or has anything changed there.
Speaker Change: Yeah, I don't think theres been a much change in the in the market I think you've seen.
Speaker Change: Some banks willing to lend and some you know something that we really see that more on the disposition side. Yeah. When we were looking to sell we've had to do a little bit more handholding.
Speaker Change: To help some buyers.
Speaker Change: Thoughts on bank financing and Fortunately, we've been we've been pretty successful at that.
Speaker Change: Okay I appreciate that color. Thanks, and then as a follow up you had mentioned it but the investment grade profile for this quarter's acquisitions was around 66% are you expecting kind of that same mix for acquisitions going forward based on the physical pipeline are there any changes there.
Speaker Change: Yeah, I mean, I think we're just going to chase, where we're getting the best risk adjusted returns, we've had quarters, where 100% of what we acquired in the quarter was investment grade we've had quarters, where it was you know 20 or 30% and so you know.
Speaker Change: We just really arent as dogmatic as people might think about whether something is a triple b minus or a double b plus or not rated.
Speaker Change: We feel like we're doing our own underwriting and if we feel like we're not taking out a lot of risk and we're getting an attractive yield than that.
Speaker Change: The types of opportunities that we're chasing.
Speaker Change: Great. Thanks.
Jana Galan: Our next question is from Jana Galan with Bank of America. Please proceed.
Thank you good morning.
Jana Galan: Following up on that I just wanted to comment on the teams are very impressive credit underwriting and I was curious if you could talk to any criteria has been modified or updated whether it be on the real estate side or on the tenant credit side.
Speaker Change: Hey, good to hear from you.
Speaker Change: Yeah, No no changes really broadly from from how we're underwriting I think really the filter hasnt changed it's really what's getting through the filter that may have changed just as we haven't seen cap rates move up enough, where you've had interest rates move up on the investment grade side, but cap rates have moved up on the investment grade.
Speaker Change: File in sub investment grade tenants and so thats just happens to be currently where the more attractive opportunities are but more broadly. We're looking at you know the corporate credit what kind of cash flow. The tenant is generating today and what can impact that over time and what are the financial obligations.
Speaker Change: They need to meet and how tight is that and what can what can change that.
Speaker Change: And then the second piece of horses. The location that we're buying are they generating a lot of cash flow at that location well beyond the rent to their banks. So that if we get the first part wrong or something changes.
Speaker Change: The corporate credit whether it's the balance sheet for operations do we have locations that are they're going to want to keep and our restructuring and it's really the same analysis. When you get to the end of the lease term theyre going to renew the leases that generate cash flow and the ones that don't they're gonna renegotiate or leaf and so we want to avoid those situations and then of course, if you get the first two pieces wrong, hopefully we will have a lot of those.
Speaker Change:
Speaker Change: What's the real estate and how fungible is the real estate how much is it going to cost to reposition it and how interesting is that location going to beat the other retailers that we want to grow with them. So and can you replace that rent and so that's it's really the same three buckets I think we think about it the same way. It's just we have different opportunities that are getting through the filter.
Speaker Change: And I guess, maybe just to stay at a kind of a.
Speaker Change: Maximum box size that you won't go over and just curious also what they just I understand the disposition into loans with more cap rate driven but just curious if you're just moving away from larger boxes in general.
Speaker Change: Yeah, I wouldn't I wouldn't say much is changing there, but we are much more cautious if the boxes bigger, especially like <unk>, we don't want to take back.
Speaker Change: Many big.
Speaker Change: Big box assets, Theyre, just going to be very difficult to reposition there's only four or five operators that could step into a lowes without us having to spend the money to split it up into three or four tenants and you know that that's.
Speaker Change: That's costly and yeah. You may you may be able to increase the rent, but its going to crush it so much in capex that its really not worth it.
Speaker Change: And so our strong preference is to focus on the smaller fungible boxes, we will have a handful of larger boxes, but we have to be very sure about our underwriting as it relates to the corporate credit in the unit level profitability.
Speaker Change: Thank you.
Speaker Change: Our next question is from Apple.
Speaker Change: Keybanc capital markets. Please proceed.
Speaker Change: Great. Thank you.
Speaker Change: I was wondering have you heard anything from your tenants regarding tariffs or any potential impacts to them. It would tariffs potentially add any new tenants to your tenant watch list.
Speaker Change: Tariffs have not I mean, you know it's been an interesting ride I think the tenants are really just trying to figure out what's going to happen because it's moved around it moved around this morning are in terms of.
Speaker Change: Whats exempt and what's not with you know with with automobile so.
Speaker Change: Yeah, I think it's really just made it difficult for them to make decisions that may slow their growth a little bit I think some companies will have trouble, making hiring decisions.
Speaker Change: It's really added some level of confusion for some people but.
Speaker Change: You know we've gone through our entire portfolio and really try to think through what could be the negative impacts of tariffs and yet where they where people source their goods and you know whether that also applies to services as much as it does for.
Speaker Change: People that are just sell things in their stores.
Speaker Change: And what's the ease of being able to switch that but then you know I think that's going to move around a lot and I think people will get caught up in the first derivative of what's going on with tariffs, but you know I think it's really prudent to think through what's the second derivative of what could happen if things continue to move around and we kind of muddle our way through.
Speaker Change: This much.
Speaker Change: Uncertainty and that's you know we could we could see a slowdown and that's really you know for US we view that as an opportunity for us where we where our portfolio shines you know when you know when things slow down you saw that during Covid, we collected all of our rent during COVID-19 when when others were really struggling to collect rent and we were able to play a little bit more offense and so we just don't have very much.
Speaker Change: That's discretionary.
Speaker Change: Within our portfolio and and so that's really where we're kind of we're not just thinking about the first derivative, we're thinking through the second and third derivative and what might happen.
Speaker Change: Okay.
Speaker Change: Okay, Great that was helpful. And then just last one for me you know in the acquisitions you did in <unk> were there any new relationships in there or were they all with existing tenants.
Speaker Change: I believe we added three new tenants in the quarter, if I recall.
Speaker Change: Okay, great. Thank you.
Speaker Change: Our next question is from Jay Kornreich with Wedbush Securities. Please proceed.
Hey, Thanks. Good morning, you mentioned, one New addition into the top 20 tenant list and I'm. Just curious if you werent able to get an improved cost of capital to acquire more do you see any growing opportunity to get additional new tenants into that top 20, either from growing current smaller exposures or just totally new tenants.
Speaker Change: Yeah, no absolutely I mean, our top 20 tenant Gerber collision, we've got a few more in the pipeline. So that that one by definition, we'll be adding to that and we have a number of tenants that have kind of fallen our top 40 that we'd like to continue to grow with as well as looking at some new opportunities and so absolutely I think that is.
Speaker Change: One thing that we're focused on.
Speaker Change: Going into 2025, and 2026 is really we need to improve the the diversification of the portfolio and that's really a great way to do it.
Speaker Change: Alright. Thank you and then just one follow up going back to the transaction market I guess just given the overall economic uncertainty are you seeing increased interest from your competition in Super investment grade assets that you would typically invest into <unk>.
Speaker Change: Relative to what you're currently you know what you expect during more.
Speaker Change: Economic.
Speaker Change: Good times or are you seeing.
Speaker Change: And an expansion in competition in that investment grade asset class.
Speaker Change: Yeah, you know.
Speaker Change: Difficult to say you know honestly.
Speaker Change: We haven't really seen a lot more competition.
Speaker Change: Show up at this point, but yeah, I mean, I think if we end up in a more sustained uncertain environment and then you really start to see the economy slow I certainly would expect to see that.
Speaker Change: Okay. Thank you.
Speaker Change: There are no further questions at this time I would like to turn the floor back over to Mark Manheimer for closing remarks.
Speaker Change: Well, thank you everybody for joining us today and for your interest and necessary. We look forward to seeing many of you at the upcoming conferences.
Speaker Change: Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Speaker Change: Okay.
Speaker Change: Uh huh.
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Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Hum.
Speaker Change: [music].