NetSTREIT Corp.

Greetings and welcome to the NetStreetCorp third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Randy Houck, Senior Vice President of Finance. Please proceed.

We thank you for joining us for NetStreet's third quarter 2020 earnings conference call. In addition to the press release distributed yesterday after market closed, we posted a supplemental package and an updated investor presentation in the investors, events, and presentations section of the company's website at www.netstreet.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. For more information about these risk factors, we encourage you to review our prospectus dated August 13, 2020, and our other SEC filings. All forward-looking statements are made as of the date hereof, and NetStreet 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, GAAP reconciliations, and an explanation of why we believe such non-GAAP financial measures are useful to investors. Today's conference call is hosted by NetStreet's Chief Executive Officer, Mark Manheimer, and Chief Financial Officer, Andy Blocker. They will make some prepared remarks, and then we will open the call for your questions. Now, I will turn the call over to Mark.

Good morning, everyone, and thank you for joining us today for NetStreet's inaugural quarterly earnings call. We hope this call finds you and your families well, and we are pleased to be here with you today. While we met with many investors during our IPO marketing efforts over the past several months, let me begin with a brief overview of NetStreet. Then I will discuss our acquisition and external growth activity and and close with a word on our commitment to you, our shareholders. Andy will provide more detail on our quarterly results, balance sheet, and fourth quarter outlook. We will then open the call for questions. Leading up to our formation transactions in December 2019 and every day since then, we have been focused on creating a high-quality, diversified, and defensive net lease retail portfolio with a conservatively capitalized balance sheet and scalable platform to support accretive and consistent long-term cash flow growth. While this is NetStreet's first conference call as a publicly traded company, Andy and I have lengthy track records within the net lease business and at publicly traded REITs, and have surrounded ourselves with a seasoned leadership team to support our future growth and our commitment to success as a public company. I couldn't be more proud of the success of our 19 team members that got us to where we are today. Let me take a moment to briefly discuss our history. Our predecessor was a private real estate fund which owned a net lease portfolio valued at approximately $350 million by asset value, consisting of approximately 50% investment-grade rated tenants. Prior to our formation transactions, that portfolio was then culled down to reduce exposure to certain tenants and sectors that we did not feel were desirable long-term. In December 2019 and into January 2020, we raised $220 million of capital from institutional investors via a private rule 144A offering and internalized our management team and other formation transactions, forming NetStreet. We also concurrently closed on a new term loan and revolver to refinance our outstanding debt and fund future growth. We then completed our IPO, raising an additional $227 million in August and September of 2020. Today, our portfolio contains 189 single tenant properties comprising 3.4 million square feet in 37 states with a diversified tenant roster of 53 tenants in 24 industries. Our weighted average lease term is 11.1 years and we are 100% occupied with no lease expirations until 2022 and only 1.4% of leases expiring before 2025. Based on our ABR, Our tenancy is 68% investment grade, with an additional 6.4% classified as high-quality underrated, and 90% of our industry exposure is what we refer to as defensive. These tenants operate in industries where their physical location is critical to the generation of sales and profits, where they focus on necessity goods and essential services, including discount stores, grocers, drug stores, pharmacies, home improvement, automotive service, and quick service restaurants. This high-quality tenancy creates bond-like leases with high-quality rent collections in times of disruption, including what we have most recently seen in 2020. While we certainly cannot take credit for having predicted the COVID-19 pandemic, we designed our portfolio and balance sheet strategy for long-term stability and strength before the pandemic was even contemplated. We have long believed that retail will continue to evolve, both in ways that we can predict and in ways that we cannot. With that backdrop, we have been and continue to be focused on retailers and industries that are well protected from threats that we can anticipate, such as e-commerce pressures, but also have balance sheet strength and access to capital to be able to reinvest in their businesses and adapt with the changing retail landscape. We are also focused on acquiring real estate that is fungible and attractive to other retail uses and at a basis that we can continue to replicate cash flows in a downside scenario. Additionally, given our portfolio was recently constructed, NetStreet has not had to work through legacy tenants and or struggling categories that may have felt an outsized impact from the pandemic. Proof of this is in our cash rent collections, which have been strong and consistent with 100% cash rent collections in both September and October. Andy will provide further details momentarily. With respect to external growth, we are committed to disciplined acquisitions and focus on underwriting underlying tenant credit locations with fungible real estate with strong market fundamentals, and locations that provide strong cash flows to the parent tenant. The single tenant retail net lease sector is large and highly liquid, and we believe we can bring our deep industry relationships to bear as we seek to execute on our pipeline of acquisition opportunities. We were able to continue to execute through market disruption during COVID, with $327 million of acquisitions completed in 2020 through the end of the third quarter. For the third quarter, we completed $103 million of acquisitions at an initial cash capitalization rate of 6.5%. These acquisitions had a weighted average remaining lease term of 10.9 years, and 100% of the properties are occupied by investment-grade rated tenants. We would note that $15 million of this activity was originally targeted to close in the fourth quarter, but we were able to accelerate these closings to September 30th. In July, we acquired a Walmart Supercenter and a Sam's Club in Tupelo, Mississippi, at an initial cap rate of 6.6% and a remaining lease term of 12 years. There, we provided a solution to the seller by partnering with a shopping center buyer who concurrently purchased the remainder of the center, and as a result, we were able to increase our exposure to what we believe is a blue-chip defensive tenant. In August, we acquired a portfolio of seven well-located and strong-performing O'Reilly's Auto Parts, New England locations with more than 11 years of remaining lease term at a 6.9% initial cash cap rate. From a transparency perspective, note that when we discuss cap rates on acquisitions, NetStreet will provide cash cap rates on total acquisition costs. We completed one disposition in the third quarter at a sales price of $1.9 million, a casual dining restaurant that we felt could have trouble competing in the future and wanted to eliminate that exposure from our portfolio. Casual dining is not a sector that we plan on adding to in the portfolio, and we continue to reduce that small exposure in the portfolio through dispositions over time. As we look ahead, we are targeting an average of $80 million or more of acquisitions per quarter, or $160 million for the last two quarters of 2020. While 100% of our third quarter acquisitions were investment grade, over time we intend to target an appropriate balance for our risk tolerance and growth objectives. We expect that approximately 70% of our investment activity will be with investment-grade tenants. The balance will be with non-investment-grade tenants at a slightly higher yield, including high-quality unrated tenants and selectively targeted sub-investment-grade tenants where we have a high level of confidence in the tenants industry, the retailer's management team, the trajectory of that retailer's business, as well as the quality of the real estate we are acquiring. Before I turn the call over to Andy, I'd like to make a few comments regarding the philosophy with which we approach our business. When we embarked on our IPO, we met with many of you through our marketing process, and we were humbled by the strong institutional support we received when we finalized our order book. We recognize that you are entrusting us with your capital, and we want you to know that you can count on us. We are committed to providing clear, straightforward disclosures, remaining accessible to investors and analysts, And finally, to fulfill our obligations as corporate citizens by establishing a strong ESG program. Regarding ESG, we are committed to creating a strong internal culture that promotes inclusion and employee well-being and are pleased with the initial steps we have taken to date. Finally, we are proud of our shareholder-friendly corporate governance structure, including our diverse majority independent board. I'll now turn the call over to Andy. Andy?

Thanks, Mark, and thank you, everyone, for joining us on our call today. I'm incredibly happy to be joining you as CFO of NetStreet. As Mark noted earlier, and we discussed frequently during our IPO process, we are committed to building and maintaining a conservative capital structure and providing transparency with respect to our business. We believe that these initiatives, when coupled with successfully executing our business strategy, will build shareholder confidence and, over time, support a competitive cost of capital. Let me begin with our results for the quarter. Yesterday in our press release, we reported net loss of 11 cents, core FFO of 15 cents, and AFFO of 21 cents per share. As of September 30, 2020, the NetStreet portfolio contributed $38.9 million of annualized base rent or ABR after giving effect to acquisitions and dispositions completed in the quarter. From a collections perspective, we're pleased to report that prior to giving any consideration to deferral or abatement arrangements granted as a result of COVID-19, we collected 100% of September rent payments, bringing total third quarter rent collections to 98.1%. This is a slight increase from our previous disclosure, as our only tenant being recognized on a cash basis paid their September rent shortly following our published business update, bringing them current through the third quarter. On a related note, Based on the payment history of our tenants, we currently have zero bad debt reserves and recognize zero bad debt in the quarter or year to date. Finally, as Mark mentioned, for the month of October, we also received 100% of cash rents. With respect to deferrals and abatements, the $108,000 of rent abatements granted in the third quarter were generally conditioned on lease extensions, which averaged approximately one and three-quarter years of additional term for each month of abated rent. Year-to-date, we granted under $750,000 of rent abatements, generally conditioned on lease extensions, which averaged approximately 1.4 years of additional term for each month of abated rent. With respect to deferrals, we deferred $261,000 of rent year-to-date, of which $75,000 has been repaid, leaving a net rent deferral balance of $186,000 at quarter end. The remaining deferred balance will be repaid over the lifetime of the leases. And therefore, we expect the quarterly impact on our business as we collected the pearls to be very small. It was $4,000 in the third quarter. As demonstrated by our 100% rent collections in September and October, we provided no deferrals or abatements after August. We currently have eight assets classified as held for sale and took $363,000 in impairments in the third quarter to bring our GAAP net book value from two of those eight assets including our single asset being recognized on a cash basis in line with the anticipated net proceeds from those sales. A couple of items resulting from our successful IPO impacted our financial statements in the third quarter. We had $0.9 million of expenses in the third quarter and $2.2 million year-to-date related to 144A and IPO-related transaction costs. These costs largely reflect consultant services as we staffed up pre-IPO to put appropriate public company processes and reporting in place. In addition, we recognize 1.8 million of non-cash compensation expense from two sources in the quarter. The first is 1.7 million resulting from a catch-up related to 4.8 million of performance-based equity awards at the time of the 144A with a shelf registration performance criteria. The nature of that performance criteria didn't allow us to recognize any expense until the performance criteria was met. And as a result, a significant catch-up was recognized in the quarter. An additional $74,000 was recognized from the 3.1 million time-based awards granted to employees and board members at the time of the IPO. These awards will be recognized on a straight line basis over their three to five year lives. The transaction expenses and the non-cash equity compensation catch up resulted in the largest non-recurring adjustments to our key financial measures in the third quarter. Turning to our capital markets activity. On August 13th, 2020, we completed our IPO and including the over allotment option in September, issued just under 14 million common shares at $18 per share, generating net proceeds of approximately $227.3 million after deducting the underwriting discount and offering expenses. In connection with the IPO, we repaid the $50 million outstanding balance on some of the companies revolving on a credit and retired the outstanding Series A preferred shares with the remaining proceeds utilized to fund future acquisitions and for general corporate purposes. In September, the company completed a $175 million LIBOR swap to hedge floating rate exposure on the entire balance of the company's term loan at an effective rate of 21 basis points through the maturity of the term loan in December 2024. As of September 30th, we had $137 million of cash and remained fully undrawn on our $250 million revolving on credit. We have no debt maturities until the maturity of our revolver in December 2023, which is subject to a one-year extension option. In addition, our net debt to annualized adjusted EBITDA ratio is 1.4 times, well below our 4.5 to 5.5 times long-term target. With respect to dividends, in August, we declared an inaugural cash dividend on our common stock of $0.10 per share for the IPO subperiod in the third quarter of 2020. The dividend amount was prorated to reflect the period of time from the IPO to quarter end. Yesterday, with our earnings release, the Board declared a 20-cent regular cash dividend to be payable in December, reflecting an annualized dividend rate of 80 cents per share. Before I turn it back over to Mark, let me just take a few minutes to discuss our outlook on a couple of fourth quarter items and provide some forward-looking perspective. First, as Mark mentioned, consistent with our average expected post-IPO acquisition volumes of $80 million per quarter, and after giving consideration to the $15 million of fourth quarter acquisitions that we accelerated to September 30th, we expect to complete at least an additional $65 million of acquisitions in the fourth quarter, bringing our total 2020 acquisition volumes to approximately $400 million. With a LIBOR hedge in place, and with current cash balances exceeding our fourth quarter acquisition expectations, we would expect no incremental borrowings under our revolver and resulting fourth quarter interest expense, including $300,000 of quarterly deferred financing fee amortization and undrawn fees, to be approximately a million bucks. We expect our fourth quarter cash G&A to better approximate our forward-looking run rate of $11 to $12 million annually, combined with an additional $3 million of non-cash compensation expense annually. As discussed during our IPO process, we believe this amount reflects the appropriate staffing to execute our business strategy and to effectively run as a public company. As a result, we would expect increases to G&A over time to be marginal as we grow. Approximately 10 basis points on incremental acquisition volumes should be a pretty good estimate. Finally, consistent with the Board's dividend declaration, We're targeting an 80-cent annualized dividend rate for the near term, with dividend growth expected once we stabilize at a 65% to 75% ASFO payout. Now I'll turn the call back over to Mark.

Thanks, Andy, and thank you all for joining us today. As we prepared for our IPO in August, we made sure that we not only had high-quality assets and the right portfolio in place to successfully enter the public markets, but the best people and platform as well. To that end, I am very proud of our portfolio's performance amid a pandemic no less, as well as our team. Andy and I are very grateful to them for their hard work and dedication. We would also like to thank our board for their valued advice and counsel. We look forward to growing this business and speaking with you all each quarter to update you on our progress. This concludes our prepared remarks. We will now open the line for questions. Operator?

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question comes from the line of Nate Crossett with Barenberg. Please proceed with your question. Hey, good morning, guys.

Good morning. And thanks for the color on the call so far. I wanted to kind of get your commentary just on the activity so far in October and what it looks like for the next two months. Sounds like $65 million is at least baked in. Is that a conservative estimate? I'm just curious if you're seeing any more deal activity because of the upcoming election and potential for tax code changes.

Yeah, no, thanks, Nate. Yeah, so, I mean, so far this quarter, you know, we've been targeting 80 million dollars. quarter since the third and fourth quarter, and we did pull forward in the neighborhood of $15 million of transactions to September 30th that we had initially targeted for the fourth quarter. That being said, we still have a pretty robust pipeline, and it really will come down to timing on some of the transactions. We continue to see similar deal flow that we saw coming into the IPO that we discussed on the roadshow with our investors. And, you know, actually very happy about what the pipeline looks like for the fourth quarter. We should get a couple of new names in the portfolio that I think people will certainly like. certainly like the tenant lineup that we think should close. A few of these could slip into January. We're hopeful that we can kind of get in a similar number here in the fourth quarter. And I guess another thing of note, our 100% investment-grade you know, acquisitions for the third quarter. It's probably the first and only time that you'll see a 100% acquisition to be all investment grade. You know, the mix of what we're looking at buying is probably more in the, you know, 70% range of investment grade. Of course, that can kind of shift around depending on what closes in December or January. But certainly, you know, kind of adding a little bit more to that high-quality non-rated bucket, which is, you know, as we defined, more than a billion dollars of revenues in less than two times debt to EBITDA, so kind of a tendency that would have an investment grade rating if they were to go out and get a rating, and so really feeling pretty good about the pipeline today.

Okay, thanks. That's helpful. Maybe you guys can just also touch on competition and pricing. Has there been any changes that you've seen since the IPO? Obviously, you guys are targeting concepts that are highly sought after, so I'm just Curious kind of what you're seeing on the ground.

Yeah, you know, not really. You know, when we think about the other institutional investors, most of them have a different, you know, credit profile that they're really chasing. Most of our competition continues to be really kind of your mom and pop 1031 type investor. And we haven't really seen too much of a change. You know, maybe we'll see after Tuesday if the results come in and, and that changes, you know, people and how aggressive they want to get. But even with the 1031, I would anticipate, you know, there's certainly a lot of strong lobbyists out there, and regardless of how the election turns out, I would imagine that's going to take some time. So I'd be surprised if there's just a massive rush for, you know, people to get some 1031s in. But, you know, we'll certainly be monitoring that.

Okay. This last question, quickly, if I can. Eight assets that are held for sale. I'm just curious what's in that mix. Is there any common theme in there?

Yes. I mean, I'll stop short of giving you exactly what they are just because we're relying on third parties to close on those, so it's a little bit out of our control. But I think what you'll see is the big focus for us is going to be on monitoring risk in the portfolio. So in most cases, it's going to be kind of getting out ahead of some potential credit risk We are looking at decreasing our exposure specifically to casual dining and maybe to a lesser extent our bank exposure over time. So I would expect to see a little bit of that. And then we do have a number one tenant that has a little bit of an outside exposure in the portfolio, so there could be a little bit of that mixed in there. Okay, thanks, guys.

Your next question comes from the line of Todd Thomas with KeyBank. Please proceed with your question.

Hi, thanks. Good morning. Just first question, following up on the investments and in terms of pricing, are you seeing any compression in cap rates or do you feel comfortable that you'll be able to continue to buy in that sort of six and a half to seven percent range. And then, Mark, you talked about striking a balance between investment grade rated tenants and sub-IG or non-rated tenants with higher yields. What's the difference in yield like there? And is that added risk being compensated for in the higher yield in this environment?

Yeah, sure. So as it relates to the mix outside of investment grade, keep in mind we're really targeting very high-quality tenants, so it's certainly not a barbell approach of buying a bunch of really high-yield assets and then trying to get some quality to kind of blend in cap rates. it's really more there's a limited universe of tenants that we're very comfortable with that don't happen to not carry an investment grade rating. Quarter to quarter, that can certainly shift, but I would expect to see maybe at least through the first nine months of this year and the $327 million that we've closed on in the first nine months of the year, there's been about a 40 basis point difference between kind of that high quality bucket versus our investment grade bucket. Hey, Todd, it's Andy.

If I could just add to that. You know, just from our perspective, since it's really the first time we're disclosing it as a public company, when we talk about cap rate on acquisitions, just to make sure we're all on the same page, that's cash cap rate on fully loaded acquisition costs.

Okay. That's helpful. In terms of the pipeline and what you're seeing out there and sort of the various channels that you source deals, you know, existing assets, I guess, build the suits, sell leasebacks, you know, where's the biggest opportunity today? And, you know, you mentioned, you know, the Walmart acquisition. Is that an area where you continue to see an increase in offerings either from mall REITs or other retail property owners? Is that an area of focus for the company?

Yeah, absolutely. modest in terms of volume. And so it allows us to be very selective. I mean, we've got about $550 million of acquisitions in our pipeline, most of which we will not get there on pricing. But we pride ourselves on being extremely creative, really trying to find a situation where Our surety of close or whatever we bring to the table is valued. It could be speed to close. It could be, you know, having the cash already raised. It could be a relationship that we have, certainly, as you mentioned, on the Walmart transaction where we partnered with a Dallas-based shopping center buyer that focuses more on kind of junior boxes and shop space. and things that we view as a little bit riskier, but being able to kind of bring that type of transaction to the seller that solved their entire problem rather than us just kind of pulling out the credit out of the deal and leaving them in a worse spot to sell the rest of the center. Certainly, you know, we're seeing more and more of those types of opportunities, you know, working more and more with developers and seeing some more opportunity there as well. Okay.

And Todd, I wouldn't forget. Hey, Sandy. I mean, just, you know, when you think about, you know, the idea of, you know, whether it's shopping center owners, you know, spinning off some of those triple net tenants, you know, certainly from Mark and my experience, you know, you really need to dig into the details there, whether that's co-tenancy provisions, restricted uses, so on and so forth. So, you know, the devil's in the details on those deals.

And we're extraordinarily conservative with how we underrate those. So we're not taking on any co-tenancy risk or, you know, restricted use if that's going to create a problem for us in the future.

Okay, got it. And then just one last question. Andy, you know, in terms of collections, you know, just a little less than 2% not collecting in the quarter. I realize you're at 100%, you know, September and October. But is that all resolved in your view? Do you feel that, you know, those tenants – um you know and your tenant base in general is on you know better footing going forward here is there some risk that you know and the tenants could come back looking for relief or deferral deferrals of some sort um do you see any risk of that you know heading into uh further into the fourth quarter yeah i mean to me kind of a lot yeah sorry mark uh yeah i mean i think yes you know todd a lot of that's going to depend on you know what the future brings with respect to cove and so on and so forth i think that we demonstrated

that our portfolio was extremely defensive during the second quarter, based on the collections we showed there and going into the third quarter. Certainly feel like if we're kind of in the current environment, I feel very, very good about collections you know, not just on, you know, the legacy assets, but the assets we have acquired and what it is that we see in the pipeline. So, yeah, I mean, as good as you can feel in the current environment, you know, we feel that good.

Yeah, and the only thing I would add there is, you know, we cut all of our deals as it relates to COVID back in April and May, and then everyone has gone along with those, you know, with those agreements and has paid 100%, you know, starting in June. So, you know, we just haven't had conversations tenants as it relates to COVID or not paying rent or rent relief or any of those types of situations. But, yeah, I mean, I think if there's, you know, a reemergence of COVID, second wave, whatever you want to call it, I think there is the possibility that we have those types of conversations. But in reality, the deals that we did cut, we ended up getting a lot of lease extensions and a lot more value came back to us than what we gave up. And so it really showed the commitment to the locations that our tenants have and in the areas that were impacted by COVID. So pretty optimistic, you know, that we'll continue to collect 100%, but, you know, we're certainly open to working with our tenants in the event that they're, you know, the government shuts them down or things outside of their control impact their ability to generate profits.

Yeah. So, Todd, just to kind of quantify on what Mark said, you know, for the, I said in my prepared remarks, you know, year to date, we've given just under three quarters of a million dollars of renovatment to our tenants. In exchange for that, if you were to quantify what we got with extended term, that equates to about $14.5 million of additional rent payments at the end of the term.

All right, great. That's helpful. Thank you.

Your next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.

Hi. Good morning. The disposition you made this quarter, was that in casual dining? And then where do you think cap rates might trend for de-risking these one-off assets going forward?

Yeah, sure, Linda. Yeah, so, yeah, that was a casual dining restaurant. That was probably the one property most impacted by COVID. By COVID, you know, in Hutchinson, Kansas, a location without a drive-through, without much of a network to really drive Uber Eats or any of those types of platforms. So they closed and were unlikely to reopen. And so we thought with the term on the lease, now is the time where we'd get some value. We felt like if we waited longer, you know, it would be a much uglier situation. So it was a way for us to de-risk. The portfolio certainly, you know, is something that we did prior to the, you know, to the IPO. At least, you know, that was the – we had agreed to that sale to really try to clean that up to, you know, have us clean a portfolio on a go-forward basis. And never say never, but keep in mind we did start out with a $350 million portfolio, really culled out the things that we thought were going to be potential problems down the road of about $90 million pulled out of the portfolio, and then have really built up most of the portfolio since the initial capital raise back in December and January. And so really feeling very good about the portfolio. There may be a one-off situation here or there. We do have the one casual dining restaurant that that typically pays about three weeks late, which is what the difference was between our business update on October 1st where we had 99.5% of rent collected in September, and now that's up to 100% because they paid. So that's one where we may look to move at some point in time. We just want to make sure that we're maximizing value and getting the best economic outcome that we possibly can in each of those situations.

Thanks. And then given increased market interest in investment-grade tenants, you know, what's the best strategy to navigate potentially increased competition and still achieve the cap rates in your targeted range?

Yeah, sure. No, absolutely. So, I mean, obviously it's the strategy that we think makes the most sense. So, you know, as we start to head into, you know, maybe a period of uncertainty, there may be more interest there. But, you know, it's a very fragmented business, very much a relationship business. You know, you take the Walmart example that we talked about earlier. That's very difficult for, you know, a private buyer to step in and do if they're not in the business, you know, each and every day like we are. And, you know, we've got, you know, $500 or so million in our pipeline, but we just have to cool down the ones that work for us, and it's just such a large fragmented market that we really feel strongly that we'll continue to be able to execute our business plan in the future. Thanks.

Thanks.

Your next question comes from the line of Katie McConnell with Citi. Please proceed with your question.

Great, thanks. Can you provide some more color around the dead deals that you walked away from this quarter to get a sense for how you're underwriting risk and acquisitions differently today? And then on the disposition front, would you expect to see similar pricing on the health for sale assets versus the three key sales?

Yeah, sure. So I'll take the first one first. So the dead deal cost, that really had to do with a deal that we had cut pre-COVID and then were able to continue to kick the can on the contract until the seller eventually didn't allow us to keep kicking the can on that. And that had to do with a specific tenant where we were buying a couple of properties that and had a hard deposit back during COVID. And the credit really had deteriorated a bit due to COVID, and then they also were undertaking a pretty large capital markets transaction that we felt was going to add leverage to the balance sheet and could potentially add additional risk to that particular acquisition. So we elected to walk from that particular transaction. I think that's going to be very abnormal. It was really a COVID – related type deal, but we felt like it was, you know, more important for us to not take in assets that could potentially lead to problems down the road than it would be to, you know, to walk away from a couple hundred thousand dollars. Obviously, something we don't want to do in the future, but, you know, I think, you know, COVID definitely, you know, had a lot to do with that. And then as it relates to dispositions, you know, I would think of the 10.4% cap rate on the one dark casual dining location to be, you know, very much an anomaly. You know, as we look at our dispositions in the future, you know, we think the cap rate should be significantly inside of that depending on, you know, what that mix looks like, how many of those are, you know, getting out ahead of risk, how many of those are diversification sales like a, you know, like a 7-Eleven. But I would imagine those would be significantly less than the 10.4% cap rate.

Yeah, just to kind of follow up on that, I mean, you know, for everybody else, you know, we had $1.2 million of transaction costs in the quarter. You know, we add back the 144A and IPO-related expenses, as I discussed in my prepared remarks, of $900,000. So, you know, to quantify that, that's $300,000 of, you know, dead deal costs in the quarter. And as Mark said, you know, we'd anticipate, you know, we'd anticipate that to be less going forward.

Okay, thanks.

Your next question comes from the line of Todd Stender with Wells Fargo. Please proceed with your question.

Hi, thanks. Just to go back to cap rates, we've been focusing on the cap rate compression direction, really, of the peer group. But When you look at the stuff you guys have been buying, it's been fairly steady with good investment-grade rated tenants. But where the 10-year Treasury is, it's been fairly range-bound, below 1%. Would you say there's a natural floor in cap rates? You just got to account for some level of risk on top of that risk-free rate. Maybe that accounts for some of the reasons why cap rates seem to be pretty steady for you guys.

Yeah, I think that's right, Todd. I think there is generally going to be a floor. I mean, you look at cap rates over time over the past 20 years, people tend to think that there is a massive correlation to interest rates. There really isn't. I think it certainly had a – there's been some gravity to bring those down over time due to a prolonged low interest rate environment that we've been in. But I think the only situations where it really, you know, has an impact is, you know, sometimes you'll see a, you know, very large sale-leaseback that could be a structured financing, you know, type execution where, you know, some of that, you know, secured debt can, you know, can come into play where someone could get pretty aggressive. But really in kind of the 1031, you know, mom-and-pop smaller transaction market, you know, there's really just not – we don't expect to see massive moves in cap rate, which we really haven't seen over the past 20 years. It's been – extraordinarily stable. So I think that's a fair assessment.

Thanks, Mark. Maybe this is for Andy. Obviously, with your proceeds from the IPO still sitting there, you're plenty liquid, debt to EBITDA sub two times. Where can we probably see you guys tap the capital markets? Would debt come next? Certainly, it's a little premature. probably have until the second quarter of next year to deploy the IPO proceeds. But maybe how are you thinking about the capital structure?

Yeah, sure, Todd. Thank you. Yeah, plenty liquid. You know, I like that expression. I mean, where we stand right now, you know, we're sitting on $137 million of cash. You know, we've got roughly $30 million worth of assets that are currently held for sale, $250 million undrawn on the credit facilities. So, you know, as you said, plenty liquid for the near term, you know, Our belief was through the 144A and into the IPO and to today is that continued execution of the business plan is going to result in improvements to our overall cost of capital over time. Mark and I are constantly talking about just keep executing, just keep executing, kind of like Dory in Finding Nemo, right? Just keep swimming. We're in no rush to raise additional equity at this point. But, you know, obviously we're constantly evaluating, you know, funding alternatives on a go-forward basis. Just from where we sit right now, you know, I don't think it's in anybody's best interest to start speculating on what type of capital, size, timing, you know, or price. But just know that, you know, we're really focused on executing the business, got our eyes wide open, and, you know, hopefully the markets trust us to make the appropriate decisions at the appropriate time.

That's helpful. Thank you.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment while we poll for more questions. Your next question comes from the line of Alexander Parnakis with Bank of America. Please proceed with your question.

Hey, good morning, guys, and congrats on your first quarter of the public company. Just one question. What are your thoughts on providing official guidance with 4Q results for 2021?

Yeah, Alex, you know, okay, I mean, it's something that we're, you know, we're regularly thinking about. You know, what we tried to do this quarter was, you know, really to give you guys, you know, whether it's, you know, on the ABR line, you know, some guidance with respect to acquisitions. You know, interest expense pretty locked in with our what's now fixed rate debt on our term loan. You know, with respect to, you know, the dividends in G&A, which are really the biggest drivers there, you know, we will continue to, you know, evaluate and try to adhere to best practices as best as we can, you know, as we continue to gain greater clarity around the business. But, you know, if you're asking for are we going to commit to providing, you know, AFFO per share guidance, you know, for 2021, you know, at this point, I think it's too, too soon to sell to the extent that, that people feel like, you know, we're not giving you the basic building blocks, which, you know, I think that we went to great lengths to do this quarter, you know, please feel free to reach out on a one-off basis and we're happy to discuss.

Got it. Thank you. That's good for me.

Your next question comes from line of key bin Kim with truest securities. Please proceed with your question.

Thanks. Good morning, and congratulations on your IPO. Could you discuss your investment philosophy? I'm sure there's a host of variables that you consider when you buy an asset. What's your pecking order, and if you can just provide some details around that.

Yeah, absolutely. Yeah, so, I mean, you know, our first and primary focus is going to be on the corporate credit and making sure that we're going to get rent, you know, during the late term. We think in a world where retail continues to evolve, we think it's extraordinarily important to have a strong management team that has access to capital and access to cash that will allow them to continue to reinvest in their business and allow them to adapt to the change that will continue to come. I think that's the one thing that's that we're sure of is that there will be change. And so, you know, being prepared for that and not having, you know, tenants that are continually, you know, taking cash out of the business but rather reinvesting in the business we think is very important, which happen to be a lot of investment grade credits and tenants that we focus on that have, you know, strong access to capital with lower leverage. You know, the next piece that is, you know, very important to us is making sure that we're buying the real estate right. And so, you know, there will be disruption. We hope to get everything right, but probably foolish to think we'll get everything right. And so really our backstop is effectively what are we actually buying, and that's, of course, the real estate. What can we do with that real estate? How attractive is that going to be to other uses? Looking at demographics and traffic counts and ingress, egress, signage, and what the other traffic drivers are in the area. we think is very important, and really trying to analyze what happens if we do get it back, what can we do with it, how much money are we going to have to put into the building, if any, and what type of rent should we be able to get replacing the rent that we're getting at the time that we initially do an acquisition. And so we also think it's important to focus on locations that generate positive cash flow for their tenants, Certainly, we've seen that be important as it relates to renewals, but that's probably third in the pecking order behind corporate credit and real estate.

Okay. And, Mark, you and both Andy have had a lot of experience and both worked at public companies in the past. I'm just curious, at NetStreet, what kind of corporate culture you're trying to create?

Yeah, absolutely. We think corporate culture is often overlooked, and it's something that we focus on every day, making sure that we've got people that are excited to come to work, like what they're doing, are valued, and we think that will continue to drive them to to do the best that they can do, really built. I think right now we've got a lot of momentum behind the culture where people are really excited about what we've accomplished, but I think it's going to get harder and harder as we continue to scale the business to make sure that we've got the right people in the right seats that kind of have that team mentality. that aren't looking to point fingers but are trying to find solutions to issues as they come up. And, you know, so far so good. You know, we feel obviously what's been accomplished by our 19 team members to date. You think about we were, you know, a smaller private entity, you know, less than a year ago. And really what we've been able to accomplish on the acquisitions front, asset management front, you know, a very heavy lift on the accounting side. And what we've been able to accomplish I don't think could have been done in a bad culture and you throw COVID in the mix, you know, it really would have been difficult. But people have held themselves accountable, you know, through this whole process from, you know, a lot of working from home. And, you know, we think that is a, you know, certainly a testament to the culture that we've built to date.

Yeah, and Keith, and I would also say, you know, look to the board, right? I mean, as Mark and I were looking to build out the board, You know, basically there's, you know, we kind of broke it down to its simplest forms, right? You know, there's the three things that we believe you can make a REIT successful are, you know, not in this order, but the real estate, the balance sheet, and the people, right? And I think that what happens is a lot of time you get a lot of folks on boards who are super focused on the first two, not a lot on the last. We have, I keep calling her, you know, our secret weapon is Heidi Everett. who is one of our new board members who came on as part of the IPO, who is really, really engaged in culture, morale, employee maximization. And Mark and I very much look forward to working with her in order to make sure that we are getting everything that we can out of our people and that we are being – you know, as responsive as we can, you know, to our employees' needs, right? You know, we're 19 employees at this point. You know, the idea that, you know, I joke, you know, Mark and I had our first conversation like just over a year ago. We've raised two rounds of capital. You know, we got our books and records, you know, in place. We were able to report, you know, pretty early in the cycle, you know, and feel like, you know, we're setting ourselves up for success. You can't do that without, you know, the best quality people. And, you know, we just couldn't be prouder of the team that we have. So hopefully that answers your question.

Yes. Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Mr. Mark Manheimer for closing remarks.

Thank you, everybody, for joining today. Certainly an exciting day for us with our first call as a public company. Also, we do plan on attending NAREIT in a few weeks and hope we can find some time to discuss our progress. Thanks again and have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your