NetSTREIT Corp.

Greetings and welcome to the NetStreet Corporation fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Amy Ahn. Thank you, Amy. You may begin.

We thank you for joining us for NetStreet's fourth quarter and full year 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. Both can be found in the investor relations 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 risk 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 perspectives dated August 13, 2020, and our other SEC filings, including our Form 10-K for the year ended December 31, 2020, when available. 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 fourth quarter and full year 2020 earnings call. We hope this call finds you and your families well, and we are pleased to be here with you today. I'll start with a brief overview of our accomplishments over the last year. Then I'll discuss our acquisition and portfolio management activity and close with a few comments on ESG-related efforts. Andy will then provide more detail on our fourth quarter and full year results, balance sheet, and outlook for 2021. We will then open the call for questions. Since our inception, NetStreet's strategy has been to create a high-quality, diversified, and fortress net lease retail portfolio with a conservatively capitalized balance sheet and scalable platform to support accretive and consistent long-term cash flow growth. As many of you are aware, we spent the first half of 2020 deploying capital raised from our private rule 144A offering. We built a portfolio that was e-commerce resistant and recession resilient, which ultimately helped us to have significantly higher rent collections as compared to our net lease peers during the second and third quarters of 2020 at the height of COVID-19 related closures. In addition, we built out our team from eight employees to 19. We made several executive hires, including Andy Blocker, Trish McBratney, and Randy Haug, who are on this call with us today. We also hired Chad Schaefer as our SVP of credit and underwriting. We added three members to our board of directors, Robin Ziegler, Heidi Everett, and Michael Christodoulou. We believe we have a best-in-class team in place to lead us forward. We successfully completed our IPO last August amid the COVID-19 pandemic, raising a total of $227 million of net proceeds, which included the over-allotment option exercised by our underwriters. I would like to pause here to take a moment to note that many of last year's accomplishments wouldn't have happened had it not been for every member of our team who worked diligently to get us to where we are today. I'm very proud of everyone, and I look forward to sharing more successes with them in the future. Moving on to our portfolio, as of December 31, 2020, our portfolio contained 203 properties comprising 3.7 million square feet in 38 states. with a diversified tenant roster of 56 tenants in 23 industries. Our weighted average lease term is 10.5 years, and we are 100% occupied with no lease expirations until 2023 and less than 1% of our leases expiring before 2025. Based on ABR, our tenancy is 70% investment grade with an additional 8% classified as unrated with an investment grade profile. and over 90% of our industry exposure is what we refer to as defensive. Put simply, we focus on well-positioned tenants who have strong balance sheets and great access to capital and are focused on tenants for whom their physical locations are integral to their ability to generate cash flow for their business. This defining characteristic has proven to be a key protection against both e-commerce risk and COVID-related disruptions. As a result, our collections have been extremely strong throughout the COVID pandemic. We collected approximately 97% of our rents for the full year 2020. Andy will discuss further, but we believe these results validate our strategic approach to portfolio construction and resulting COVID-related rent payment disruptions are now in the rear-view mirror. Throughout 2020, we continued to grow our portfolio through disciplined acquisitions. As a reminder, we underwrite and acquire properties with strong underlying tenant credit and seek fungible real estate with strong market fundamentals and locations that are highly productive for the parent tenant. In 2020, we completed $409 million of acquisitions. The depth and breadth of our pipeline meant that we kept a steady pace of acquisitions throughout the year with no slowdown due to COVID. This activity included investments in stabilized assets, blend and extend opportunities, set leaseback transactions, and development projects, which demonstrates the depth of our opportunity set. For the fourth quarter, we completed $81 million of acquisitions at an initial cash capitalization rate of 6.8%. These acquisitions had a weighted average remaining lease term of 8.8 years, with 68.7% of the properties occupied by investment-grade rated tenants, and an additional 12% occupied by tenants with investment-grade profiles. Finally, with respect to timing, these acquisitions were back-end loaded in the quarter, which tends to be the case in most quarters. During the fourth quarter, we added a few new tenants to our portfolio roster, including Best Buy, Sunbelt Rentals, and our first 15-year Chick-fil-A ground lease. We also added our first target in Massachusetts just south of Boston to the portfolio at a 6.4% cap rate, subject to a seven-year ground lease with rent of just $2.81 per square foot. The adjacent former Sears box has been demolished, and Trammell Crow has begun construction on a luxury Class A 282-unit apartment community in its place. Not only are we encouraged by the new customers that will be moving in next door in the next couple of years, but also by the increasing land value that we expect on our 3.5-acre parcel that we acquired at what we feel was a bargain price. We also continue to consider strategic dispositions to improve portfolio quality and reduce risk. In 2020, we sold 15 properties for $50 million, of which 12 properties and $37.4 million were closed in the fourth quarter. We felt that market conditions in the fourth quarter presented an attractive opportunity to eliminate or lessen our exposure to certain tenants, geographies, and industries and improve our overall credit quality. This drove our decision to sell these assets sooner rather than later, despite their near-term impact on absolute earnings. During the fourth quarter, we took an opportunity to reduce our exposure to casual dining, which has been a stated goal of ours. This exposure was reduced from 4.5% to 2.2% during 2020. We believe that we have now addressed the immediate potential credit risks in this category, but we'll continue to decrease exposure in this category over time. We also look to refine our geographic exposure, and to date have done so in a way that was accretive. During the fourth quarter, we sold an Ollie's in Texas at a 6.4% cap rate and replaced it with an acquisition of another Ollie's in Indiana with similar remaining lease term at a 7.8% cash cap rate. As a result of our active capital recycling and portfolio management in 2020, we transformed our existing portfolio, enhancing its credit quality and improving diversity. We acquired 124 total assets, adding 23 new tenants, 10 new states, and four new industries. Importantly, our percentage of investment-grade tenants grew from 63.7% to 70%, and our weighted average lease term grew from 10.1 to 10.5 years. At the same time, we reduced ABR exposure to our largest tenant, which was BBB-rated CVS at 11.8% of ABR on December 31, 2019, to AA-rated 711 at 8.9% as of December 31, 2020. We continue to evaluate future acquisitions, including with many of our top ten tenants. However, over time, we expect tenant concentration to decrease due to the denominator effect as our portfolio continues to grow. Finally, let me remind you that we have zero exposure to theater, health club, or early childhood education tenants, reflecting our long-held view that these tenants have generally weaker tenant credit profiles and lack of fungibility of their underlying real estate. As we look ahead, we are targeting net acquisition activity inclusive of dispositions of $320 million in 2021. We expect that the bulk of this activity will be a mix of investment grade and high quality unrated tenants that is similar to our current portfolio mix and reflect the current mix of our industry concentrations. Given the sheer size of the net lease sector and our deep industry relationships, we believe we have plenty of growth opportunities ahead of us. And due to our relative smaller size, We know that future acquisitions can move the needle for us in terms of earnings growth in a meaningful way. We continue to improve our portfolio quality and diversification with no erosion in going in cash cap rates or weighted average lease terms. We are encouraged by our robust and growing pipeline of opportunities as we look forward to reaching our 2021 acquisitions goals with high-quality properties. As this is our fourth quarter call, let me take a brief moment to cover an important topic here, ESG. When we came to market at the time of our IPO, we indicated that ESG would be a part of our strategy and processes. First, we are committed to strong governance. From the time of our IPO, we ensured that our board was designed to fit today's standards for governance. We have an independent and diverse board with a strong mix of backgrounds and expertise, including real estate, financial markets, and human capital. These are the same three pillars that support NetStreet itself. Second, From the beginning, employee well-being and engagement has been and remains very important to Andy and me. From a social perspective, we made sure that NetStreet offers professional training, continuing education reimbursement, competitive benefits, and flexible parental leave to our employees. We also survey employee satisfaction annually. I am proud to say that every one of our employees is a shareholder in NetStreet, meaning all of our employees have a personal stake in our collective success. Finally, with respect to the environment, 17 of our top 20 tenants have corporate sustainability programs, and our acquisition due diligence process has an ESG and environmental component. At the asset level, we look to fund capital improvement projects with an eye towards sustainability. We are very proud of all that we've accomplished in 2020, having significantly grown our portfolio while improving its quality and built an operating platform designed for growth, supported by a low leverage balance sheet. Finally, our strong performance on collections objectively proves the durability of our strategy as we meaningfully outperformed our peer set in an unforeseen, uncertain economic environment over the past year. As a result, we believe we are extremely well positioned as we enter 2021, and we are excited for the future at NetStreet. I'll now turn the call over to Andy. Andy?

Thanks, Mark, and thank you all for your time with us this morning. Let me begin with our results for the fourth quarter and full year 2020. Yesterday in our press release, we reported net income of 15 cents, core FFO of 18 cents, and ASFO of 20 cents per diluted share for the fourth quarter. For the full year, we reported net income of a penny, core FFO of 65 cents, and ASFO of 69 cents per diluted share. As of December 31st, 2020, The in-place portfolio was generating $41.8 million of annualized base rent, or ABR, which as a point-in-time metric reflects the effect of acquisitions and dispositions completed in the fourth quarter. From a collections perspective, we're very pleased with our portfolio performance. Prior to giving any consideration to deferral or abatement arrangements granted as a result of COVID, we collected 100% of fourth quarter rent payments and for the full year collected 96.9% of rent. Further, based on the payment history of our tenants, we currently have zero bad debt reserves and recognize zero bad debt in the fourth quarter and for the full year of 2020. Finally, based on our 100% rent collections in the fourth quarter, we did not provide any deferrals or abatements and have not done so since August. Turning to our balance sheet and our capital markets activity. The work we completed in 2020 with respect to our balance sheet was very important and set the stage for future growth for NetStreet. We accessed the equity markets and raised net proceeds of approximately $227 million through our IPO in August. We repaid our outstanding line of credit, retired our outstanding Series A preferred shares, and completed a $175 million LIBOR swap to hedge floating rate exposure on the entire balance of our term loan. As of December 31st, we had $93 million of cash, which includes $14 million of restricted cash held in 1031 exchange accounts. and remain fully undrawn on our $250 million revolving line of credit. We have no debt maturities until the maturity of our revolver in December 2023, which is subject to a one-year extension option, which would match the December 2024 maturity of our fully drawn term loan. In addition, our net debt annualized adjusted EBITDA ratio of 2.8 times is well below our 4.5 times to 5.5 times long-term target. With respect to dividends, earlier this week, the Board declared a 20-cent regular cash dividend to be payable on March 30th to shareholders of record on March 15th, reflecting an annualized dividend rate of 80 cents per share. Let me now take a few minutes to discuss our outlook on a couple of guidance items and provide some forward-looking perspective. We're starting the year with 41.8 million of in-place annualized base rents. As Mark mentioned, we expect to complete 320 million of acquisitions this year, net of dispositions, back end weighted in each quarter, and a cap rate comparable to our fourth quarter and full year 2020 activity. We expect cash interest expense to range from three to three and a half million dollars, depending on the timing of draws. If any, on or revolving on credit, and expect an additional 600,000 of non-cash deferred financing fee amortization. We expect to incur state and franchise tax of $200,000 to $300,000 and expect to report those amounts on their own line item in 2021, reflecting the growth and increasing geographic diversity of our portfolio. We expect 2021 cash G&A in the range of $11 to $12 million, with an additional $3 to $4 million of non-cash compensation expense, which reflects executive compensation agreements that have been recently finalized through our compensation committee process. As we have largely stabilized the size of our team, our overall compensation structure, and our outside service requirements to efficiently and effectively execute our strategy and perform as a public company, we expect that we will continue to gain the benefits of scale and a relatively fixed cost structure as we grow. As a result, our G&A as a percentage of revenue and assets is expected to decrease over time. I will echo Mark's comments and say that I'm grateful to our entire team for their exceptional contributions in 2020. Their hard work each day through a pandemic, no less, allowed us to establish and build what we believe is a truly great platform and portfolio. As we start 2021, we believe we have significant momentum to continue to grow both our portfolio and earnings and remain focused on creating significant shareholder value. This concludes our prepared remarks. We'll now open the line for questions. Operator?

Thank you. We will now 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 that 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. Thank you. Our first question comes from Linda Sy with Jefferies. Please proceed with your question.

Hi, good morning. You collected 100% of rent payments for October, November, and December, but we didn't see mention of rent collections for January and February in your press release. Is there anything to highlight here?

Thanks, Linda, and good morning. Yeah, we did collect 100% of rent in January, but yeah, just to preface that question, As it relates to COVID and or any tenant requesting any rent relief, we have not had a discussion with any tenant since the second quarter about paying rent, as we had hoped and still believe that we have fully resolved and documented all COVID impacts to the portfolio last year going back to the second quarter. But this February, we had an investment grade tenant send us our rent check, but we never received it. And so we had the tenant cancel the check and then move that tenant to ACH. So which we're trying to do with all of our tenants. And we've got all the confidence that we're going to be receiving that rent from them on Tuesday, which is the day of the week that they release all their wires and will continue to collect 100% of our rent, not only for February, but for the rest of the first quarter. But we wanted to be really hyper careful when it comes to transparency and maintaining our credibility. So technically, we're waiting on one rent payment of $23,000 to to get to 100% in February, and that would make our sixth consecutive month of receiving every penny of rent. So hopefully that answered your question.

Thanks for that clarification. And then we're also seeing a growing number of net lease transactions occur in the multi-tenant shopping center space with a smaller shopping center announcing yesterday JV to acquire high-quality investment-grade net lease tenants. You know, this sounds like your sandbox. How are you viewing the competitive landscape right now, and should we be concerned about greater cap rate compression or more difficulty sourcing deals in 2021?

Yeah, sure. So, you know, first I think it shows how attractive, you know, the space is that we have seen, you know, a couple more entrants, you know, in the last few years. But I do think it bears mention that this particular new entrant has a very specific acquisitions approach. that would make it very unlikely that we'd be competing directly with them. And, again, it's just a very, very fragmented market, which was really a big topic. You know, when we raised capital in the 144A, that we'd be able to deploy capital in the quality that we have at the pricing that we have was also a topic at the time of the IPO and is still today. But we think we just continue to prove our ability to compete and, you know, still be able to hit pretty attractive yields for the quality of assets that we're bringing in. And, in fact, you know, as we look forward to, you know, the pipeline, I think it's more robust today than it really has been over the past, you know, few quarters.

Just one last one. How are you approaching tenant concentration? Is this best addressed through dispositions or dilution through higher acquisition volume?

Yeah, no, that's a good question. I mean, obviously, we're a smaller, you know, portfolio at this point. So, you know, the majority of that is going to come through the denominator increasing in size. With that being said, if we have, you know, one particular outsized, you know, tenant You know, we did sell a couple of 711 assets, you know, one at a 5 cap and one at a 495 cap, you know, back in the fourth quarter, you know, pretty accretively, you know, which is great. But, you know, we will continue to selectively, you know, work through dispositions. But, you know, you did see in the fourth quarter a little bit more dispositions than what I think you can typically expect from us on a go-forward basis. We just had an opportunity to move some some tenant credits that we, you know, that really thought made sense to move out of the portfolio and some shorter-term leases where, you know, we felt like we were getting pricing similar to longer-term leases. So, you know, we felt like that was helpful for us to improve our lease expiration schedule.

Thank you.

Thank you. Our next question comes from Nate Crossnett with Barrenburg. Please proceed to your question.

Hey, good morning. I was wondering if you could comment on the activity you've had so far in Q1 since we're already kind of approaching the end of this quarter. And you mentioned the pipeline's bigger than it's been in the last two quarters. I was wondering if you could just help us size that in terms of dollar terms. And within that pipeline, is it mostly concepts you already own or is it a mix of new and current?

Yeah, sure. So yeah, I mean, again, I think this quarter, similar to the fourth quarter is likely to be a bit back end loaded. You know, we've closed in the neighborhood of $20 million of assets so far. I know there's a couple that should be closing either today or early next week. We have, you know, a little bit over $120 million of assets that are, you know, under contract approved through investment committee and moving through the closing process. So That can take anywhere from, you know, 30 to 60 days. So some of that will be in the first quarter. Some of that will leak into April. And I think, you know, the good thing there is that, you know, we will have probably a pretty robust April as well. So that will, you know, kind of make the acquisitions a little bit less, you know, back-end loaded that we saw in the first quarter and likely to see in the first quarter. But, yeah, as it relates to, you know, the tenants that we're seeing, you know, we did add a few new tenants, as you heard in my prepared remarks. You know, Target being one. We do have a couple more new tenants that I think are pretty attractive investment-grade tenants that we'll be adding to the portfolio here in the first quarter. But it's going to look a lot like, you know, what you saw in the fourth quarter in terms of investment grade and investment grade profile, pretty high-quality assets with an attractive weighted average lease term at yields that are pretty consistent with what we've done in 2020. Okay.

Okay, that's helpful. You mentioned some ground leases you did in the quarter. I was wondering if you could just remind us how much of your portfolio is ground leases and where is that going to grow over time or kind of how do those opportunities present themselves to you?

Yeah, sure. So, yeah, I mean, I think, you know, ground leases to us are, you know, they're not all created to be equal. I mean, you see Wawa and Sheetz and some of those tenants out there that are ground leases, but they're several million dollars to acquire. So when you look at the rent on a fee simple versus ground lease, there's really not much difference. I don't really think you're picking up much of an advantage other than losing out on some depreciation. But when we do see rents that are reflective of really just what the land is worth or less, those are very attractive. Typically, we're going to get priced out on a lot of those types of transactions. I think the target, if that was a more effective marketing of that asset, I think that cap rate would be significantly inside of the 6.4 going in cash cap rate that we acquired those. We do have a handful of ground leases in the portfolio. We've got a Lowe's, which is I think a real ground lease. Obviously, we mentioned the Chick-fil-A. and we've got a few others, but it's inside 5% of the portfolio. I don't really think that's going to grow meaningfully. We don't really want to pay up for ground leases, but in the event that we find them and they're priced similar to a fee-simple deal and we're coming in at low rents, those are going to be pretty attractive to us.

Okay, that's helpful. I'll leave it there. Thank you.

Thank you. Our next question comes from Greg McGinnis with Scotiabank. Please proceed with your question.

Hey, good morning. Andy, I apologize if you covered this in your opening remarks. My call dropped for a few seconds, but just curious what prevented you from providing a full per share guidance this year and whether you expect that to be an abnormality this year or kind of what we should be expecting going forward.

Yeah, Greg, thanks for the question. Yeah, I mean, look, I think that it is a 2021 phenomenon, certainly, you know, at this point, but, you know, based on our current size, you know, The assumptions that we make around, you know, timing, size, pricing of additional capital raises, you know, things that we've talked about in the past. And to a lesser extent, expectations around our ordinary course business. You know, the range that we would have had to provide would have been so wide. It would have been meaningless to users, you know. So what we did is I think that we provided guidance around the key operational items. you know, that we really expect are going to dictate our 2021 corporate performance, right, and, you know, left the capital raising, you know, to the side, knowing that we're going to be opportunistic with respect to our access to capital as we move throughout 2021. But, yeah, I mean, for us to, you know, produce AFFO per share, you know, in the high 60s and then provide a, you know, 10 to 15 cent guidance range, you know, as a result of those things, we just didn't think was meaningful enough.

I can appreciate that. In regards to the capital raises, though, are there any updates you can provide there in terms of kind of how you're thinking about funding acquisitions this year?

Yeah, I mean, you know, as I talked about in my prepared remarks, I mean, we've got $93 million worth of cash on the balance sheet as of year end. Mark's got a very robust pipeline that we're working through. We have a fully undrawn $250 million fund. you know, credit facility. We were at 2.8 times net debt to EBITDA. So we feel like we've got room. And, you know, as a result, we have the ability to be, you know, opportunistic with respect to capital. Okay. Great. Thank you so much.

Thank you. Our next question comes from Todd Stender with Wells Fargo. Please proceed with your question.

Good morning. Thanks. You touched on your reduced casual dining exposure. But when it comes to quick service, we don't see specific names in your top tenant list. Can you guys just comment on your appetite to buy portfolios of QSRs? It's not in the essential or necessity bucket, but it sure seems that way during COVID.

Yeah, I think that's a great question, Todd. I mean, going back to when COVID first hit, we hit the brakes entirely on acquisitions for a short period of time. And, you know, similar to the Great Recession and, you know, the COVID disruption, you saw quick service restaurants perform, you know, extraordinarily well. I mean, we're still going to be very focused on credit, and there's really, you know, probably a list of about 10 names that we're, you know, very comfortable with as it relates to quick service restaurants. And we want to make sure that we've got, you know, drive-through when we've got, you know, a large enough parcel to accommodate, you know, drive-throughs and we're even seeing Some quick service restaurant operators that historically hadn't had a drive-thru are going to that model, so we want to make sure that that's going to be a very fungible box. But it is an area I think you can expect to see us acquire some assets in the future. And again, as you mentioned, casual dining down to a little over 2%. I think you're likely to see that creep below 1% by year end.

That's helpful. You added some Best Buy, Burlington's, and some grocery stores in the quarter. Can you speak to these? At first glance, it doesn't appear, or these don't appear terribly fungible, but maybe you like the credit, maybe you like location, maybe just kind of touch on these things.

Yeah, absolutely. I mean, I think, you know, the size boxes specific to Burlington and Best Buy, they've been really kind of decreasing the size of their box. So we were in pretty close communication with the tenants on those particular assets and how committed they are to those long-term, generating very strong sales at each of them. So we are fairly confident that those particular tenants are likely to remain in those boxes beyond their initial lease term. But that being said, there are a lot of tenants in kind of that $35,000 to $40,000 you know, square foot range. And so, you know, we feel that those are actually fairly easy for us to either replace the rent or increase the rent should we, you know, be put in a position to replace the tenant.

All right. Thanks. Last one from me. Just with this year, kind of a backdrop, there's commentary out there just as an increased M&A activity potential. where do you guys stand on doing sale leasebacks? Do you think that'll be a part of your strategy, or do you think you're going to be more in the highly widely marketed space?

Yeah, so hopefully not in the widely marketed space, because I feel like the pricing, you know, gets awfully competitive and a little bit less attractive. Yeah, but that being said, you know, last year, you know, I was asked a lot of different questions, you know, related to how we source acquisitions. You know, we really do have a lot of different ways that we approach the acquisition side, whether they be blended extends, whether it's, you know, partnering with a multi-tenant buyer and where we, you know, pull up the net lease or on the development side or even Sally specs. I did not really expect at that time to be doing many Sally specs as you typically see those as being a tenant that doesn't have great access to capital, you know, resource to selling their real estate to in a Sally spec and really leverages themselves and puts that in maybe not a great position long-term and on a credit profile. That being said, we've seen a large number of investment-grade, high-quality tenants that just don't want to have their capital tied up in their real estate and have seen an increasing list of opportunities within some of those tenants that we like and think are really strong performers. So we have done a little bit more than what I think we expected, and there's even some of that in our go-forward pipeline.

All right, that's helpful. Thank you.

Thank you. Our next question comes from Katie McConnell with Citi. Please proceed with your question.

Hey, guys. This is Parker D. Cranion for Katie. I guess I was just curious about how you guys are thinking about inflation sort of. I think it's been a key topic that's come up over the past few weeks and sort of keeping in mind, you know, where your lease escalators are sort of at, just how you're thinking from a competitive standpoint versus some of your peers.

Yeah, sure. I mean, yeah, I mean, I think you're right. I mean, our leases, as you'd expect with a, you know, a higher credit profile, typically those leases are going to be a little bit flatter than maybe, you know, some of the other peers that are really kind of financing through Sally Spex, you know, kind of your kind of smaller credits. You know, but that being said, and I think we're also going to have, and, you know, we view it as, you know, predictability of the cash flow should be uh, a little bit better, uh, on a gopher basis. So maybe a little bit less in, in rent loss. Um, but yeah, I mean, you know, I think, you know, we're getting close to 1% on our, our escalators within, within our leases. Um, and so, um, you know, I think inflation, um, you know, is, is, you know, maybe not going to be here, here permanently. Uh, you know, it could be a temporary, you know, you know, situation where it comes into the portfolio. If you listen to, uh, Yeah, Mr. Powell. But yeah, I mean, I think that, you know, if you're anticipating a very high inflation market, then, you know, our leases are going to be a little bit less attractive.

Okay, got it. Thanks. And then I guess I have one other one, just in terms of cap rates for this year, you know, and sort of recently as well, if you're seeing any sort of movement just within the sort of IG category that you guys are targeting.

Yeah, we really have not. I mean, I think there's a good advantage to the fact that we're only looking to acquire 80 million or so per quarter. So that allows us to really source significantly more than that and then focus really on the assets where we think the pricing is a little bit less efficient and really kind of chop off that tail of that bell curve and has really allowed us to get pretty attractive cap rates. We've shown that as a private company. We've shown that as a public company the last couple of quarters. And, you know, even in the first quarter, we're seeing similar types of cap rates.

Got it. Okay. That's all for me. Thanks.

Thank you. Our last question comes from Todd Thomas with KeyBank Capital Markets. Please proceed with your question.

Hi. Thanks. Good morning. Andy, I just wanted to follow up. I think you said acquisitions would be back-end weighted. Was that for the quarter or for the year? And, you know, I guess it seems like the pipeline's growing, so I'm just curious why, you know, deal flow would sort of slow from the current pace a bit, if that's the case.

Yeah, and look, I don't know that deal flow is going to slow in any material way. I would just tell you that the nature of the beast for us has been that, you know, on average, you know, if you look at – know since last year if you look um you look at the average timing of our execution of our acquisitions i think that they're like the second day of the third month of the quarter right and um you know as mark indicated in his in his prepared remarks i think that that's just been somewhat typical to what it is that we've seen and you know from a modeling perspective the impact of that for a company of our size can be meaningful uh but You know, we're pushing, as Mark indicated, you know, we're pushing as we go into, you know, end the first quarter, into second quarter to try to change that. But from a modeling perspective, like I said, it could be a meaningful impact.

Okay. And then, Mark, you talked, you know, a bit about the COVID-resistant nature of, you know, the company's tenants, right, which benefited a bit during the pandemic, you know, some convenience auto drugstores. You know, how are you thinking about, tenant categories and credits moving forward as we hopefully continue to move away from the pandemic? Is there a little bit of froth in the market around the edges maybe that could benefit the company from a capital recycling standpoint? Would you potentially look to shift away from essential retail to some extent, either in terms of some of the newer acquisitions you're looking at or assets that you might be looking to sell?

Yeah, I think it's a good question. And you know, when you think about, you know, when Andy and I first started, you know, trying to raise capital, you know, for this venture back in, I guess it was, you know, back half of 2019, you know, the strategy was the same then as it is today, you know, very focused on the essential retailers, you know, ones that are really, you know, what's working in retail today was really what was working, you know, pre-COVID as well. And, you know, those sectors are really where we focus in those defensive names. And so it was a little bit less popular when we were raising capital back in late 2019 and into early 2020 pre-COVID. But that being said, that's our strategy. We think retail is going to continue to evolve. We think having capital available and management teams that have shown a propensity to continue to reinvest in their business are going to be the ones that are going to be left standing. And really that's you know, what we think is the appropriate way to invest in retail. And so, you know, it shouldn't surprise you that, you know, that held up very well in the first bit of disruption. I think we're going to see, you know, more disruption may come sooner and may come later, but we want to be prepared for, you know, that disruption as it, you know, as it comes over the next, you know, 10, 20 years. And, you know, so I don't, I would not anticipate us, you know, selling off our assets and going buying, you know, going buying movie theaters or things that are really outside of our value, but Um, you know, on the margin, we will look to, you know, if the market is going to pay us at a very aggressive cap rate for a specific asset, uh, you know, we're always going to be opportunistically looking to, to recycle capital. Uh, but I think we'd be redeploying into, uh, back into, you know, what our bread and butter is, which is, which is essential retail.

Okay. Got it. Just last one for me. Apologies if I missed this, but, um, can you just talk about that, uh, development project, um, that was disclosed in, uh, in the 10K, you know, what kind of asset and tenant credit is that? And is that an area where you see some growth opportunities?

Yeah, I mean, I think we've got, you know, a few development projects in the works. It's something that we spoke a lot about really at the time of the roadshow and the IPO is an area that we're really going to focus on, try to drive a little bit more yield that way. But really getting those going takes some time, and now we're starting to see the fruits of the labor of the acquisitions team. So I do think that is an area that you'll see us be a little bit more active.

What kind of yield expectations are you targeting for that project or for developments in general?

Yeah, so we're not going to be spec developers, and we're not going to go buy land and build a building and hope someone comes. You know, we're only going to, you know, get involved in the development process in the event that we've got a lease in hand with a tenant. So we're going to be pretty far, you know, and that shouldn't be too surprising, pretty conservative with the way that we approach, you know, development. And I think, you know, we'll pick up, you know, maybe 50 basis points. I don't think it's going to be, you know, again, we're not going to take much risk. And we need the lease in hand, we need the tenant committed to the site, and we need to keep, you know, a developer, you know, into a pretty tight box in terms of, you know, cost overruns and the like. And so, you know, we think it could be a meaningful percentage of what we do because we're not really looking to, you know, to deploy several hundred million dollars a quarter. So if we can do $30 million, $40 million a year in that area, we think that can really help move the needle on our yields.

All right, great. Thank you.

There are no further questions at this time. I would like to turn the floor back over to Mark Manheimer for closing comments.

All right, well, thank you, everyone, for joining and your interest in NetSuite. Again, if you're attending the REIT conference next week, hopefully we'll get a chance to talk. We're really excited about the growth opportunities ahead of us for NetSuite. So take care, everyone.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.