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?