NetSTREIT Corp.

Greetings and welcome to the NetStreetCorp third quarter 2023 earnings 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, Director of Investor Relations. Thank you. You may begin.

We thank you for joining us for NetStreet's third quarter 2023 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 Form 10-K for the year ended December 31, 2022, 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 of our non-GAAP measures, reconciliations to the most comparable GAAP measure, and an explanation of why we believe such non-GAAP financial measures are useful to investors. Today's conference call is hosted by NetStreet's Chief Executive Officer, Mark Manheimer, and Chief Financial Officer, Dan Donlan. We will make some prepared remarks, and then we will open the call for your questions. Now, I'll turn the call over to Mark. Mark?

Good morning, everyone, and thank you for joining us today for our third quarter conference call. With the recent changes in the capital markets and subsequently the property markets, I want to begin with how NetStreet is positioned for what we foresee as an increasingly challenging landscape for the consumer, and by extension, certain retailers. We will also discuss where we see opportunities and how we plan to operate in this environment. The challenges we expect to occur for many retailers center around a consumer that is unlikely to spend at the same level that they have in years past, especially when it comes to purchases by lower income consumers on more discretionary type items. While a small handful of our tenants have a diversified product mix that includes some exposure to discretionary items that may come under some pressure The portfolio is built around necessity retailers, off-price value merchants, and resilient service providers. We believe this defensive industry focus, coupled with our tenants' strong balance sheets and ready access to capital, position our portfolio to deliver predictable cash flow generation over the long term. While there may be some headline risk associated with top-line performance and gross margin pressures for some of our investment-grade tenants, we do not see these pressures threatening their ability to meet their financial obligations, including paying rent. We continue to be vigilant in monitoring our portfolio and where we have seen risk, we have actively recycled and redeployed capital into less challenged assets and generally higher going in cash yields. Turning to credit, our watch list consists of just one tenant, Big Lots, which now represents 1.9% of ABR versus 2.4% last quarter. While we may look to further decrease this exposure over the coming quarters, we do want to highlight that the nine infill assets that we now own have solid demographics, below-market rents, and excellent foot traffic. More specifically, our remaining locations have an average five-mile population density of over 100,000 people and an average household income of approximately $80,000, which is attractive for most retailers when looking for expansion markets. Additionally, we believe our average rent per square foot of $6.90 is well below market. Lastly, when using Placer AI to track store-level foot traffic, our big lots rank in the top 75 percentile of the entire chain on average. Again, while we may continue decreasing our exposure to big lots, we do not believe that there is long-term economic risk to these assets given the positive underlying fundamentals of the real estate, which is a testament to how we have underwritten our portfolio since inception. The other area of risk that we see developing across the retail space resides in tenants that have a high exposure to floating rate debt and or low-cost debt that is maturing soon. Given the financial transparency we receive from our tenants each quarter, we are able to quantify our tenant's exposure to the aforementioned. Specifically, less than 9% of our tenancy, as measured by ABR, has debt coming due between now and year-end 2025, and the majority of this concentration, or 7.5%, is with Walgreens, who has exceptional access to capital. With that in mind, based on our limited exposure to retailers that are reliant on discretionary spend from low-income consumers, our tenant base having little to no refinance risk over the next few years, and only 2.3% of our ABR expiring through 2025 year-end, we continue to expect our portfolio to generate consistent cash flow as we navigate a potentially choppy macro environment. Turning to the portfolio, as of September 30th, we had 547 investments that were leased to 85 tenants that operate within 26 retail industries across 45 states. The annualized base rent for our portfolio was $124.3 million, 83.3% of which is leased to tenants with investment grade ratings or investment grade profiles. Our occupancy remains at 100% and our weighted average remaining lease term was 9.3 years. Moving on to external growth, we closed on $117.5 million of investments this quarter at a blended cash yield of 7%. The weighted average lease term remaining on these investments was 10 years, and 97.2% of these investments were leased to investment-grade or investment-grade profile tenants. Turning to quarterly disposition activity and loan payoffs, we divested up six properties for gross proceeds of $13.5 million at a blended cash yield of 6.9%. continuing to demonstrate our ability to accretively recycle capital while improving the quality and risk profile of our portfolio. All told, we completed $103.9 million of net investment activity in the third quarter, which brings our year-to-date net investment activity to $327.9 million. While we are seeing significantly more opportunity for acquisitions in the fourth quarter at higher cap rates than what we have seen in 2023, We are also seeing plenty of opportunities to sell assets at stubbornly low cap rates to trade buyers and thus plan to ramp up our selling efforts to take advantage of this spread. Before I hand the call off to Dan, I want to provide additional commentary on our strategy and expectations as we finish 2023 and head into 2024. Since our inception and IPO several years ago, we have exercised diligence in creating one of the highest credit quality net lease portfolios in the freestanding retail space by partnering with the strongest retailers in the country. We have had no rent interruptions to date, even through a global pandemic, and have experienced zero vacancies. With the current narrative being dominated by headlines discussing looming recessionary concerns, higher for longer interest rates, and rising delinquencies in consumer credit, we believe the underwriting discipline we have exercised since inception have positioned our portfolio to outperform during a time of heightened macro uncertainty. With that, I'll let Dan go over our third quarter financial results, balance sheet, and 2023 guidance update.