NETSTREIT Corp. Q1 FY2021 Earnings Call

Greetings, and welcome to the NETSTREIT Corp. First Quarter 2021 Earnings Call. Please note, this conference is being recorded. I will now turn the call over to Amy An. Please go ahead.

We thank you for joining us for NETSTREIT's First Quarter 2021 Earnings Conference Call. In addition to the press release distributed yesterday after market close, 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.NETSTREIT.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 Form 10-K for the year ended December 31, 2020, and other SEC filings. All forward-looking statements are made as of the date hereof, and NETSTREIT 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 definition, GAAP reconciliation and an explanation of why we believe such non-GAAP financial measures are useful to investors. Today's conference call is hosted by NETSTREIT's Chief Executive Officer, Mark Manheimer; and Chief Financial Officer, Andy Blocher. 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 NETSTREIT's First Quarter 2021 Earnings Call. We are pleased to be here with you today. I'll start with our portfolio metrics and recent acquisitions activity, and then take a moment to discuss our pipeline and continued focus on external growth in light of our recent transformative equity raise. Andy will then provide more detail on our first quarter results and balance sheet. We will also update you on our expanded outlook, including AFFO guidance for 2021. We will then open the call for questions at the end of our prepared remarks. As of March 31, 2021, our portfolio contained 235 leases, comprising of 4.4 million square feet in 39 States with a diversified tenant roster of 60 tenants in 23 industries. Our weighted average lease term is 10.1 years. We are 100% occupied with no lease expirations until 2023, and less than 2% of ABR expiring before 2025. Based on ABR, our tenancy is 70% investment grade, with an additional 11% classified as investment-grade profile, and 89% of our industry exposure is what we refer to as defensive. We continue to focus on well-positioned tenants, who have strong balance sheets and great access to capital and on physical locations that are integral to the tenant's ability to generate cash flow. Finally, let me remind you that we do not own or intend to own theater, health club or early childhood education tenants, as these tenants typically have weaker credit profiles and real estate that is often cost prohibitive to efficiently adapt to other uses. Our strategic approach to portfolio construction has resulted in strong collections through COVID. Through this April, we have collected 100% of rents for each of the past 8 months. This steady operational performance has allowed us to focus on our external growth plan. In the first quarter, all of our acquisitions were either with investment-grade tenants or with tenants with investment-grade profiles. We completed $88.2 million of acquisitions at an initial cash capitalization rate of 6.7% and a weighted average lease term of 8.8 years. Subsequent to quarter end, we extended 2 of these leases that increased the weighted average lease term from 8.8 years to 9.6 years, with an impact of only 6 basis points to the quarter's going-in cash cap rate. We also provided $1.3 million of funding towards an estimated $4.4 million development project for an investment-grade tenant that is expected to be completed in the next few quarters. We also acquired 2 more O'Reilly's auto part stores in New England at a 6.9% cap rate with more than 10.5 years of lease term as an add-on transaction to a portfolio done in 2020. These are good examples of our ability to extend leases as part of our acquisitions and grow our opportunity set through providing development capital for our target tenants. Our multi-pronged acquisitions approach allows us to sift through a broad opportunity set and pursue where we see the best risk-adjusted returns with the highest quality tenants in all retail throughout the country. The different approaches have allowed us to add several new tenants to our portfolio, including Marshalls, Natural Grocers, Ross Stores, and Wawa. As we look ahead, our pipeline continues to grow in size, and we are excited about our ability to execute on our external growth strategy. Earlier in the month, we raised our acquisitions guidance to $360 million from $320 million. And to fund that effort, we subsequently completed a transformational well-oversubscribed equity offering that allowed us to reload our balance sheet with approximately $194 million of additional dry powder. We view this offering as a milestone for NETSTREIT, given its expected impact on our future growth. We continue to review a wide breadth of opportunities, including investments in stabilized assets, blended and extend opportunities, sale-leaseback transactions, and development projects. We will continue to target the same industries and a similar mix of investment-grade and high-quality tenants that currently make up our portfolio. We do expect to continue to grow the portfolio, but we are also focused on diversification as well as enhancing the overall quality of our portfolio. Finally, we expect that cap rates and lease terms will be generally consistent with what you've seen from us over the past few quarters. We are truly excited by the opportunity ahead of us as we know that execution on our external growth effort should result in extremely attractive earnings per share growth given our size. As I mentioned previously, but it bears repeating, our track record of 100% rent collections for the past 8 months means that we have not been distracted by chasing rents or workouts with problem tenants. We remain focused and have diligently built a strong pipeline of acquisitions. Over the past 16 months, we have raised over $600 million of equity capital in 3 separate transactions with our 144A offering, our IPO, and our most recent follow-on. We have historically deployed each capital raise efficiently and accretively. With the completion of our recent follow-on offering, we remain laser-focused on growth. We will continue to keep you updated on our progress. I'll now turn the call over to Andy to discuss the balance sheet and our capital markets activities. Andy?

Thanks, Mark, and thank you for your time with us this morning. Let me begin with our results for the first quarter 2021. Yesterday in our press release, we recorded net income of $0.02, core FFO of $0.22, and AFFO of $0.23 per diluted share for the first quarter. Please note that these per share results reflect the acquisitions completed during the first quarter for an average of only 13 days during the quarter. As of March 31, 2021, the in-place portfolio is generating $48 million of annualized base rent, or ABR, which reflects the effect of acquisitions completed in the first quarter. Turning to our balance sheet and capital markets activity. As of March 31, we had $13.7 million of cash and $13 million drawn 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 1-year extension option, which would match the December 2024 maturity of our fully drawn $175 million term loan. Our net debt to annualized adjusted EBITDA ratio was 4.7x that quarter. Subsequent to quarter end, we completed our first follow-on offering. The offering saw significant oversubscription by investors, which resulted in the upsizing of the offering by 20%. We raised $194.3 million in proceeds net of operating expenses, including the exercise in full of the underwriters' option to purchase additional shares. We view this equity raise as a pivotal moment for the company as this will serve to further fund our growth. In addition, this will take us through our 1-year anniversary since our IPO last August, at which point, we expect we will further expand the capital choices available to us. We intend to utilize the proceeds for acquisitions and to repay our revolver. Pro forma for the offering at March 31, 2021, we would have $195 million of cash and a fully undrawn $250 million revolver. We would like to thank our entire bank group for their support and execution. We're also very proud of our entire team for their hard work that positioned us for this milestone offering. With respect to dividends, earlier this week, the Board declared a $0.20 regular quarterly cash dividend to be payable on June 15 to shareholders of record on June 1, reflecting an annualized dividend rate of $0.80 per share. Now let me take a few minutes to discuss our outlook. We are introducing full year 2021 AFFO guidance in the range of $0.95 to $0.99. This guidance reflects the impact of a recent follow-on offering and as previously disclosed, we now expect to complete $360 million of acquisitions this year net of dispositions, up from our original guidance of $320 million. We still see this as back-end weighted in each quarter and cap rates consistent with our recent activity. We continue to expect our G&A to be in the range of $11 million to $12 million with additional noncash compensation expense of $3 million to $4 million. We expect our cash interest expense, including unused line of credit fees of $3 million to $3.5 million and an additional $600,000 of noncash deferred financing fee amortization. We expect to incur state and franchise taxes in the range of $200,000 to $300,000. And lastly, we expect fully diluted weighted average shares outstanding to be in the range of 38 million to 39 million for the year. To wrap up, we're very pleased with our strong first quarter activity. But beyond that, we believe our recent equity offering was a very key step in our progress as we seek to achieve certain important public company milestones, such as index and investment-grade ratings that will have a meaningful impact on our cost of capital. We take our role as stewards of our investors' equity capital very seriously, and we are focused on execution. We thank our shareholders for their support. This concludes our prepared remarks. We will now open the line for questions.

Our first question comes from Nate Crossett with Berenberg.

I was wondering if you could comment on the activity so far in Q2. I think you highlighted some stuff on the operating perspective in terms of what was under contract and LOI. Is there anything notable that's different from what you disclosed a few weeks ago there?

No, I don't believe there's a significant difference from what we previously disclosed, but we have continued to build our pipeline. I feel confident about our position for the quarter. We raised our guidance at the end of the first quarter, and I believe we're on track for a strong year. Our visibility extends about 75 to 90 days out, and with current developments, including not just our portfolio but the types of opportunities emerging, we are optimistic. As stated in our prepared remarks, we are utilizing multiple strategies, including sale-leasebacks, blend and extends, and development, some of which require more time. Public companies are successfully executing similar transactions, leading to repeat business. We're seeing an increase in both development and blend and extend activities, and I'm optimistic about the volume, quality, and pricing for the second quarter.

Okay. And so pricing is pretty consistent over the last 3 months. I mean, we tend to get questions as to the fact that you guys are able to get a little bit higher yield than some of your closest competitors? And maybe you can just kind of remind us what you guys are doing that may be a bit different than peers to kind of achieve that a little bit higher yields on acquisitions?

Yes. No, it's a good question. We get asked that question quite a bit by investors. And I think it has a lot to do with our size being a smaller public REIT, not needing to go out and acquire several hundred million dollars of properties every single quarter. We really try to build out a bell curve of what opportunities fit our criteria that we really want in the portfolio and then what assets are most inefficiently priced and really kind of build out that bell curve, chop off the left side of the bell curve there and try to buy the most inefficiently priced assets. And only needing to go out and buy $360 million net of dispositions per year allows us to be a little bit more surgical with the assets that we take into the portfolio.

Okay. I appreciate that. And then if I could just ask one for Andy. It sounds like you'll probably put the ATM in place later this year, and I'm just curious how do you view kind of ATM funding versus overnight follow-ons? And how should we kind of think about that heading into next year?

Thank you, Nate. I believe that considering the level of acquisitions we plan to undertake over time, our current liquidity and the average daily trading volumes indicate that we cannot solely depend on the ATM right now. Everything we do will require a balanced approach. The advantage of this strategy is improved match funding, as we currently hold $195 million in cash on our balance sheet. Similar to all our initiatives at NETSTREIT, achieving balance will be key.

Next question is Greg McGinnis with Scotiabank.

So now that Biden appears to actually be going after 1031 exchanges on property tax gains over $500,000 and given your comments that most of your competition seems to fall into that category, how do you expect the potential rollback of that perk to impact the business?

It's a good question. I believe there's still a lot of work to be done for it to become law. However, you're correct that most of our competition consists of buyers using 1031 exchanges, smaller family offices, and individuals, so we're not really competing much with larger institutions. It would be reasonable to expect that if they manage to eliminate the loopholes that would remove this perk, pricing may begin to rise. There will likely be significant opposition from lobbyists and various parties before it becomes law. Nevertheless, I think this situation slightly benefits us in terms of acquisition pricing due to reduced competition. We aren't selling many assets; we didn't sell anything this quarter and have taken a more aggressive approach to managing our portfolio before raising money as a private company. Therefore, we don’t need to sell many assets, but having the option to sell into a deeper 1031 private market can be advantageous if we choose to divest some assets from the portfolio.

And how much of your acquisitions are sourced from 1031 sellers?

Not many. When we examine our acquisitions, we're primarily working on deals with developers and partnering with buyers of shopping centers. Most of these sellers are institutional types, making this a small percentage of our acquisitions. I understand that you're suggesting there could be a decline in overall transaction volume, which I believe is accurate. However, if we consider some of our peers who sell significantly more assets than we do, only about 25% to 30% of their sales go into the 1031 market. Therefore, while there may be an effect on total transaction volume, we might be somewhat less affected than some of our peers.

Okay. And just one last question from me. I know you mentioned that you expect volumes and cap rates to remain steady in the acquisition pipeline. However, as we begin to move past the impacts of pandemic restrictions, have you noticed any changes in cap rates or desirability that might make certain tenants or sectors more or less appealing to you?

No. We are definitely observing more transactions occurring in areas that we are less focused on, which I believe is beneficial for the overall market. Some casual dining sectors that we are not concentrating on seem to be easing up a bit, leading to an increase in those transactions. Even prior to the pandemic, our company strategy has always been to concentrate on essential retailers and those with strong balance sheets, solid access to capital, and active sectors in retail. We anticipate significant changes in retail, which began before the pandemic and have accelerated afterward. It is crucial in retail, as it evolves, to be involved in sectors that are somewhat protected from the impact of e-commerce and to have the capital necessary to reinvest and adapt to inevitable changes. This has been the foundation of our strategy since starting the company and raising capital as a private entity in 2019, which remained consistent throughout the pandemic. We aim to provide reliable cash flows for our investors and will not pursue high yields or alter our investment strategy based on cyclical changes. We see these as long-term investments, accepting that cyclicality and change will occur, and we want to be well-positioned for that change when it arises.

Next question, Todd Thomas with Keybanc.

I wanted to ask, in light of recent migration trends, are there specific markets where you're looking to strengthen your position or expand?

Not really. I think we are seeing more opportunity in areas experiencing population growth. Over time, you will likely notice us concentrating more in the sunbelt regions of the country. We are assessing real estate similarly to how retailers evaluate it on a market-by-market basis, considering whether the demographics support not only our intended use but also other potential uses if we take back a property. There are healthier, growing markets in the Southeast, Southwest, and sunbelt area. Therefore, you will see us gradually increase our exposure there. However, over time, we are likely to operate across all of the lower 48 states with a highly specific focus on each market.

Okay. And can you comment on development opportunities, whether you see more opportunity there and expect to see more development and sale-leaseback opportunities in the future?

Yes. No. We are seeing more opportunities in development. That was a real focus for our acquisition team. I think they've done a great job of going out and trying to source those types of opportunities. When we were first getting going and initially publicly had a few of those opportunities, they really do take a lot of nurturing those relationships to get them going. And then you really get a lot of repeat business once you do a few. And now we're starting to get a lot more traction with a lot of those repeat sellers. So we're very encouraged by that. So I do think you'll see a little bit of an uptick on the margin as it relates to development. We've always been somewhat not a sale-leaseback, but thinking that that's probably not going to be an area that we're going to have a lot of success. Usually, those are cash-driven events, where you might have a private equity firm buying a retailer and trying to pull as much cash out of the real estate as they can and write smaller equity checks. That's not a great equation for us and how we look at corporate credit. So we have not really focused too much on that, but we are seeing even more opportunity there. In fact, part of our pipeline does have a sale-leaseback in there with an investment-grade retailer that's looking to really grow. So I think you are seeing a little bit more opportunity with investment-grade and high-quality retailers, mainly because they're the ones that are growing and some of them like to use the real estate as an avenue for funding their growth.

Next question, Linda Tsai with Jefferies.

Can you remind us how you plan to manage leverage moving forward? What are the current drivers, and is anything preventing you from operating at a higher level?

Well, right now, we're at zero. However, when Mark and I were developing the story, we focused on our experience. Our targeted leverage is between 4.5 and 5.5 times. We believe that this is a reasonable level. From our perspective, the portfolio could certainly support a higher leverage. But in the context of a public company, we consider 4.5 to 5.5 times to be an appropriate range for our company.

Got it. And then how is your investment sourcing pipeline broken out? Does it loosely mirror your 70% IG, 11% IG like? I'm just wondering if there's a ratio of how much you have to source in order to execute in those categories?

Yes, we are not heavily tied to that, but we are focused on what gets through the investment committee. We anticipate being around two-thirds to three-quarters, which has been quite consistent for the investment-grade category. We aim to further increase our investment-grade profile, and we've been making progress in that area over the past few quarters. We are optimistic about the pipeline and expect to acquire more of those types of assets, which we see as carrying similar risk but possibly yielding higher returns. We definitely want to expand in this segment. Additionally, we will consider the BB- to BB+ sub-investment-grade bucket, particularly when we find strong operators, as there are a couple of opportunities there. However, we are not engaged much in the fourth category of non-investment-grade profiles, which includes smaller operators without ratings. That said, we believe quick-service restaurants may be an area where we could explore more, given their strong funding potential and resilience across various economic conditions, which have been demonstrated historically. While there isn't a lot currently in the pipeline, we are beginning to see some more opportunities in this space.

And just one last one. Given recently raised net investment volume, can you discuss how your acquisition team has evolved over the past year? And what do you think they are capable of in terms of how much can they actually deliver in terms of volume?

Yes. No, I think, significantly more than what we're doing right now. We're very focused on pricing and really trying to cut off that side of the bell curve of what's the most inefficiently priced assets. I think we can maybe eat a little bit more into that bell curve. I think you'd see a little bit of degradation on cap rate, maybe 10, 20 basis points at the most. If we were to double the amount of acquisitions that we're doing, I think the team has really bought into our approach and has really been very creative in terms of how we've gotten in front of a lot of opportunities. And then, like I mentioned earlier, a lot of the development side and doing some blend and extends with some retailers now that we've done a couple, everyone is pretty comfortable with the process and kind of what the lease amendments need to look like if it's a blend and extend. And so the repeat business there, I think, should get easier over time and certainly starting to see that in the pipeline. But I think with the team that we currently have, doubling our acquisitions volume is pretty achievable. If we were to double, I think we may look to maybe add a little bit more help on the closing side and asset management side. So maybe one person on each side there. But I think we're really happy with the progress that the acquisitions team has made in developing relationships and really getting into more and more repeat business because I think that's going to be more and more important as we grow the portfolio.

Next question, Ki Bin Kim with Truist.

So as you become a bigger company and acquirer, what kind of benefits do you think you can see in terms of deal access or visibility? I know you guys have a long history of doing this anyway, regardless of the size of the company, but just curious what kind of benefits you might see?

Yes, that's a great question. We expected this to happen a bit more gradually as we develop our relationships and enhance our reputation, so that people think of us more when they want to sell something. However, this process has occurred more quickly than I anticipated. That said, we still aren't very competitive when it comes to the much larger portfolios. We have seen several opportunities in that realm, but they are typically widely marketed and highly competitive, and we just won't be able to compete on pricing in most cases. I don’t foresee much change in this aspect, but as we continue to strengthen our relationships and generate more repeat business, I believe that will help us grow. However, we still have a long way to go before we can truly compete in the larger transactions.

So how would you describe the deals that you're looking at today? Like how much is the repeat business that are kind of directly done with tenants versus more broadly brokered type of deals? And is there actually the pricing benefit?

Yes, we've definitely observed many peers navigating what qualifies as brokered and what does not. Most of our transactions tend to fall into a gray area. For example, when we identify a blend and extend opportunity, we may come across a shorter-term lease that is broadly marketed but attracts limited interest from buyers. We can secure that lease and then approach our retail partner to extend it before or shortly after closing. In this case, we have essentially created our own deal. While a broker may technically be involved, we don't typically view it that way. Additionally, a significant portion of what we're acquiring, around 80% in the second quarter, reflects repeat business.

Next question, Katy McConnell with Citi.

So if you were able to double your acquisition volumes at some point in the future, what do you anticipate would be the mix of equity versus debt funding for acquisitions going forward?

I'm sorry, Katy. Can you say that again?

Sure. Can you hear me?

Yes, I can hear you.

Okay. So I just asked, if you were able to double your acquisition volumes in the future, what do you anticipate would be the mix of equity versus debt funding going forward?

Yes. I mean, look, I think that if you kind of do the math and you assume the impact on NOI associated potential increase in G&A, what that means from an EBITDA perspective, rough math, it probably looks like something like 2/3 equity, 1/3 debt. Rough numbers.

Okay. Great. And then can you just update us on how you're thinking about the timing of acquisitions throughout the remainder of this year to get a sense for the potential ramp in AFFO throughout the year?

Yes. Sure. I mean I think we're going to be pretty consistent. We did about $90 million in the first quarter with no dispositions. We may have a few dispositions here in the second quarter with a little bit more acquisitions. So I think we'll likely be pretty consistent with around $90 million net of dispositions each quarter.

Yes. Katy, I wanted to mention that in the first quarter, acquisitions were recorded on the balance sheet for an average of just 13 days. When we discuss back-end loading, we are actively working to enhance that situation. Given the size of the company, this could significantly affect the absolute AFFO in any quarter and for the year.

Our next question comes from Todd Stender with Wells Fargo.

Maybe just sticking with you, Andy, on that last question. When you layer in the oversubscribed equity offering, where does that leave your expectation for debt funding? I guess, that has the sourcing changed? You're now a bigger company, the size, pricing, how did that really transform how you're looking at your pricing, probably just from the debt side?

Yes, Todd. I don't think the debt side had a significant impact. As we mentioned earlier, we currently have a fully drawn $175 million term loan, and there's no balance on the $250 million credit facility. The term loan is completely hedged until its maturity date in December 2024. It will take some time before we start generating substantial debt that we can secure through private placements. I anticipate this might occur in about 12 to 18 months. From our discussions with the banks, we believe that the insurance companies and key players in the private placement market, as well as the rating agencies, will respond positively to our focus on high-quality investment-grade tenants. These factors are beneficial for us. However, we need to keep improving our diversification and continue growing. I don't think there has been a significant change since our last discussion. Previously, we talked about 7-year private placements in the high 2s to low 3s, and those still appear to be good options to consider.

Got it. And probably for Mark, when you're looking at the cap rate on the quarter, can you bifurcate, if you can, with the investment-grade properties went for collectively? If you had a 6, 7 average cap rate, what is the investment-grade go for? And then, I guess, the other 1/3 that was either below investment-grade or not rated?

Yes. I mean there's not a huge difference. There's maybe a 30 or 40 basis point difference. The only assets that we acquired in the quarter were either investment-grade or investment-grade profile. So there's maybe a 30, 40 basis point difference on average between those 2 buckets.

Okay. Got it. Last one, when you look at the average lease term, it's not that far off from your average, but you're inside of 9 years now. How short did you go on any leases, maybe just kind of speak to your appetite for anything in the short to medium-term category?

Yes, we did extend a few leases in April, which adjusted the average lease term to approximately 9.6 years instead of 8.8. However, we are considering some shorter-term leases. In one specific case, we engaged in discussions with a tenant who is committed to staying long term. Their sales are strong and their rents are below market, which minimizes our risk. While we prefer longer terms, we might accept shorter ones under certain circumstances. In this instance, the tenant typically does not extend leases early, but we feel confident that they will remain long-term. Even if they decide to leave, we believe we can reposition the space and possibly increase the rent. Therefore, we are open to shorter-term leases in these situations. The average of 9.6 years is slightly shorter than our usual preference, but for the second quarter, I anticipate a longer average lease term.

Next question, Michael Gorman with BTIG.

Mark, you mentioned your acquisition strategy of working with shopping center owners to explore potential parcels within their centers. Notably, there were some significant transactions in the public space about a quarter ago. Are you noticing an increase in interest from shopping center owners in evaluating their properties to unlock value?

Yes, we've noticed an increase in interest from sellers, and there's also growing demand from buyers of multi-tenant retail. We've observed cap rate compression in this area, and more buyers are returning. However, the competition has increased, and while our volume is up, the number of deals we are pursuing has slightly decreased. We have multiple partners, each with different strategies, ranging from those looking to invest heavily in property renovations to those who prefer stable cash flow. Our focus is on securing strong retailers with good leases in locations that promise long-term viability, while ensuring the overall health of the shopping center to drive foot traffic for our tenants. There is one group that is becoming more aggressive, but their specific strategy may not overlap with ours, as many shopping centers are actively traded. As a result, we anticipate facing more competition in the multi-tenant retail sector, which could make it challenging to achieve high volume with that strategy. Thankfully, we have diverse approaches to acquisitions, allowing us to maintain a steady flow of growth by identifying the most promising opportunities for risk-adjusted returns.

Okay. That's helpful. And then when you're looking at acquisitions with tenants who may be in more of an omnichannel space but are doing a good job with it, how do you change your underwriting or as you look at the tenants, are you getting increased visibility in terms of what kind of e-commerce volume is flowing through that specific location? Are you looking for specific real estate attributes, whether it's clear heights or end caps? So if it's a tenant like maybe, as an example, like a Walmart, are there different things you're looking at to see how critical that location is to their omnichannel strategy?

Yes, it's a really good question. I believe it highlights the evolution of retail and the importance of understanding this change. For example, Walmart operates differently in each market, where online purchasing and in-store pick-up become more vital in certain areas. Best Buy is another example; they are reevaluating their distribution approach and adjusting their store designs significantly. They have shifted from very large locations to smaller ones but are now slightly increasing their footprint again, avoiding overly large spaces. It's essential to communicate with tenants to grasp their specific needs for each location, rather than applying a one-size-fits-all strategy regarding attributes like clear heights for storage. In some regions, a hub-and-spoke model is more effective. Thus, understanding tenants' strategies and anticipating changes is crucial for our operations and planning for future scenarios.

Okay. And then one last one. Andy, I apologize if I missed it. But maybe could you just talk about how the Board is thinking about dividend policy here obviously, I think just looking at the guidance range, you're on track with the current payout for kind of low 80s. Should we think about, as the company is in its kind of major growth phase that, that payout will trend down or will the dividend growth kind of keep pace with the AFFO growth from here as the company expands?

Yes, I believe we've consistently communicated our approach regarding the AFFO payout, which typically ranges between two-thirds to three-quarters. We believe this strikes a good balance between returning dividends to shareholders, meeting our tax obligations, and ensuring we retain sufficient free cash flow. Looking ahead over the year, based on the numbers discussed, the final decision regarding the dividend lies with the board. While we do propose recommendations, I anticipate that we could start considering a potential increase in the dividend beginning in 2022.

I would like to turn the floor over to Mark for closing remarks.

Well, thank you, everyone, for joining us today. We look forward to continuing to discuss our progress in the future. Take care.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.