Greetings and welcome to the NETSTREIT Corp. Second Quarter 2022 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Cathy, Investor Relations. Thank you, Cathy. You may begin.

We thank you for joining us for NETSTREIT's second quarter 2022 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.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 31st, 2021, and our 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 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 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'll turn the call over to Mark. Mark?

Good morning everyone, and welcome to our second quarter 2022 earnings conference call. Before I discuss our investment activity for the quarter, I want to take a moment and say how pleased I am with the team's ability to consistently source attractive investment opportunities at strong yields and continue to be nimble and creative in a dynamic market. We have a unique and proven strategy and our performance demonstrates our continued ability to execute and drive strong and steady results. With that, I am pleased to report that we completed $122.7 million of net investment activity for the quarter. In a market that is evolving rapidly with higher interest rates and macroeconomic uncertainty, we have remained disciplined and selective with opportunities we pursue. As we started to see changes in the acquisitions market, we pivoted to higher quality and better priced acquisitions, as shown by the higher yield for the quarter, which resulted in approximately $375,000 in dead deal costs in the quarter. We believe this was the right strategy as there was a clear economic benefit to being nimble in an evolving market. Since our IPO less than two years ago, we have more than doubled our portfolio size from 163 properties to 381 properties. Our annual base rent increased from $34.5 million to $84.2 million and enhanced our diversification metrics while maintaining the highest credit quality and stable portfolio in the net lease space, increasing investment grade and investment grade profile tenancy by about 900 basis points to 81%. Our portfolio is largely made up of tenants in the necessity, discount and service industries, all of which are well insulated from recessionary and/or inflationary pressures. Despite uncertainty in the current economic environment, we believe that the defensive nature of our portfolio will allow us to continue to outperform as we did during the COVID pandemic, where we were the only public net lease retail REIT to collect 100% of our pre-COVID rents. In addition, we have a strong balance sheet with ample flexibility and liquidity to meet our investment goals for the year. Now turning to our investment activities for the second quarter. We acquired 22 properties for $117 million at a weighted average initial cash capitalization rate of 6.7% with a weighted average lease term of 10.9 years. It is important to note that our second quarter acquisitions were on average at a higher going-in cap rate, better credit and with longer lease terms than prior quarters, which really demonstrates the strength of our team and ability to adapt and source high-quality opportunities in an evolving market. Rent commenced on three development projects that had a total cost of $9.8 million at a weighted average investment yield of 6.5% and a lease term of 10.3 years. During the quarter, we entered into a $6 million convertible loan with a 12-month term and an interest rate of 6.5%. We expect this loan to be converted into fee simple ownership of two properties by the end of 2022, with a cash cap rate in line with the current interest rate. Additionally, we sold a Kohl's for $9.9 million at a 6% cap rate, and we terminated a lease with a small auto parts retail store and sold the property. We expect to collect the remaining lease payments in a lump sum, which should result in a small gain in a future period. Finally, we provided $4.6 million of funding to support ongoing development projects. At quarter-end, we had six projects under development where we have invested $12.8 million to date. You'll notice that our development activity is down from prior quarters due to recent completions, and we have taken a more cautious approach as we expect a more challenging environment for developers to perform within their previously negotiated construction budgets with tenants, given rising construction costs, rising labor costs and economic uncertainty. At quarter-end, our portfolio was comprised of 381 properties with 75 tenants contributing approximately $84.2 million of annualized base rent. The portfolio had a weighted average lease term remaining of 9.5 years with 81% of annual base rent represented by tenants with investment grade ratings or investment grade profiles and the portfolio remains 100% occupied. We added four new tenants in the quarter, which includes a grocery store with solar panels on its roof, augmenting our ESG efforts, an Alta store, a restaurant and an automotive service store. Subsequent to quarter-end, we acquired seven properties for $45.4 million, including closing costs. With the recent acquisitions, we have completed $304 million in net investment activity year-to-date, which is over 60% of our full year $500 million targeted net investment activity. This level of activity is a testament to the experienced team we have in place and our focus to grow the portfolio with high-quality tenants. We believe we are well-positioned to maintain our momentum for the remainder of the year and beyond. With that, I'll turn the call over to Andy to go over our second quarter financial results and 2022 guidance.

Thank you, Mark. And once again, thank you all for joining us on today's call. In our earnings release published yesterday after market close, we reported net income of $0.04, core FFO of $0.26 and AFFO of $0.28 per diluted share for the second quarter. The portfolio's annualized base rent grew to over $84 million in the second quarter, up 52% from June 30, 2021, driven by 114 acquisitions, seven developments and two mortgage loan receivables since the end of the prior year second quarter. Interest expense increased $600,000 to $1.5 million from $900,000 in second quarter 2021, due principally to our higher average balance outstanding on the revolver and increased base rates compared to second quarter 2021. General and administrative expenses increased to $4.9 million in the second quarter compared to $4 million from second quarter 2021 and primarily due to an increase in the number of employees from 24 to 30 to support our growing portfolio. In addition, as Mark referenced, we had approximately $375,000 of dead deal costs in the quarter, but we do not expect this increased level of dead deal costs in future quarters. Turning to our balance sheet. At quarter-end, we had over $39 million in escrow to facilitate acquisitions that closed on July 1 and total debt of $412 million outstanding, of which $175 million is from our fully hedged term loan, with the remaining balance from our revolving line of credit. We launched a recast of our credit facility on July 11 to expand our revolver from $250 million to $400 million and to add a $200 million loan five-year term loan to our debt structure. The new term loan is expected to be freely prepayable at any time, providing optionality to access the private placement market or to seek other capital markets alternatives for refinancing if we see attractive longer-term opportunities. The $600 million recast is already fully committed and is expected to close in mid-August, at which time our liquidity will increase by $350 million. We intend to leave our existing $175 million term loan outstanding, which has a fixed interest rate of 1.36% and matures in December 2024. On June 23, we settled 2.4 million shares, receiving net proceeds of $50 million under our forward sales agreement associated with our January offering. We have until January 10, 2023, to settle the remaining 4.5 million shares associated with our forward sales agreement. During the quarter, we did not make any sales under our ATM program. At June 30, 2022, our net debt to annualized adjusted EBITDA ratio was 3.7 times after giving consideration to the remaining shares outstanding under the forward sales agreement from our January offering, well below our target range of 4.5 to 5.5 times. With regard to our dividend, earlier this week, the Board declared a $0.20 regular quarterly cash dividend to be payable on September 15th to shareholders of record as of September 1st. Our payout ratio for the quarter was 71%. For 2022 AFFO per share guidance, we are maintaining our previous guidance range at $1.14 to $1.17, but due to market volatility, we have widened some of the expectations in our underlying assumptions. Our guidance includes the following assumptions: Investment activity in the year, including developments where rent commenced, and mortgage loan receivables net of dispositions to remain at least $500 million. Cash G&A is expected to remain in the range of $14.5 million to $15 million, which is inclusive of transaction costs. Non-cash compensation expense is expected to remain in the range of $5 million to $5.5 million. Due to a combination of increased borrowings and a significant increase in the forward curve since we most recently provided guidance, our cash interest expense expectation has been increased and widened from our previously stated $5.5 million to $6.5 million, to $7 million to $9 million. Non-cash deferred financing fee amortization, which is not included in our cash interest expense, is increased from $600,000 to the range of $800,000 to $900,000 to reflect the pending credit facility recast. And lastly, a decrease to full year 2022 diluted weighted average shares outstanding, which includes the impact of OP units, from our previously stated 52 million to 54 million shares to now be in the range of 50 million to 52 million shares as a result of higher projected debt balances for the remainder of 2022. These changes will not impact our targeted leverage as we continue to expect our net debt-to-EBITDA to be between 4.5 to 5.5 times. To wrap up, we're confident in the ability of our portfolio to offer stable and predictable cash flow during a time of economic uncertainty, and we appreciate the support of our bank group as we finalized our largest round of debt financing. During our tenure as a public company, we have demonstrated our ability to execute and build our best-in-class portfolio. Our team remains focused and diligent as we work toward meeting our investment goals for the remainder of the year. With that, we will now open the line for questions.

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question is from Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Hi, good morning. First question, in terms of funding investments throughout the balance of the year, you have the remaining shares to settle from the forward equity in January. And Andy, you just discussed a little bit of the revised guidance, your expectation for the weighted average shares. But I was just wondering if you could just talk about plans to permanently finance the line balance from here and also discuss thoughts on raising equity capital in the back half of the year, as you look towards the $500 million net investment guidance that you maintained?

Yeah. Thanks Todd. So, from our perspective, we're taking a big step by funding the line balance with the recap that we just talked about. That’s a $600 million recast where we stand right now. We've got about $900 million of current in-place commitments. We're waiting on another $170 million more. We'd anticipate that closing in the next couple of weeks, but it is fully committed. As I said, it's a long five-year term loan that goes along with the existing term loans that comes to maturity at the end of 2024. So, we feel like from a debt perspective, we're pretty locked up, and we're adding, as I said in my remarks, another $350 million worth of debt liquidity on the balance sheet. On the equity side, we've got roughly $95 million of equity that remains undrawn under the forward, and we just wanted to get greater certainty on the debt financing before we decided to be more efficient on the funding mix. If you recall, we started off the year talking about a private placement, but that market closed very quickly. That's when we moved to the debt market. We are really thankful for the support that we have. We still have access to roughly $160 million worth of equity through the ATM, and we feel very confident with where we stand as we look out at the opportunity set that Mark and his team are looking at on the asset side.

Okay. Does the current budget have any additional equity capital being raised throughout the balance of the year? It looks like you would be in sort of the high five times range on a net debt-to-EBITDA basis, pro forma the remaining $250 million of acquisitions or so. You mentioned the 4.5 to 5.5 times target leverage level. I realize you've been below that by a wide margin for many quarters, and it may bounce around a little bit above that in the near term. But where would you expect to be at year-end?

Yeah. I mean, I would think that we would probably be a more efficient leverage around size. We're never going to talk about the specific methods that we have available to us. But we have not been active on the ATM, and we do have that as a tool at our disposal to take advantage of on a go-forward basis.

Okay. And then, in terms of asset pricing and acquisition cap rates, I was just curious if you could talk about pricing trends and whether you are seeing cap rates widen a bit as buyers and sellers begin to adjust to the higher interest rate environment and sort of what you're seeing in the pipeline today.

Yeah. Absolutely. So, you saw a pretty big pivot from us early on in the quarter, which resulted in a bit of dead deal costs, which we always like to avoid. The increase in pricing was just due to a lot of the typical buyers falling out of the market. A lot of the 1031 buyers that used leverage have locked in an exchange that needed to close those transactions. But once those kind of flowed through the market, we've seen less activity with 1031 buyers. They're still there, but any of them that use a decent amount of leverage are not anticipated to be as active. The larger private equity firms that are using a lot of leverage are mostly out of the market. We pivoted during the quarter, and it shouldn't be lost on everybody that not only did we get a 6.7% cash cap rate on acquisitions but also when you look at the quality of what we acquired during the quarter—credit standpoint, weighted average lease term, etc.—we are really excited about the opportunities that we saw during the quarter. So our highest quality portfolio acquisitions during the quarter really demonstrate our success in this market. To summarize, we’ve seen, on average, about a 25 basis points increase in the areas we’re looking for.

Okay. Great. And one last one. Andy, if I could just go back to the recast and the term loan. Is the term loan fixed or variable? And do you plan to put hedges in place?

Yeah. When we talk about the interest expense guidance expectations, the forward curve has been all over the place. We've shown our rate to our Board recently and the current market is well inside of that. So, we're going to evaluate. Our thought at this point is that, while it has a delayed draw feature, we would likely fully draw it down at closing. Then the question is going to be what does the forward curve look like at that point? How do we think about fixing that in either in full or in part based on market conditions at that point in time? But with the Fed increasing rates by 75 basis points and a recent GDP read, I think we've seen a little bit better forward curve recently than a week or two ago. That will be an evaluation we’ll make and we’ll certainly keep you aware of that at that point in time.

Okay. Great. All right. Thank you.

Thank you. Our next question is from Nicholas Joseph with Citi. Please proceed with your question.

Hey, guys. It's Chris Wetherbee on with Nick Joseph. Are you seeing any—I just want to follow back up on the transaction market. Are you seeing any buyers pull out of certain markets more so than others? And has there been differences in buyer appetite across different qualities across the quality spectrum for different assets?

Yeah. It's a good question. I think really where we started to see more buyers pull out had to do with leverage buyers at lower cap rates. The higher-quality transactions that were well below the cap rates we're acquiring assets at have started to get a lot more interest. A lot of those deals began to drop off as interest rates increased, especially in the industrial sector which is not our focus. As you start to see more buyers relying on leverage, you've seen less interest in lower cap rate deals. This has led to a larger opportunity set for us and improved selectivity in both quality and pricing this quarter. We're optimistic about the opportunities continuing into the third quarter.

Got it. And then, with a tougher macro backdrop today, how are you guys thinking about the watchlist? Are there any tenants on the watchlist that maybe you're keeping a closer eye on? Or how has the watchlist evolved?

Yeah. Sure. Yeah. It's pretty similar to what we were starting to see last quarter regarding the consumer, especially on the lower end. They're really starting to feel more pressure as consumer savings return to pre-pandemic levels. You’re beginning to see higher reliance on credit cards. The results from retail giants illustrate that necessity products are performing well, while discretionary products are not. We've taken a deep dive into our portfolio and feel very confident in its defensive nature. In terms of specific tenants, Best Buy has seen poor results recently due to shifts in consumer preferences, though their sales remain above pre-pandemic levels. We have confidence in their resilience and the strength of our assets. We need to be cautious with that particular tenant but don’t foresee any risk to rent collection. Our underwriting emphasizes tenant health and the cyclicality in varying economic climates.

Good color. Thank you.

Thank you. Our next question comes from Connor Siversky with Berenberg. Please proceed with your question.

Hey, thanks for having me on the call. Just quickly on the development pipeline. I noticed the spend this quarter was around $5 million. Can you provide any expectation for what that run rate spend might look like through the end of the year and possibly into 2023?

Yeah. Sure. It's going to depend heavily on construction costs, labor costs, and other economic factors. A typical development deal involves partnering with a developer, negotiating rents with tenants, and locking in yields. We've been active in discussions with our developers who are experiencing significant pressures due to increasing costs and difficulty in sourcing labor. We want to avoid being placed in a situation where developers ask for our help covering their costs. We see a lot of opportunities elsewhere right now and think it prudent to take a cautious approach, especially where we have ample acquisition opportunities.

Got it. Understood. And then, maybe just a bit of a modeling question on the 26 investments completed during the quarter. Can you give us any sense of the timing as to when those 26 were completed?

Yeah. From our perspective, bringing them into the portfolio averaged about 20 days.

Sorry, say that one more time.

20 days, and that was influenced by early in the quarter where we started seeing cap rates move and better opportunities when we pushed back on some other transactions. We had a somewhat backend weighted quarter, which I believe will likely reverse itself in the third quarter.

Yeah. And Connor, just remember, we closed roughly $40 million on the first day of the quarter in the third quarter, so we’re ahead of that pace.

Okay. So, for the second quarter, we're looking at just for clarification, 20 days after March 30 or 20 days before June 30?

Yeah. 20 days before.

20 days average outstanding is how I thought about it.

Got it. Okay. Thank you. That's all for me.

Thank you. Our next question is from Josh Dennerlein with Bank of America. Please proceed with your question.

This is Dan on behalf of Josh Dennerlein. I was hoping to see if you can elaborate more on where you see the best opportunities for capital recycling within the portfolio?

Yeah. Sure. We're always looking at the portfolio for potential risks. Fortunately, we conducted extensive review before going public, so there isn't much concern. However, we maintain relationships with various counterparties in the marketplace that might find themselves needing to close on something quickly. We’ll take advantage of those opportunities and sell assets selectively. We tend to receive attractive offers on some of our assets, and if we can redeploy that capital efficiently and accretively, we are willing to do so. However, we are cautious and won't sell large sums if we can't replace them effectively in the quarter.

Great. Thank you. And then also, could you remind us of the mix between the fixed rent bumps and inflation-linked bumps within your portfolio as well?

Yeah. Sure. While we have some assets in the portfolio with CPI bumps, most of the CPI rent bumps in the net lease retail space are capped at three times CPI, the lesser of three times CPI or a fixed percentage based on how the lease is structured. We prefer fixed-rate bumps, as they ensure maximum rent growth during non-inflationary periods. About two-thirds of our portfolio includes some level of rental increases.

Thank you.

Thank you. Our next question is from Connor Siversky with Berenberg. Please proceed with your question.

Hey, just one more for me here. I'm just looking at the provision for impairment recognized in Q2, was that related at all to any assets that were maybe slated for sale and then moved back into your operating portfolio once mark-to-market?

Yeah. We encountered an unusual situation concerning an auto parts store where we terminated the lease and sold the property during the quarter. We're expecting to receive a lump sum of the remaining lease payments in the third quarter. The timing led to an impairment, which will likely show up as a gain afterward, creating a unique accounting scenario. However, if you put all those pieces together, the end result will be a slight gain.

Got it. Can you quantify what that gain would be at all?

We're looking at approximately $100,000 or so.

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

Well, thanks everybody for joining us today, and we look forward to continuing the dialogue in the future. Take care.

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