NETSTREIT Corp. Q3 FY2022 Earnings Call

Greetings. And welcome to the NETSTREIT Corp. Third Quarter 2022 Earnings 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, Amy An, Investor Relations Manager. Ma’am, you may begin your presentation.

We thank you for joining us for NETSTREIT’s third quarter 2022 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. 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, 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 will turn the call over to Mark.

Good morning, everyone. And welcome to our third quarter 2022 earnings conference call. We are pleased to share that NETSTREIT continued to perform very well in the third quarter, despite high inflation, rising interest rates, and macroeconomic uncertainty. With diligent planning and strong execution, we believe we can continue to create value throughout all stages of this economic cycle. During the quarter, we completed $130 million of net investment activity, closed on both our second forward equity offering of 10.35 million shares and our $600 million sustainability-linked credit facility, locking in attractively priced capital before the latest interest rate hikes and heightened market volatility. As stated in last night’s earnings release, given the nature of today’s environment and anticipated pricing adjustments in net lease assets, reflecting the disconnect between the current capital markets and property markets, we believe it is prudent to take a more opportunistic approach to capital deployment. While we are pleased with our investment activity to date and are seeing no shortage of opportunities, rising marginal borrowing costs and increased equity costs across the sector make it prudent for us to eliminate our quantitative investment targets. At the same time, the positive investment decisions we have made, the limited operating risk associated with our current tenant lineup, and our ability to lock in significant portions of our capital structure in the third quarter allow us to narrow our AFFO per share guidance range to $1.15 per share to $1.17 per share, resulting in a small increase in our midpoint of expectations. Given the current economic uncertainties, our portfolio of high-quality assets is best positioned to weather the road ahead. With over 88% of our portfolio in defensive industries and partnering with retailers that have strong access to capital and experienced management teams, we believe our portfolio will continue to perform well during a potential downturn in the retail environment. Due to our diligent underwriting process and continued credit monitoring, we are confident in our tenants’ ability to meet their rental obligations. As a reminder, we have collected 100% of our rent since our IPO in 2020 and believe we have put the proper risk management guardrails in place to see this trend continue. Now moving onto our third quarter investment activity, we acquired 26 properties for $131.3 million at a weighted average initial cash capitalization rate of 6.6% and a weighted average lease term of 11.8 years. As part of an acquisition of a Winn-Dixie property, we assumed our first mortgage loan payable of $8.6 million with a fixed rate of 4.5% that matures in November 2027. This acquisition provides strong store sales and profitability, dense infill real estate, and attractive pricing. Also in the quarter we disposed of a bank property for $1.7 million at a 5.5% cap rate, further reducing our banking exposure. Finally, we provided $4.7 million of funding to support six ongoing development projects. At quarter end, we have invested $17.5 million to date in these projects. As with the previous quarter, we remain comfortable with the performance of our existing development projects, but remain cautious in committing to new developments during a time of increased cost for construction and labor, and heightened economic uncertainty. At quarter end, our portfolio was comprised of 406 properties with 77 tenants contributing approximately $92.7 million of annualized base rent. The portfolio has a weighted average lease term remaining of 9.6 years, with approximately 79% of ABR represented by tenants with an investment grade rating or investment grade profile. The portfolio remains 100% occupied. We added two new high-quality grocery tenants, Festival Foods and Dollar Fresh, and a discount retailer, TJ Maxx, in the quarter. During the quarter, Big Lots' credit changed due to their second quarter results with reported margin pressures, therefore no longer meeting our investment grade profile definition. That being said, we believe the company has a strong balance sheet and we remain confident in their performance. To conclude, despite the uncertain macro backdrop, we remain confident that our cycle-tested portfolio and experienced team will continue to maximize shareholder value. With that, I will turn the call over to Andy to go over our third 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 $0.03, core FFO of $0.28 and AFFO of $0.30 per diluted share for the third quarter. The portfolio’s annualized base rent grew to $92 million in the third quarter, up 55% from September 30, 2021. Interest expense increased to $3 million from $895,000 in third quarter 2021, due to higher borrowing costs and increased debt balances. G&A increased to $4.6 million in the third quarter, compared to $3.8 million from third quarter 2021, primarily due to building out our team to 32 employees. As Mark stated in his opening comments, we had an active third quarter with regards to our financing activities, opportunistically completing over $800 million of capital raising and refinancing. We completed a forward equity offering for 10.35 million shares in August. Similar to our last two offerings, the deal was upsized and underwriters exercised the shoe, demonstrating the continued support from investors for our strategy and execution. Following our equity deal, we completed a new $600 million sustainability-linked credit facility. The new credit facility includes a $400 million revolver that matures in August 2026, subject to an extension option, and replaces our previous $250 million revolver. The credit facility also features a new $200 million, five-and-a-half-year term loan, set to mature in February 2028, which is fully hedged at 3.88%. If we were to hedge the term loan today, the all-in rate would be above 5%. As part of the recast, we made some notable enhancements to our credit facility. Our cap rate utilized for valuing our asset base decreased from 7.25% to 6.5%. Covenants have been adjusted to offer greater flexibility for our various approaches to acquisitions. And we added an investment grade pricing grid to reflect continued progress toward becoming an investment-grade unsecured borrower. In addition, we would like to highlight that in the lending environment where banks are being significantly more selective, NETSTREIT was able to secure three new banking relationships, giving further credence to our strategy and growth initiatives. Finally, we included an innovative sustainability feature as part of our credit facility, which allows us to benefit if certain key performance indicators are met. If year-over-year improvements are made to the percentage of our annualized base rent from tenants with science-based target initiative commitments, as determined by our sustainability agent, we can see up to a 2.5 basis point reduction in pricing. The structure of this KPI is an innovative approach for retail net lease landlords to participate in the reduction of greenhouse gas emissions, as determined by science-based target initiatives and hopefully empowers more of our tenants to make reduction commitments as well. On September 29th, we settled all 4.5 million remaining shares from the January forward equity offering. We see net proceeds of $93.5 million. We did not settle any of the 10.35 million shares from our August forward equity offering and did not make any sales under our ATM program during the quarter. As a result of our latest financing activities, we have raised over $1 billion of capital this year and increased our liquidity position, allowing us to remain opportunistic in the current environment. At quarter end, we had total debt of $413.5 million outstanding, of which $375 million is from our fully hedged term loans, with an additional $30 million on our revolving line of credit and $8.5 million from the fixed-rate secured mortgage we assumed as part of the Winn-Dixie acquisition. At September 30, 2022, our net debt to annualized adjusted EBITDA ratio was 2.5 times after giving consideration to the remaining shares outstanding under the forward sales agreement, well below our target range of 4.5 times to 5.5 times, and 93% of our debt is fixed. With regard to our dividend, earlier this week, the Board declared a $0.20 regular quarterly cash dividend to be payable on December 15th to shareholders of record as of December 1st. Our AFFO payout ratio for the quarter was 67%. As stated in our earnings release, we are narrowing our AFFO per share guidance range to $1.15 to $1.17 per share. The new guidance range includes the following assumptions: 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. Our cash interest expense expectation has been narrowed from our previously stated $7 million to $9 million to $8 million to $9 million. Non-cash deferred financing fee amortization, which is not included in our cash interest expense, remains unchanged at $800,000 to $900,000. And lastly, a full-year 2022 diluted weighted average shares outstanding, which includes the impact of OP units, is updated from our previously stated 50 million shares to 52 million shares to now be in the range of 50 million shares to 51 million shares. As we finished the last half of 2022 and enter into 2023, we believe we are in an extremely enviable position. Our capital structure has significant undrawn liquidity, especially considering our size and 93% of our debt is fixed through maturity. In addition, on an apples-to-apples basis, our acquisition team has consistently proven their ability to source and close high-quality assets through a variety of sources at yields demonstrably better than our competition. With all the right pieces in place, we believe we are well positioned to continue our track record of success and remain excellent stewards of shareholder capital. With that, we will now open the line for questions.

Thank you. Our first question comes from R.J. Milligan with Raymond James.

Hey. Good morning, guys.

Good morning.

Good morning, R.J.

Okay. I am curious, obviously, you highlighted the disconnect between the capital markets and private markets. I am just curious how you view your current cost of capital, what is it today and how do you calculate it?

Sure, R.J., and welcome aboard to the NETSTREIT team. I think the question that you are asking really is and shouldn’t be the question of the day, based on the changes that we are seeing in the capital markets. So whether we think about it is, we start by assuming our target capital structure, which you know, since the beginning of our existence, we said is a third debt and two-thirds equity. Our current capital structure is somewhat more conservative than that at under 30% on market cap basis. On the debt side, we think about our marginal cost of borrowing, which is somewhere between 4.1% and 4.2% on an all-in spot basis. But the forward curve is really indicating an increase in that all-in rate to about 5.6% year out, maybe 5.4% two years out. So we need to take that into consideration, and if we are going to access the private placement market with term, that fixed rate is slightly north of 6%. From our perspective, we really think utilizing a spot marginal borrowing rate or even our weighted average cost of debt actually underestimates the true borrowing costs in the current market and the risks there. It potentially produces false positive investment decisions for assets we intend to hold for the long term. So that’s the debt side. On the equity side, we have historically utilized the implied cap rate as a proxy for our marginal cost of equity. Just as I look at this morning at the current trading levels, our implied cap rate is somewhere in the 6.5% to 6.75% range, and even if you use an AFFO yield, it probably produces a result that’s very similar to that range. The marginal cost of the undrawn $200 million forward is probably about 50 basis points inside of that. And similar to the way that we were thinking about the spot rate on the debt side, the benefit of the undrawn forward could produce positive investment decisions for assets that our spot equity cost wouldn’t, right, and really our preference with respect to that is to utilize the benefit to provide additional accretion to our shareholders for less marginal investment decisions. So those are kind of the components. So if you are asking me to peg a specific range, I’d probably put our WACC for investment decision-making purposes in the low-to-mid 6s. If you want me to pinpoint something, probably the best number that we have in a volatile market is about 6.25%.

That’s helpful, Andy. And so, then, what is the spread, assuming that you maintained the sort of credit quality that you guys have been buying, what is the spread that you need to achieve to go out there and become more aggressive on the acquisition side?

We believe that market fundamentals suggest cap rates should be slightly higher than current levels, and we are beginning to notice some signs of that. Recently, we've been acquiring properties at an average cap rate of 6.6%, and we remain committed to our investment criteria. However, we feel we are not currently being compensated adequately, even though there are some promising indicators ahead. The decision to move forward on acquisitions will depend on various factors such as credit quality, real estate quality, lease duration, and rental increases, along with the fluid nature of capital markets. For instance, if we encounter a high-quality asset with a AAA-rated tenant, a long lease, and favorable rental increases, we might consider moving forward with a cap rate of 6.25% to enhance the portfolio. Conversely, if we face a subpar asset with issues on the borderline of our investment criteria at a 7.5% cap rate, we would likely not proceed. There are many variables to consider, but we do perceive several opportunities arising from pricing adjustments, and our patience seems to be paying off. Currently, all of our dealings are beneficial, but as we analyze our model's sensitivity, it is clear that volume does not significantly influence our potential profits right now. Therefore, we believe it is wise to exercise caution and focus on maximizing the capital we have raised.

Thanks, Mark. And just a follow-up to that is, you said that you are starting to see signs of the market cracking and I am curious what you think the catalyst is for the market to really open up and cap rates to acquire...

Yeah. No. Yeah. I think that’s a great question. I think that’s been what every net lease company is really trying to figure out over the past six months and probably for the next couple of quarters. Like we said, I mean, the fundamentals clearly show that cap rates should be moving up as we have seen everyone’s cost of equity and cost of debt increase. But really what we are seeing is that sellers have really gotten used to very aggressive cap rates that we were seeing in 2021 and before that. So if sellers can hold off on selling, they are going to hold off. Those who have pressures to sell are going to be very patient and try to find a 1031 buyer who is willing to pay 2021 prices, and that does exist, it’s just getting much harder to find those types of buyers. Then those that can’t be patient and have to sell, they have got to sell at prices that make more sense for us and we have been able to pick off a few so far this quarter. We just don’t know how many we are going to be able to pick off. The market is not completely there yet, but we feel like it’s certainly on its way.

Appreciate the comments. Thank you.

Thank you. Our next question is with Nick Joseph with Citi.

Thank you. Completely understand being opportunistic and disciplined. I was hoping you can kind of quantify where the current pipeline is today and then just compare that to where it normally looks on the forward, I don’t know either kind of three months or whatever kind of metric you focus on?

The opportunity set we have is significantly larger now that leverage buyers are largely out of the market. With a less competitive 1031 market, it really comes down to pricing and identifying potential cracks. Even after removing the quantitative aspect from our fourth quarter acquisitions guidance, we believe we can still meet it, although it's unclear how many sellers will align with our pricing. We've started to see some movement in that area recently, but it's hard to predict how much will come our way. Overall, the opportunities we can pursue right now are greater than they have ever been.

That’s helpful. And then just on that movement in cap rates. So there are different categories or retailers or tenants adjusted more versus others thus far.

It's interesting. We often get asked if certain tenants are investment grade. Ultimately, it depends on the sellers' circumstances and their urgency to sell, which may affect their patience. This situation has little to do with the type of asset. For instance, if you're dealing with lower cap rates, like some of the industrial properties, you can experience negative leverage more quickly. However, the key factor remains the type of seller we're dealing with.

Thank you very much.

Thank you. Our next question comes from Ki Bin Kim with Truist.

Thanks and good morning.

Good morning.

So I was wondering if you can help paint the landscape as we look into next year. Obviously, the acquisition part of that is a little bit more ambiguous, which makes sense. But how about things like G&A, interest expense, and I am not sure if there was, I remember, a while back, there was a topic about the insurance costs as well for the company. I just want to make sure that we don’t get surprised in any one way or another?

Sure, Ki Bin. We have 93% of our debt costs locked in, so our interest expense is relatively stable, with only $30 million in floating rate balances primarily for acquisitions. In terms of general and administrative expenses, we have been expanding our team throughout 2022 and currently have 32 positions on our organizational chart. Some of these positions will need to be filled, but I don’t expect our team size to grow significantly beyond this. You should start to see some stabilization in G&A expenses on the income statement. However, keep in mind there is some seasonal variation, especially in the first and second quarters due to tax and auditor fees. Aside from that, we are achieving stabilization in salaries and benefits. Regarding Directors and Officers insurance, we have been performing well, but we didn’t see the anticipated increase, which accounts for some of the minor uptick in G&A expenses. It's not substantial, just a couple hundred thousand annually. Now that we are just over two years into our journey as a public company, we are effectively stabilizing that area of the income statement.

And I can’t remember, if I missed it, but did you guys give an update on the assets you closed in the fourth quarter to date?

We have not.

Are you able to provide just some color around that?

Yeah. I mean, it’s pretty similar to the types of assets that we have acquired, but we are not providing a dollar figure on that.

Okay. Thank you, guys.

Thanks.

Thank you. Our next question comes from Wes Golladay with Baird.

Hey. Good morning, everyone. Guys a little bit more on the developer side. What I am looking for is the developers, you mentioned the 1031 market was not that robust right now. So I am kind of curious what are the developers doing if they are not hitting the bid right now? Are they holding off on new developments and is this a segment you typically get a higher yield from?

That’s a great question. We've primarily been engaging with larger developers who are working on multiple locations with various tenants. Unfortunately, many of them either don't respond to us or we can't agree on pricing due to the strong 1031 market. Historically, these developers have been able to sell 15 to 25 locations each month, but that number has now dropped to just two or three. As their inventory increases, their sources of equity and debt are becoming stretched. We've been having more discussions with these developers, but they tend to remain optimistic for as long as possible. It's hard to predict when this situation will change, but it seems there could be some opportunities in this area.

And just a follow-up on that, it’s typically a higher yield when you look at the way you source deals throughout the year. You have multiple channels, is this one of the higher cap rate channels and probably the tight band, which is the debt is up unusually?

Yeah. It’s a good question. So developers, if they are able to finance themselves and develop properties all the way to certificate of occupancy and then they sell into the 1031 market, they are going to get more aggressive pricing than what we are willing to pay. But then the developers that would prefer for us to finance their development, so whether we are buying the land and funding development or providing a guaranteed equity takeout, we do typically get better cap rates on those types of transactions.

Got it. And then one modeling question, do you happen to have the end of period rent for the cash basis, excluding the active developments?

Yeah. We will follow up with you offline on that one.

Okay. Sounds good. Thanks, everyone.

Thanks, Wes.

Thank you. Our next question comes from Joshua Dennerlein with Bank of America.

Yeah. Hi, everyone. Just curious, you mentioned in your press release appropriate pricing for assets. What do you think is appropriate pricing in today’s environment, last quarter was the 6.6% on the acquisitions, just kind of curious?

Yeah. No. It’s a good question. So, I mean, I think it’s really going to be asset dependent, depending on credit quality, real estate quality, lease term, rental increases, et cetera. And so, feels like we are going to start to see some pretty good increases in cap rate as just that’s kind of what we are expecting and from the conversations that we are having with various sellers. How much higher that goes, I think, depends on what happens in capital markets, as well as whether other buyers are able to kind of come back to the market. So it’s got a lot of different factors there, hard to say where it goes, but I think it should be meaningful to us.

Appreciate that. And then, you mentioned Big Lots. You said it’s no longer an IG-like credit after rich resource.

Correct.

How do you think about that in the portfolio? Is that a temporary blip for them or is that something you would maybe look to monetize?

We are continuously evaluating our sales strategies and the best economic outcomes for various assets. Big Lots is currently facing supply chain issues and increased freight costs, both by truck and sea, which have significantly impacted their margins. However, their debt to EBITDA ratio is 2.1 times, which nearly aligns with our investment grade criteria. While I anticipate that margin pressures will continue, they have over $400 million in liquidity, which should help them navigate the current challenges without raising concerns about their ability to fulfill financial obligations. Additionally, we have identified 10 properties in our real estate portfolio where the rent can be replaced, indicating that we still have plenty of time to monitor the situation before any major concerns arise regarding that tenant. Nonetheless, the overall trend is not moving positively for them.

Okay. Thank you.

Thank you. Our next question comes from Todd Thomas with KeyBanc.

Hi. Thanks. Good morning. I just wanted to follow up a little bit on the investment activity and the slowing pace of investments that you are talking about, which we think makes sense, just given the volatility in your cost of capital in the market more broadly. But we are through October and I am curious if there’s any way to size up what the fourth quarter might look like in terms of acquisitions and just maybe help us also think about deal volume heading into 2023? Again, I realize the world has changed quite a bit, but the pace of external growth that I think investors have been thinking about was sort of in the $500 million range per year. I am just curious what you might be thinking about over the next few quarters, if you could maybe provide some insight?

Honestly, I wish I could give you better guidance other than it’s going to be facts and circumstances driven, based off what the opportunity set is and whether we start to see enough volume move into the cap rates where we feel like we are, maybe not making the same spread that we did over the past couple of years, but kind of trending more in that direction. So it’s just a little bit difficult for us to give guidance on what we think we are going to do in 2023 when we were struggling to tell you what we are going to do in the fourth quarter of this year.

Todd, if I could just add a little bit to that. I think you go and take a look back, I mean, at the beginning of the year, SOFR was like zero; it’s 3% now. You’ve seen equity costs go up dramatically. And we have been able to kind of make hay by buying assets, as I said in my prepared remarks, at better yields than the peer group. But I just think that the pace of change of the capital markets has just been so great in such a short period of time. It would almost be irresponsible for us to go and start throwing numbers out there without getting a better look as to some of the changes that Mark talked about earlier that we are starting to see.

Okay. For the fourth quarter, are you considering whether it will be around the $450 million mark, or potentially just slightly below the $500 million for the full year, as we think about the exit rate as we move into 2023?

Yeah. I mean, it’s going to be opportunity-based. I mean, we are going to be opportunistic. I think all things are on the table. We have got some opportunity to take advantage of the fact that there is a 1031 market out there and potentially sell some assets and then redeploy. So there’s a lot of different factors that we are considering and a lot of different options that I think are on the table. The thing that we don’t want to do is take money in one pocket and just put it in the other and we are bigger without really any benefit to shareholders. So we think the best thing for shareholders is to consider all options on the acquisitions and dispositions side and try to maximize the transaction volume that we are going to do. And what that looks like is still in flux.

Okay. Got it. And then, just last question also, just following up, I guess, on the underlying credit of the portfolio and in the context of the discussion around Big Lots being lowered to sub-IG during the quarter. I am just curious as you look out, if there are other retailers, other tenants on your credit watch list over the course of the next few quarters as we head further into the cycle where you see potential risk and not looking for names specifically, but just in the context of the overall portfolio and your exposure to IG and IG-like profiles?

Yeah. No. I think it’s a good question. And really what we have seen with the tenants within our portfolio is, as you know, it’s a very defensive portfolio, very high credit quality portfolio, not a lot of debt coming due for these tenants, which I think is going to be interesting to see how some of the retailers are able or not able to refinance their debt. But I think it should be indicative of the quality of the portfolio when you consider Big Lots is a company with almost $1 billion tangible net worth with $400 million of liquidity and total debt to EBITDA is 2.1 times, which by most definitions is not very leveraged. If that’s the one that we are talking about on the call, I think that should be seen as a good sign, and in fact, we have had a couple of credit upgrades within the portfolio.

Okay. All right. Thank you.

Thank you.

Thank you. Our next question comes from Nick Yulico with Scotiabank.

Hi, everyone. First question is on drugstore investments, you did take your exposure up to this segment and also the CVS now specifically 11% of ABR. I mean how much higher are you willing to take the exposure for CVS and for the drugstore category?

Yes, that's a great question. We initially didn't plan to increase our pharmacy exposure as much as we did, but we noticed some attractive opportunities with CVS and Walgreens due to their appealing pricing and strong locations. These options provided the best risk-adjusted returns for our investors. I don’t anticipate us adding more to those names. In fact, we've mentioned considering dispositions, which might involve offloading a couple of those locations in the 1031 market at favorable cap rates and reinvesting in other retailers we prefer to enhance our diversification. When you're at our size, one or two transactions can indeed impact concentration, but we don’t expect to increase our concentration in the near future.

Thanks, Andy. Regarding your thoughts on the weighted average cost of capital, it seemed to me that when assessing your cost of debt, it appears that debt may not be cheaper than equity in the coming year. How are you considering the mix between equity and debt, especially since your leverage target is around 4.5 to 5.5 times debt-to-EBITDA? Are there situations where you might increase your equity to address these dynamics?

We have over equitized today, sitting below 30% on a market cap basis, debt-to-equity, with a target of 33%. We're always considering the tools available to us, and the $200 million forward we executed in August is a valuable option. If equity prices improve, we can utilize the ATM, whether it's spot or forward. However, I want to emphasize that focusing solely on spot rates in the current environment might lead to poor decision-making and could result in misleading investment choices. Similarly, the notion that our balance sheet is overly equitized should be reassessed, as there are significant opportunities in the debt capital market to bring ourselves more in line. Mark, Randy, Amy, and I discuss these matters daily, constantly reviewing our available options. The most significant advantage we've gained is our agility; we managed to complete the August offering right after releasing our second-quarter earnings and entered the term loan market early, even as it becomes more challenging. All options remain open for us.

All right. Makes sense. Thank you.

Thank you. Our next question comes from Linda Tsai with Jefferies.

Hi. Appreciate the prudence with which you are allocating capital going forward. Is your assumption that you stick with the 65% IG profile or would you expect to capitalize on more IG-like tenants?

Yeah. I mean, I think we would like the investment grade profile tenant just as much as we like the investment grade tenants. In that the risk profile is, in most cases, even slightly better for investment grade profile as they carry no debt and generate strong cash flow of larger retailers. There are just fewer of them out there. So, I think the opportunity set will likely dictate what we buy, but I would expect the ratios of the portfolio to remain fairly constant.

And then can you comment on any general trends in the sale leaseback environment and whether higher cost inflation are a catalyst for operators to do more sale leasebacks?

Yeah. And as you know and we have only done a handful of sale leasebacks, but I do think that when CFOs start looking at refinancing their debt and they may have a little bit of sticker shock, I would assume that sale leaseback could start to make a little bit more sense than it has in the past.

Thanks.

Thanks, Linda.

Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to Mr. Mark Manheimer for closing comments.

Thanks everyone for joining today and for those of you attending the upcoming conferences, we will look forward to seeing you then.

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