Good day, and welcome to the NETSTREIT Corp. First Quarter 2023 Earnings Conference Call. Please note, that today’s call is being recorded. At this time, I would like to turn the conference over to Amy An, Director of Investor Relations. Please go ahead.

We thank you for joining us for NETSTREIT's first quarter 2023 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 of which 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, 2022, 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 of our non-GAAP measures, reconciliations to the most comparable GAAP measure, and an explanation of why we believe such non-GAAP financial measures are useful to investors. Today's conference call is hosted by NETSTREIT's Chief Executive Officer, Mark Manheimer; and Chief Financial Officer, Dan Donlan. 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 first quarter 2023 earnings conference call. Before we begin, I am pleased to welcome our new CFO and Treasurer, Dan Donlan, to the NETSTREIT team. Dan brings strong corporate finance, capital markets, and operational REIT experience to our platform, and he is committed to helping the company generate sustainable long-term value for shareholders. Welcome aboard, Dan. Turning to our first quarter results, we had an active start to the year despite the volatile capital markets environment and an uncertain macroeconomic backdrop. Our best-in-class portfolio continues to perform exceptionally well in the face of persistent inflation, recession concerns, interest rate increases, and higher volatility. We have maintained 100% occupancy and 100% rent collections, and any disruption to our tenant sales and profitability has been minimal. Having spent a good portion of 2022 locking in significant portions of our capital structure by prudently accessing capital when conditions were supportive, we started 2023 with ample dry powder to make investments that meet our quality and return thresholds. During the quarter, we completed net investments of $112.7 million, including the acquisition of 20 properties for $67.7 million at a weighted average cash yield of 6.9%, two senior loan investments secured by 49 properties at $46.1 million with a weighted average cash yield of 9.3%, two completed development projects for $14.8 million, and $4.5 million of additional funding to support ongoing development projects and eight dispositions for $15.8 million at a weighted average cash yield of 6.8%. Notably, based on total ABR, 95% of these first quarter investments were with investment-grade and investment-grade profile tenants. While the net lease industry transaction market remains less active today than this time last year, we are seeing a healthy pace of opportunities at attractive prices with better terms as financing contingent and leveraged buyers remain sidelined. While our first quarter net investment activity has us slightly ahead of pace versus our 2023 target, we have taken and will continue to take a judicious approach to the investments we pursue. We are extremely mindful when it comes to capital deployment, and we are staying disciplined in our credit underwriting standards and the pricing of assets. Currently, stress in the regional banking sector has created dislocations in the net lease transaction market, which has provided us with opportunities to maintain our growth strategy momentum. We remain in constant communication with existing tenants, developers, and other landlords to provide financing solutions where we see the best risk-adjusted returns. This solutions-based approach with a growing number of counterparties has helped expand our industry relationships while increasing the number of opportunities for NETSTREIT. With that in mind, we have seen an increase in alternative investment structures, including mortgage loans. In the first quarter, we funded $46 million of loans for our borrowers’ purchase of 49 convenience stores leased to Speedway, a subsidiary of 7-Eleven. The loan-to-value of the underlying collateral is approximately 60%, and we are in the first lien position with no capital ahead of us. The loans have a 3-year term and a weighted average interest rate of 9.3%. While this is a larger loan exposure for us, it provides outsized risk-adjusted value to NETSTREIT in addition to demonstrating our creativity in deploying capital. As of March 31, our 100% occupied portfolio was comprised of 488 investments with 83 tenants, contributing $108.9 million of annualized base rent. Tenants with investment-grade ratings or profiles represented 82% of ABR. A key part of our execution is recycling capital where the risk, value, or return no longer meets our criteria. In the first quarter, we accretively sold eight properties for $15.8 million. Excluding investments associated with mortgage loans receivable, the portfolio has a weighted average lease term of 9.4 years with no lease expirations in 2023 and only 0.3% of total ABR expiring through 2024. As we look to the balance of 2023, we will continue to focus on scaling our portfolio of high-quality tenants while prudently managing our balance sheet and liquidity position. Furthermore, despite ongoing economic uncertainty, we continue to believe our durable cash flow stream and attractive growth profile offer compelling total return potential for investors. With that, I'll turn the call over to Dan to go over our first quarter financial results and 2023 guidance.

Thank you, Mark, and thank you to everyone joining us today. I'm incredibly excited about the opportunities that lie ahead for NETSTREIT. I look forward to spending more time with the broader investment community over the coming weeks and months. Turning to our first quarter earnings, we reported net income of $0.03, core FFO of $0.28, and an AFO of $0.30 per diluted share. Regarding our G&A expense, with a fully built-out executive and senior management team, our G&A should continue to rationalize relative to our asset base as we grow the portfolio. As of March 31, our balance sheet had total debt of approximately $480 million with a weighted average contractual interest rate, including the impact of fixed-rate swaps of 3.4%. After giving consideration to the settlement of all outstanding forward shares, our net debt to annualized adjusted EBITDAre was 4.1 times, which remains well below our targeted leverage range of 4.5 to 5.5 times. Moving on to capital markets activities in the quarter, we used our ATM to issue 147,000 shares at a weighted average net price of $19.96, which generated $2.9 million of net proceeds. Additionally, pursuant to our forward equity offering in August 2022, we settled 2.6 million shares in the quarter, which generated approximately $50 million of net proceeds. As of March 31, 2023, 4.8 million shares, or approximately $91 million, remained unsettled under the August 2022 forward sale agreement. Regarding our dividend, on April 25, the Board declared a $0.20 regular quarterly cash dividend to be payable on June 15 to shareholders of record as of June 1. Based on this dividend amount, our AFO payout ratio for the first quarter was 67%. Turning to 2023 guidance, we are maintaining our AFO per share range of $1.17 to $1.23. This range assumes investment activity, including acquisitions, completed developments, and mortgage loans receivable net of dispositions of at least $400 million in 2023. With that, we will now open the line for questions.

We will now begin the question-and-answer session. Today's first question comes from Eric Wolff with Citi. Please proceed.

Thanks. Good morning. It's actually Nick Joseph here with Eric. I was wondering if you could walk through your appetite or preference between the loans versus on-balance-sheet acquisitions and how you think about underwriting those differently as you look to new deals?

Yes. Look, the Speedway loan was maybe a little bit of a one-off as it relates to not only the risk return there where we really saw what we felt like was an outsized return for the risk we're taking, stepping in at a 60% LTV position ahead of all the equity and getting a 9.3% interest rate. I think that's probably not likely to appear again in the future. So I would think about it as being a smaller piece of what we're going to be doing in the future, certainly a little bit outsized in the first quarter. I think we'll probably be doing somewhere in the neighborhood of 5% to 10% of volume on a go-forward basis. Of course, that can fluctuate quarter by quarter. I would expect those yields to be a little bit closer to where we're buying properties. Right now, the transaction market is certainly in flux from sellers that this time last year were eager to sell their properties to now where there typically needs to be a reason for them to sell their properties or to feel okay with the pricing we're seeing today. This was an avenue for us to build relationships with those future sellers, as well as sprinkle in some really strong risk-adjusted returns. However, I think we're a little bit hesitant to make that a huge part of what we do, just as we think eventually those loans are going to get paid off and we want to minimize any replacement risk down the road.

Thanks. That's helpful. And then just how are you thinking about current equity cost of capital, but even if you want to do on a weighted average basis there versus acquisition cap rates? Are you comfortable with the current investment spread? Or who do you need cap rates to expand to in order to do more accretive deals?

Yes. Nick, it's Dan Donlan. First and foremost, you should expect us to continue to prudently manage our balance sheet and maintain leverage within our targeted range of 4.5 to 5.5 times. Given that our leverage is today at 4.1, we can be judicious with how we deploy equity capital, as we're highly mindful of investment spreads today relative to our weighted average cost of capital. That said, when you look at our current cost of equity and think about the impact of our free cash flow and where we believe we can source debt in excess of 5 years, we're getting anywhere from 100 to 130 basis points of investment spread relative to where we can deploy capital today.

And you're comfortable with that 100 to 130. How does that compare to history?

Yes. I think historically, that's been a little bit higher when we were, certainly, in a much lower interest rate environment. And of course, we want that to be closer to the norm, but we're comfortable deploying capital with that type of spread.

Thank you.

The next question comes from Todd Thomas with KeyBanc Capital Markets. Please proceed.

Hi, thanks. Good morning. Just wanted to circle back to the loan investments. To the extent that additional opportunities arise, is there a threshold? I think you said 5% to 10% maybe of volume going forward might be sort of the right way to think about it, but is there a threshold for loan investments relative to the balance sheet or portfolio that would govern how large that book might be overall in the future?

Yes. Right now, we're in a situation where there are tightened opportunities on the loan side, which I don't think is going to necessarily be the case long into the future. So in the short term, I think that 5% to 10% is probably a good barometer. We don't want our loan book to exceed 10%, although they're not all created equally. Looking back at the loans we’ve done in the past, they will either convert to us having fee ownership of those assets, so there wouldn't be any disruption to income or we get paid off at rates that are relatively easy for us to take that capital and redeploy accretively. Those types of loans are a little less risky in my opinion as we think about reinvestment risk. However, I can provide a threshold for modeling purposes: we won't let it exceed 10%.

Okay, got it. And then in terms of the reinvestment risk there and, I guess, just for modeling purposes in general, do you plan to provide some additional disclosure around the loan portfolio as it grows in order to detail some of the maturity dates, loan rates, and some other terms that might be important for underwriting purposes?

Yes. We will assess as we start adding loans into the portfolio whether we feel it's helpful for investors to understand the story. Certainly, something we would consider. However, we've added some disclosure already this quarter, which should give a clearer picture regarding credit risk. As it relates to loan maturities, we may take a different approach than others, focusing on having shorter-term loans so we can reassess properties sooner. We'll ensure that we provide adequate disclosure to make sure investors understand our capital deployment and the risks within the portfolio.

Okay. And then in terms of the guidance, I'm just curious, was that loan or are those two loans, almost $50 million at a 200 to 250 basis point premium yield to your acquisition yields, contemplated in the guidance? And just as it pertains to the guidance, is there anything sort of offsetting some of that premium investment yield that is impacting the guide on the other side?

It's Dan Donlan. Yes, the loan was contemplated in guidance. Given that we only set guidance two months ago and there's a lot of volatility out there right now, we just thought it prudent to wait a few months before revisiting our guidance range.

Our next question comes from Greg McGinniss with Scotiabank. Please proceed.

Hey, good morning. In thinking about the opportunity set for normal course acquisitions where we had the Speedway loan that helped offset lower acquisition volumes in Q1, what are you seeing in the transaction market that's giving you confidence to maintain net investment volume guidance and when thinking about that 5% to 10% range on the secured mortgage loan investment going forward?

Yes, I think we've seen a continued migration from late last year where sellers did not want to sell. They've had trouble believing that cap rates had moved, even though interest rates have. Now they've seen enough comparisons and have some debts coming due or other reasons why they are coming to the table. We're seeing many sellers struggle to hold the line while others, who need to sell, are willing to transact. I do not foresee cap rates dropping drastically anytime soon. That second bucket of sellers continues to grow, creating more opportunities. We've just had to be extraordinarily selective, especially regarding loans, because while we see many opportunities, there are many more in the fee simple side than we had earlier in the year.

Great. Thanks. Then looking at the development pipeline, it looks like you haven't added any projects there in a couple of quarters. Can you give us some sense of how you're viewing developments today or partnering with merchant builders, and what that opportunity might look like compared to other uses of capital?

Yes. We've certainly seen stress on merchant developers for quite some time. We've acquired properties from them when they were willing to meet cap rates that made sense to us. In the current scenario, when thinking about those that are developing stores for some tenants we're growing with, we’ve observed pressure building. We've made a decision to consider other ways to partner with developers than just funding their developments. We’re working on several transactions, either providing equity takeouts at completion or acquiring some of their properties. We will likely provide more disclosure on some of these transactions once they come to fruition, but these should be viewed favorably by the market as they yield positive results.

Thanks, Mark. Just to clarify on that, so we should probably expect to see the development pipeline come down as other investments offset that capital use?

Not necessarily. Many of our counterparties right now are developers, and the structuring of those investments is what matters—whether they are traditional equity takeouts, funding for developments, loans that may convert to fee ownership, or simply equity takeouts at the end of construction. We’re involved in various types of transactions, some of which have already closed, while others are still being negotiated.

The next question comes from Josh Dennerlein with Bank of America. Please proceed.

Hi. This is Barel Grant for Dennerlein. I just wanted to ask about, as you've been increasing your investment-grade tenant base, what is the competition for these assets been looking like?

Yes, overall, the competition is very much muted versus what we've seen in the past. Leveraged buyers, whether they be private equity firms or large family offices reliant on debt capital, are largely out of the market. It has become very difficult for 1031 buyers to achieve the yields they need when they attempt to source transactions through their community banks. So we've not only seen the opportunity set pick up and transaction volume increase industry-wide in the second quarter compared to the fourth and first quarters, but we're operating in an environment with significantly less competition.

Our next question comes from Alex Fagan with Baird. Please proceed.

Hey, guys. Welcome to the team, Dan. I have a question if you can provide some more color on the external growth opportunities and maybe any more details about what's in the pipeline and stuff that you're seeing?

Yes. I think what you'll see us acquire will include similar tenants, along with a few new names we've been trying to bring into our portfolio for some time, likely through smaller portfolios. We're certainly excited about the credit quality of new acquisitions in the grocery sector, some discounters, and the quick service restaurant area, where we've seen more opportunity than in the past at cap rates that make sense for us. Typically, these were cap rates that were previously too aggressive for us, but we’ve observed movement there.

Our next question comes from Linda Tsai with Jefferies. Please proceed.

Hi, good morning. From a valuation perspective, what kind of multiple would you assign to the loans versus the rest of your portfolio?

Yes, and it's certainly a smaller portion of the portfolio. A lot of what we do in the future will be at similar cap rates. I don't think there needs to be too much differentiation there.

The next question comes from Ki Bin Kim with Truist. Please proceed.

Thanks. Good morning. I just want to go back to the loans that you made this quarter. What does the interest coverage look like from Speedway?

Yes, we're essentially taking all of the rent in that 9.3%. The cap rate on the transaction from the buyer's perspective was about a 5.6 to 5.7% cap rate, and then we collect all of the cash flow. I think what's interesting for the borrower, and the reason why this was a compelling opportunity for them, is that they have uncapped CPI bumps, which should be hitting in about 2.5 years. So when those increases occur, that could provide a good opportunity for them to either refinance this loan or for us to extend terms, depending on what we want to do at that point in time. They are a large 7-Eleven developer, so they've got a strong relationship directly with the tenant, which is how they were introduced to this opportunity and have great insight into the performance of the location. So, a really robust portfolio. We would certainly like to own them, but just not at the cap rate that the borrower was paying.

And just to clarify, I was asking about the four-wall coverage for the entire interest payment. What does that look like?

Yes, so it's north of 3 times.

Okay. And can you remind us what types of tenants make up the sub-investment-grade profile group within your portfolio? And if any of those tenants are you seeing any kind of incremental pressure from the banking changes that we've seen?

Yes. A lot of those tenants are quick service restaurants, and we aimed to get all the tenants and locations out of the portfolio that we did not want to own long term. We're left with tenants and locations that yield high rent coverage, likely higher than that of some sub-investment-grade peers, as those are the ones we believe offer the best risk-adjusted return for us.

Thank you. And congrats, Dan.

Thank you.

Thank you, Ki Bin.

At this time, there are no further questioners in the queue, and this does conclude our question-and-answer session. I would now like to turn the conference back over to Mark Manheimer for any closing remarks.

Thank you all for joining us today. We look forward to speaking with you all again very soon.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.