Earnings Call Transcript - NTST Q4 2020

Operator, Operator

Greetings, and welcome to the NETSTREIT Corporation Fourth Quarter 2020 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 Amy An. Thank you, Amy. You may begin.

Amy An, Host

Thank you for joining us for NETSTREIT's fourth quarter and full year 2020 earnings conference call. In addition to the press release distributed yesterday after market close, we posted a supplemental package and an updated investor presentation. Those 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 prospectus dated August 13, 2020, and our other SEC filings, including our Form 10-K for the year ended December 31, 2021 available. 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.

Mark Manheimer, CEO

Good morning, everyone. And thank you for joining us today for NETSTREIT's fourth quarter and full year 2020 earnings call. We hope this call finds you and your families well and we are pleased to be here with you today. I'll start with a brief overview of our accomplishments over the last year. Then I'll discuss our acquisition and portfolio management activity and close with a few comments on ESG-related efforts. Andy will then provide more detail on our fourth quarter and full year results, balance sheet and outlook for 2021. We will then open the call for questions. Since our inception, NETSTREIT’s strategy has been to create a high-quality diversified and fortress retail portfolio, with a conservatively capitalized balance sheet and scalable platform to support accretive and consistent long-term cash flow growth. As many of you are aware, we spent the first half of 2020 deploying capital raised from our private Rule 144A offering. We built a portfolio that was e-commerce resistant and recession resilient, which ultimately helped us to have significantly higher rent collections as compared to our net lease peers during the second and third quarters of 2020, at the height of COVID-19 related closures. In addition, we built out our team from eight employees to 19. We made several executive hires, including Andy Blocher, Trish McCartney, and Randy Howe, who are on this call with us today. We also hired Chad Shaffer as our SVP of Credit and Underwriting. We added three members to our board of directors, Robin Ziglar, Heidi Everett, and Michael Christodolou. We believe we have a best-in-class team in place to lead us forward. We successfully completed our IPO last August amid the COVID-19 pandemic, raising a total of $227 million in net proceeds, which included the over-allotment option exercised by our underwriters. I would like to pause here to take a moment to note that many of last year's accomplishments wouldn't have happened had it not been for every member of our team who worked diligently to get us to where we are today. I'm very proud of everyone, and I look forward to sharing more successes with them in the future. Moving on to our portfolio. As of December 31, 2020, our portfolio contains 203 properties comprising 3.7 million square feet in 38 states with a diversified tenant roster of 56 tenants in 23 industries. Our weighted average lease term is 10.5 years, and we are 100% occupied with no lease expirations until 2023 and less than 1% of our leases expiring before 2025. Based on ABR, our tenancy is 70% investment grade with an additional 8% classified as unrated with an investment-grade profile, and over 90% of our industry exposure is what we refer to as defensive. Simply put, we focus on well-positioned tenants who have strong balance sheets and great access to capital and are focused on tenants for whom their physical locations are integral to their ability to generate cash flow for their business. This defining characteristic has proven to be a key protection against both e-commerce risks and COVID-related disruption. As a result, our collections have been extremely strong throughout the COVID pandemic. We collected approximately 97% of our rent for the full year of 2020. Andy will discuss further, but we believe that these results validate our strategic approach to portfolio construction, and resulting COVID-related rent payment disruptions are now in the rearview mirror. Throughout 2020, we continued to grow our portfolio through disciplined acquisitions. As a reminder, we underwrite and acquire properties with strong underlying tenant credit and seek fungible real estate with strong market fundamentals and locations that are highly productive for the parent tenant. In 2020, we completed $409 million of acquisitions. The depth and breadth of our pipeline meant that we kept a steady pace of acquisitions throughout the year with no slowdown due to COVID. This activity included investments in stabilized assets, blend-and-extend opportunities, sale-leaseback transactions, and development projects, which demonstrates the depth of our opportunity set. For the fourth quarter, we completed $81 million of acquisitions at an initial cash capitalization rate of 6.8%. These acquisitions had a weighted average remaining lease term of 8.8 years, with 68.7% of the properties occupied by investment-grade rated tenants and an additional 12% occupied by tenants with an investment-grade profile. Finally, with respect to timing, these acquisitions were back-loaded in the quarter, which tends to be the case in most quarters. During the fourth quarter, we added a few new tenants to our portfolio roster, including Best Buy, Sunbelt Rentals, and our first 15-year Chick-fil-A ground lease. We also added our first Target in Massachusetts, just south of Boston, to the portfolio at a 6.4% cap rate, subject to a seven-year ground lease with rent of just $2.81 per square foot. The adjacent former Sears box has been demolished, and Trammell Crow has begun construction on a luxury Class A 282-unit apartment community in its place. Not only are we encouraged by the new customers that will be moving in next door in the next couple of years, but also by the increasing land value that we expect on our three-and-a-half-acre parcel that we acquired at what we feel was a bargain price. We also continue to consider strategic dispositions to improve portfolio quality and reduce risk. In 2020, we sold 15 properties for $50 million, of which 12 properties and $37.4 million were closed in the fourth quarter. We felt that market conditions in the fourth quarter presented an attractive opportunity to eliminate or lessen our exposure to certain tenants, geographies, and industries, and improved our overall credit quality. This drove our decision to sell these assets sooner rather than later despite their near-term impact on absolute earnings. During the fourth quarter, we took an opportunity to reduce our exposure to casual dining, which has been a stated goal of ours. This exposure was reduced from 4.5% to 2.2% during 2020. We believe that we have now addressed the immediate potential credit risks in this category, but we'll continue to decrease exposure in this category over time. We also look to refine our geographic exposure, and to date have done so in a way that was accretive. During the fourth quarter, we sold an ally in Texas at a 6.4% cap rate and replaced it with an acquisition of another ally in Indiana with a similar remaining lease term at a 7.8% cash cap rate. As a result of our active capital recycling and portfolio management in 2020, we transformed our existing portfolio, enhancing its credit quality and improving diversity. We acquired 124 total assets, adding 23 new tenants, 10 new states, and four new industries. Importantly, our percentage of investment-grade tenants grew from 63.7% to 70%, and our weighted average lease term grew from 10.1 to 10.5 years. At the same time, we reduced ABR exposure to our largest tenant, which was BBB-rated CVS at 11.8% of ABR on December 31, 2019, to AA-rated 7-Eleven at 8.9% as of December 31, 2020. We continue to evaluate future acquisitions, including with many of our top 10 tenants. However, over time, we expect tenant concentration to decrease due to the denominator effect as our portfolio continues to grow. Finally, let me remind you that we have zero exposure to theater, health clubs, or early childhood education tenants, reflecting our long-held view that these tenants have generally weaker tenant credit profiles and lack of fungibility of their underlying real estate. As we look ahead, we're targeting acquisition activity inclusive of dispositions of $320 million in 2021. We expect that the bulk of this activity will be a mix of investment-grade and high-quality unrated tenants that is similar to our current portfolio mix and reflect the current mix of our industry concentrations. Given the sheer size of the net leased sector and our deep industry relationships, we believe we have plenty of growth opportunities ahead of us. And due to our relatively smaller size, we know that future acquisitions can move the needle for us in terms of earnings growth in a meaningful way. We continue to improve our portfolio quality and diversification with no erosion in going-in cash cap rates or weighted average lease term. We are encouraged by our robust and growing pipeline of opportunities as we look forward to reaching our 2021 acquisitions goals with high-quality properties. As this is our fourth-quarter call, let me take a brief moment to cover an important topic here, ESG. When we came to market at the time of our IPO, we indicated that ESG would be a part of our strategy and processes. First, we are committed to strong governance. From the time of our IPO, we ensured that our board was designed to fit today's standards for governance. We have an independent and diverse board with a strong mix of backgrounds and expertise, including real estate, financial markets, and human capital. These are the same three pillars that support NETSTREIT itself. Second, from the beginning, employee well-being and engagement have been and remain very important to Andy and me. From a social perspective, we make sure that NETSTREIT offers professional training, continuing education reimbursement, competitive benefits, and flexible parental leave to our employees. We also survey employee satisfaction annually. I'm proud to say that every one of our employees is a shareholder in NETSTREIT, meaning all of our employees have a personal stake in our collective success. Finally, with respect to the environment, 17 of our top 20 tenants have corporate sustainability programs, and our acquisition due diligence process has an ESG and environmental component. At the asset level, we look to fund capital improvement projects with an eye towards sustainability. We are very proud of all that we've accomplished in 2020, having significantly grown our portfolio while improving its quality, and built an operating platform designed for growth, supported by a low-leverage balance sheet. Finally, our strong performance on collections objectively proves the durability of our strategy as we meaningfully outperformed our peer set in an unforeseen, uncertain economic environment over the past year. As a result, we believe we are extremely well positioned as we enter 2021, and we are excited for the future at NETSTREIT. I'll now turn the call over to Andy.

Andy Blocher, CFO

Thanks, Mark, and thank you all for your time with us this morning. Let me begin with our results for the fourth quarter and full year 2020. Yesterday, in our press release, we reported net income of $0.15, core FFO of $0.18, and AFFO of $0.20 per diluted share for the fourth quarter. For the full year, we reported net income of $0.01, core FFO of $0.65, and AFFO of $0.69 per diluted share. As of December 31, 2020, the in-place portfolio was generating $41.8 million of annualized base rent or ABR, which has important time metric reflects the effect of acquisitions and dispositions completed in the fourth quarter. From a collections perspective, we're very pleased with our portfolio performance. Prior to giving any consideration to deferral or abatement arrangements, granted as a result of COVID, we collected 100% of fourth quarter rent payments, and for the full year collected 96.9% of rent. Further, based on the payment history of our tenants, we currently have zero bad debt reserves and recognize zero bad debt in the fourth quarter and for the full year of 2020. Finally, based on our 100% rent collections in the fourth quarter, we did not provide any deferrals or abatements and have not done so since August. Turning to our balance sheet and capital markets activity, the work we completed in 2020 with respect to our balance sheet was very important and set the stage for future growth for NETSTREIT. We accessed the equity markets and raised net proceeds of approximately $227 million through our IPO in August. We repaid our outstanding line of credit, retired our outstanding Series A preferred shares, and completed a $175 million LIBOR swap to hedge floating rate exposure on the entire balance of our term loan. As of December 31st, we had $93 million of cash, which includes $14 million of restricted cash held in 1031 exchange accounts, and remain fully undrawn 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 one-year extension option, which would match the December 2024 maturity of our fully drawn term loan. In addition, our net debt to annualized adjusted EBITDA ratio of 2.8 times is well below our 4.5 times to 5.5 times long-term target. With respect to dividends, earlier this week, the board declared a $0.20 regular cash dividend to be payable on March 30th to shareholders of record on March 15th, reflecting an annualized dividend rate of $0.80 per share. Let me now take a few minutes to discuss our outlook on a couple of guidance items and provide some forward-looking perspective. We're starting the year with $41.8 million of in-place annualized base rent. As Mark mentioned, we expect to employ $320 million of acquisitions this year, net of dispositions back-end weighted in each quarter and a cap rate comparable for fourth quarter and full year 2020 activity. We expect cash interest expense to range from $3 million to $3.5 million depending on the timing of draws, if any, on our revolving line credit and expect an additional $600,000 of non-cash deferred financing fee amortization. We expect to incur states and franchise tax of $200,000 to $300,000 and expect to report those amounts on their own line item in 2021, reflecting the growth and increasing geographic diversity of our portfolio. We expect 2021 cash G&A in the range of $11 million to $12 million, with an additional $3 million to $4 million of non-cash compensation expense, which reflects executive compensation agreements that have been recently finalized through our compensation committee process. As we've largely stabilized the size of our team, our overall compensation structure and our outside service requirements to efficiently and effectively execute our strategy and perform as a public company, we expect that we will continue to gain the benefits of scale and a relatively fixed cost structure as we grow. As a result, our G&A as a percentage of revenue and assets is expected to decrease over time. I’ll echo Mark's comments and say that I'm grateful to our entire team for their exceptional contributions in 2020. Their hard work each day through a pandemic allowed us to establish and build what we believe is a truly great platform and portfolio. As we start 2021, we believe we have significant momentum to continue to grow both our portfolio and earnings and remain focused on creating significant shareholder value. This concludes our prepared remarks; we’ll now open the line for questions.

Operator, Operator

Thank you. Our first question comes from Linda Tsia with Jefferies.

Linda Tsia, Analyst

You collected 100% of rent payments for October, November and December, but we didn't see mention of rent collections for January and February in your press release. Is there anything to highlight here?

Mark Manheimer, CEO

Yes, we did collect 100% of rent in January. But just to preface that question, as it relates to COVID and/or any tenant requesting any rent relief, we have not had a discussion with any tenants since the second quarter about paying rent, as we had hoped and still believe that we have fully resolved and documented all COVID impacts to the portfolio last year going back to the second quarter. This February, we had an investment-grade tenant send us our rent check, but we never received it. So, the tenant canceled the check and then moved that tenant to ACH, which we're trying to do with all of our tenants. We've got all the confidence that we're going to be receiving that rent from them on Tuesday, which is the day of the week that they release all their wires. We will continue to collect 100% of rent, not only for February but for the rest of the first quarter. However, we wanted to be really hyper-careful when it comes to transparency and maintaining our credibility. So technically, we're waiting on one rent payment of $23,000 to get to 100% in February, and that would make our sixth consecutive month of receiving every penny of rent. So hopefully, that answered your question.

Linda Tsia, Analyst

And then we're also seeing a growing number of net lease transactions occur in the multi-tenant shopping center space, with a smaller shopping center REIT announcing yesterday JV acquire high quality investment-grade net lease tenants. This sounds like your sandbox. How are you viewing the competitive landscape right now, and should we be concerned about greater cap rate compression or more difficulty sourcing deals in 2021?

Mark Manheimer, CEO

So first, I think it shows how attractive the spaces that we have seen a couple more entrants in the last few years. But I do think that there is mention that this particular new entrant has a very specific acquisitions approach that would make it very unlikely that we’d be competing directly with them. Again, it's just a very, very fragmented market, which was really a big topic. When we raised capital in 144A that we'd be able to deploy capital and the quality that we have at the pricing that we have, it was also a topic at the time of the IPO, and it's still today. We believe we can continue to prove our ability to compete and still be able to hit pretty attractive yields for the quality of assets that we're bringing in. In fact, as we look forward to the pipeline, I think it's more robust today than it really has been over the past few quarters.

Linda Tsia, Analyst

Just one last one. How are you approaching tenant concentration? Is this best addressed through dispositions or dilution through higher acquisition volume?

Mark Manheimer, CEO

I mean, obviously, we're a smaller portfolio at this point. The majority of that is going to come through the denominator increasing in size. With that being said, if we have one particular outsized tenant, we did sell a couple of 7-Eleven assets, one at five caps and one at 4.95 cap back in the fourth quarter pretty accretively, which is great, but we will continue to selectively work through dispositions. But you did see in the fourth quarter a little bit more dispositions than what you can typically expect from us on a go-forward basis. We just had an opportunity to move some tenant credits that really thought made sense to move out of the portfolio and some shorter-term leases, where we felt like we were getting pricing similar to longer-term leases. We felt like that was helpful for us to improve our lease expiration schedule.

Operator, Operator

Thank you. Our next question comes from Nate Crossett with Berenberg.

Nate Crossett, Analyst

I was wondering if you could comment on the activity you've had so far in Q1, since we're already kind of approaching the end of this quarter. And you mentioned the pipeline's bigger than it's been in the last two quarters. I was wondering if you could just help us size that in terms of dollar terms? And within that pipeline, is it mostly concepts you already own, or is it a mix of new and current?

Mark Manheimer, CEO

So, I think of this quarter similar to the fourth quarter. It is likely to be a bit back-end loaded. We closed in the neighborhood of $20 million of assets so far. I know there are a couple that should be closing either today or early next week. We have a little bit over $120 million of assets that are under contract approved through investment committee and moving through the closing process. So, some of that will be in the first quarter, and some of that will leak into April. The good thing there is we will probably have a pretty robust April as well. So that will kind of make the acquisitions a little bit less back-loaded than what we saw in the first quarter and likely to see in the first quarter. But yes, in terms of the tenant stuff that we're seeing, we did add a few new tenants that, as you heard in my prepared remarks, one being Target. We do have a couple of attractive investment-grade tenants that we'll be adding to the portfolio here in the first quarter. But it's going to look a lot like what you saw in the fourth quarter in terms of investment-grade and an investment-grade profile with pretty high-quality assets and attractive weighted average lease term that yields that are pretty consistent with what we've done in 2020.

Nate Crossett, Analyst

You mentioned some ground leases you completed in the quarter. Could you remind us what percentage of your portfolio consists of ground leases and whether that will expand over time, or how those opportunities came about?

Mark Manheimer, CEO

I think ground leases vary significantly. Some tenants have ground leases that can cost several million dollars to acquire. When comparing fee simple rents to ground lease rents, there's not much difference, so the benefits are limited, mainly involving the loss of depreciation. However, we find rents that accurately reflect the value of the land or less to be very appealing. Usually, those types of transactions are competitive, and we often get priced out of them. If the marketing of the Target asset had been more effective, I believe the cap rate would have been well below the 6.4% cash cap rate we received on that acquisition. We have a few ground leases in our portfolio, including ones with Lowe's and Chick-fil-A, but they make up less than 5% of it. I don't expect that portion to increase significantly, as we prefer not to overpay for ground leases. If we do encounter opportunities priced comparably to fee-simple deals with low rents, those would be quite appealing to us.

Operator, Operator

Thank you. Our next question comes from Greg McGinnis with Scotiabank.

Greg McGinnis, Analyst

Andy, I apologize if you covered this in your opening remarks; my call stopped for a few seconds. But just curious what prevented you from providing AFFO per share guidance this year and whether you expect that to be an abnormality this year, or kind of what we should be expecting going forward?

Andy Blocher, CFO

Yes, I mean I think that it is a 2021 phenomenon, certainly, at this point. But based on our current size, the assumptions we make around timing, size, pricing of additional capital raises, things that we talked about in the past and to a lesser extent expectations around our ordinary course business. The range that we would have had to provide would have been so wide, it would have been meaningless to users. What we did is I think we provided guidance around the key operational items that we really expect are going to dictate our 2021 corporate performance and rough capital raising to the size knowing that we're going to be opportunistic with respect to our access to capital as we did throughout 2021. To produce AFFO per share in the high 60s and then provide a $0.10 to $0.15 guidance range as a result of those things, we just didn't think it was meaningful to users.

Greg McGinnis, Analyst

In regards to the capital raises though, are there any updates you can provide there in terms of how you're thinking about funding acquisitions this year?

Andy Blocher, CFO

I mean, as I talked about in my prepared remarks, we’ve got $93 million worth of cash on the balance sheet as of year-end. March had a very robust pipeline that we're working through. We have a fully undrawn $250 million credit facility. We were at 2.8 times net debt to EBITDA. So we feel like we’ve got the room. As a result, we have the ability to be opportunistic with respect to capital.

Operator, Operator

Our next question comes from Todd Stender with Wells Fargo.

Todd Stender, Analyst

You touched on your reduced casual dining exposure. But when it comes to quick service, we don't see specific names in your top tenant list. Can you guys just comment on your appetite to buy portfolios of QSRs? Not in a central or a necessity bucket, but it sure seems that way during COVID.

Mark Manheimer, CEO

Going back to when COVID first hit, we hit the brakes entirely on acquisitions for a short period of time. Similar to the great recession and in seeing how the COVID disruption you saw, quick service restaurants performed extraordinarily well. I mean, we're still going to be very focused on credit, and there's really probably a list of about 10 names that we're very comfortable with as it relates to quick service restaurants. We want to make sure that we've got drive-thru, and we have a large enough parcel to accommodate directors; we're even seeing some quick service restaurant operators that historically hadn't had a drive-thru are going to that model. We want to ensure that that's going to be very fungible back, but it is an area, I think, you can expect to see us acquire some assets in the future. Again, as mentioned, our casual dining is down to a little over 2%; I think you're likely to see that creep below 1% by year-end.

Todd Stender, Analyst

You added some Best Buy, Burlington’s, and some grocery stores this quarter. Can you discuss these additions? At first glance, they don't seem very interchangeable; maybe consider factors like credit or location and touch on those points?

Mark Manheimer, CEO

I think the size boxes specific to Burlington and Best Buy, they've been really kind of decreasing the size of their box. So we were in pretty close communication with attendance on those particular assets and how committed they are to those long term, generating very strong sales at each of them. We are fairly confident that those particular tenants are likely to remain in those boxes beyond their initial lease term. That being said, there are a lot of tenants in that 35,000 to 40,000 square foot range. We feel that those are actually fairly easy for us to either replace the rent or increase the rent should we be put in a position to re-tenant.

Todd Stender, Analyst

Last one for me, just with this year as kind of a backdrop, there's commentary out there just about increased M&A activity potential. Where do you guys stand on doing sale-leasebacks? Do you think that'll be a part of your strategy, or do you think you're going to be more in a widely marketed space?

Mark Manheimer, CEO

I hope we won't be in the broadly marketed space, as that tends to lead to very competitive pricing, which can be less appealing. Last year, I received many questions about our acquisition sourcing strategies. We have various approaches to acquisitions, including blend-and-extend deals, partnerships with multitenant buyers where we enhance the net lease, developments, and even sale-leasebacks. I initially didn’t expect to engage in many sale-leasebacks, as they usually indicate a tenant with limited access to capital and resources for selling their properties, which can put them in a challenging credit position long term. However, we've encountered numerous high-quality, investment-grade tenants who prefer not to have their capital tied up in real estate. This has led to an increasing number of opportunities with these strong tenants. Consequently, we've undertaken more sale-leasebacks than I had anticipated, and we have some of those transactions in our future pipeline.

Operator, Operator

Thank you. Our next question comes from Katy McConnell with Citi.

Unidentified Analyst, Analyst

I was curious about your thoughts on inflation. It seems to be a significant topic recently, and I'm interested in how you view your lease escalators and your competitive position compared to some of your peers.

Mark Manheimer, CEO

I think you're right. Our leases, as you'd expect with a higher credit profile, typically, those leases are going to be a little bit flatter than maybe some of the other peers that are really kind of financing through sales leasebacks, smaller credits. That being said, we also believe we have predictability of cash flow and should be a little better on a go-forward basis and have less than in rent loss. But yes, we’re getting close to 1% on our escalators within our leases. I think inflation may not be here permanently; it could be a temporary situation where it comes into the portfolio. If you listen to Mr. Powell, if you're anticipating a very high inflation market, then our leases are going to be a little less attractive.

Unidentified Analyst, Analyst

I have one other question just in terms of cap rates for this year and sort of recently, as you're seeing any sort of movement, just within the sort of IG category that you guys are targeting?

Mark Manheimer, CEO

We really have not. I think there's a good advantage to the fact that we're only looking to acquire $80 million or so per quarter. This allows us to really source significantly more than that and focus on the assets where we think the pricing is a little less efficient, really kind of chop off that tail of that bell curve, and this has really allowed us to get pretty attractive cap rates. As a private company, we’ve shown that we can do that as a public company in the last couple of quarters, and even in the first quarter we're seeing similar types of cap rates.

Operator, Operator

Thank you. Our last question comes from Todd Thomas with KeyBanc Capital Markets.

Todd Thomas, Analyst

Andy, I just wanted to follow-up. I think you said acquisitions would be back-end weighted. Was that for the quarter or for the year? And I guess it seems like the pipeline's growing. So I'm just curious why deal flow would sort of slow from the current pace of it, if that's the case?

Andy Blocher, CFO

I mean, I don't think the deal flow is going to slow in any material way; I would just tell you that on average, if you look at it since last year, the average timing of our execution of our acquisitions, I think that they are like the second day of the third month of the quarter. As Mark indicated in his prepared remarks, that's just been somewhat typical to what we’ve seen. And from a modeling perspective, the impact of that for a company of our size can be meaningful. But what we're pushing as we go into the end of the first quarter, into the second quarter is to try to change that. However, from a modeling perspective, like I said, it could be a meaningful impact.

Todd Thomas, Analyst

Mark, you talked a bit about the COVID-resistant nature of the company's tenants, which benefited a bit during the pandemic: some convenience, auto, drugstores. How are you thinking about tenant categories and credits moving forward, as we hopefully continue to move away from the pandemic? Is there a little bit of froth in the market around the edges, maybe that could benefit the company from a capital recycling standpoint? Would you potentially look to shift away from essential retail to some extent, either in terms of some of the newer acquisitions you're looking at or assets that you might be looking to sell?

Mark Manheimer, CEO

When Andy and I first started trying to raise capital for this venture back, it was in the back half of 2019. The strategy was the same as it is today, very focused on essential retailers. What was working in retail today was really what was working pre-COVID as well, and those sectors are really where we focus on those defensive names. It was a little less popular when we were raising capital back in late 2019 and into early 2020 pre-COVID. But that being said, that's our strategy. We think retail is going to continue to evolve. We think having capital available and management teams that have shown a propensity to continue reinvesting in their business are going to be the ones that are going to be left standing. That's the appropriate way to invest in retail. It shouldn't surprise you that that held up very well in the first bit of disruption. We expect to see more disruption may come sooner or later; we want to be prepared for that disruption as it comes over the next 10 to 20 years. Thus, I would not anticipate us selling off our assets and going to buy movie theaters or things that are outside of our evaluations. But on the margin, we will look to, if the market pays us with a very aggressive cap rate for a specific asset, we will always be looking to recycle capital opportunistically. We'd redeploy back into what our bread and butter is, which is essential retail.

Todd Thomas, Analyst

Just the last one from me; apologies if I missed this. But can you just talk about that development project that was disclosed in the 10-K? What kind of asset and tenant credit is that? And is that an area where you see some growth opportunities?

Mark Manheimer, CEO

Yes, I think we've got a few development projects in the works. It’s something that we spoke a lot about really at the time of the roadshow in the IPO. This is an area that we're really going to focus on, trying to drive a little bit more yield that way. However, getting those going takes some time, and now we're starting to see the fruits of the labor of the acquisitions team. I do think that this is an area that you'll see us be a little bit more active. We won't be speculative developers, and we won't acquire land to build without securing a tenant first. Our approach to development will be cautious. We're looking to gain maybe 50 basis points, but we won't take much risk. We need to have a lease secured and a tenant ready to occupy the site, and we will keep the developer's budget tightly controlled to avoid cost overruns. We believe this could represent a significant portion of our activities since we're not aiming to invest several hundred million dollars each quarter. If we can manage $30 million to $40 million a year in this area, it can positively impact our yields.

Operator, Operator

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

Mark Manheimer, CEO

Well, thank you, everyone for joining and your interest in NETSTREIT. Again, if you are attending the REIT conference next week, hopefully, we'll get a chance to talk. We're really excited about the growth opportunities ahead of us for NETSTREIT. So take care everyone.

Operator, Operator

That concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.