Good day, and welcome to the NETSTREIT Corp. First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, that today’s is being recorded. At this time, I would like to the conference 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 can be found in the Investor Relations section of the company's website at www.netstreit.com. On today's call, management's remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. For more information about these risk factors, we encourage you to review our Form 10-K for the year ended December 31, 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 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. 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 to 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, 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 the 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, which are secured by 49 properties were $46.1 million at a weighted average cash yield of 9.3%, two [ph] completed development projects for $14.8 million and $4.5 million of additional funding to support ongoing development projects and 8 dispositions for $15.8 billion 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. Overall, 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…

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, an AFO of $0.30 per diluted share. As it pertains to 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. At 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 [ph] which generated $2.9 million of net proceeds. In addition, 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. Operator?

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

Thanks. Good morning. It's actually Nick Joseph here with Eric. Wondering if you could walk through kind of 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, yes, and I think 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 that we're taking kind of 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 think I would think about it as being maybe 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%, 10% of volume on a go-forward basis. Of course, that can kind of move up and down quarter-by-quarter. And I would expect those yields to be a little bit closer to where we're buying properties. Right now, the transaction market is certainly influx from sellers that this time last year were eager to sell their properties to now there typically needs to be a reason for them to have to sell their properties or to be okay with the pricing that we're seeing today. So this was kind of an avenue of us building relationships with a lot of those future sellers, as well as sprinkling in a little bit of really strong risk-adjusted returns. But I think we're a little bit hesitant to make that a huge part of what we do, just as we start to think about eventually those loans are going to get paid off and want to minimize any replacement risk down the road.

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

Yes. Nick, it's Dan Donlan. Look, first and foremost, I think 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. And given where our leverage is today at 4.1 using the impact of the Ford [ph] 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, you 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 to 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 are certainly - we were 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. So you have other loans on the book as well. 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 as in the future?

Yes. And I think right now, we're in a position in a situation where there's 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's probably a good barometer. We don't want to let our loan book get north of 10%, although they're not all created equally. So looking back at the loans that we've done in the past, I think those are either going to end up where those will convert into us having fee ownership of those assets. So there wouldn't be any disruption to the income or we get paid off at rates that are, I think, pretty easy for us to take that capital and redeploy accretively. And so those are kind of a little bit less of a risk in my mind as we kind of think about the reinvestment risk. But yes, I think the typical type of loan in the future is likely going to be kind of you've got a group that historically had relied on regional banks. It's harder to get LTVs higher, harder to get debt at all for a lot of these types of developers and other types of counterparties. And so right now, there's an opportunity for us to kind of step in and provide 100% of capital and own the property, provide 100% of - or 90% of the capital or 85% of the capital and collect all of the cash flow for a period of time, where we get ROFRs [ph] on each of those transactions. So there is some new loans to each of these, and we're really trying to balance \-- we don't want to take on and have 25% of our of our book, the loans that are going to get paid off and then we can't redeploy the capital accretively. So that's really kind of the way that we're thinking about it. But if you're looking for just a threshold for modeling purposes, I don't think we're going to let it get north of 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 that grows in order to sort of detail some of the maturity dates, loan rates and some other terms that might be important for underwriting purposes?

Yes. I mean we'll kind of have to evaluate as we start adding loans into the portfolio, if we feel like that is helpful to investors to understand the story, certainly something that we would consider. But I think we've added that into some of our disclosure already in this quarter, which I think should give a clearer picture as it relates to credit risk. And then as it relates to loan maturities, we've kind of taken maybe a different tact than others as we think about having 2-year loans, 3-year loans versus 10, 15-year loans, which we've seen some peers kind of take more of the latter approach, we kind of like to be able to be back at the negotiating table a little bit sooner and reassess whether we'd like to be paid off or if we want to extend the loan, maybe get some extension fees and things like that, if that's prudent at the time. So we'll evaluate. But certainly, I think you can rely on us to provide disclosure to make sure that investors understand how we're deploying capital and what exactly the risks are 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, call it, a 200, 250 basis point premium yield to your acquisition yields. Was that contemplated in the guidance? And just as it pertains to the guidance, then which you maintained, is there anything sort of offsetting some of that premium investment yield that is impacting the guide on the other side?

It's Dan Dolan. Look, yes, this - the loan was contemplated in guidance. And look, given that we only set guidance two months ago, and there's a lot of volatility out there in the world right now, we just thought it prudent to wait a few months before revisiting our guidance range.

Okay, great. All right, thank you.

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, sure. So yes, I mean, I think we've seen a continued migration from late last year of sellers that did not want to sell. We're having trouble believing that cap rates had moved as much as they had even though, obviously, interest rates have moved. And now they've seen enough comps out there where they've got some debt coming due or various other reasons why they're coming to the table. What we're seeing that bucket that we talked about on the last call, people really trying to hold the line as much as they can. And then the second bucket of either sellers that need to sell or the ones that say, okay, I need to transact. And I don't foresee cap rates dropping like a rock anytime soon. And so that second bucket continues to grow. And we've seen the opportunities increase, and we've just had to be extraordinarily selective as it - certainly as it relates to the loans because I think that opportunity is certainly there for us, but we're seeing a lot more opportunities on 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, I think, in a couple of quarters. Can you give us some sense of - how are you viewing developments today or partnering with merchant builders what that opportunity might look like as compared to other uses of capital?

Yes. So we saw certainly some stress coming to merchant developers for quite some time. We've acquired some properties from them when they were willing to kind of come to cap rates that we thought made sense. But when you think about the ones that are going out, developing a lot of stores for some of the tenants that we're trying to grow with and had historically relied on regional banks and selling the properties into the 1031 market, which historically has been much more aggressive on a cap rate basis than the institutions are willing to go. That pressure has continued to build, and we made the decision that there are other ways to partner with the developers than just funding development. And so, we've been working on a number of transactions, either providing equity takeouts at the end or buying some of their properties. A couple of those will likely be some of the loans that we do. And I think in the next quarter, we'll likely be providing a little bit more disclosure on some of those transactions after they come to fruition, but I think they should be viewed pretty favorably by the market as I think we got pretty creative like we have in the past and should yield pretty positive results.

Thanks, Mark. And 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. So a lot of our counterparties right now are developers, and it's just going to be how we end up structuring those investments, whether they are typical equity takeouts, funding the development, some loans that could potentially convert into fee ownership, just regular loans or just equity takeouts at the end of construction. There's a number of types of transactions that we're working on right now, some of which have closed already, but some of which are still in the pipeline of being negotiated.

All right. Thank you very much. Appreciate the time.

Thank you.

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

Hi. This is Barel Grant for Dennerlein. And so 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, sure. So I mean, I'd say overall, the competition is very much muted versus what we've seen in the past. I mean the leverage buyer, whether that be private equity firms or even some larger family offices that have relied on using debt capital is a big part of their capital stack. They're largely out of the market. It's become very difficult for 1031 buyers to achieve the yields that they need when they go out and try to source some of these transactions and then go to their community bank and try to get some debt. So we've really not only seen the opportunity set pick up and I think transaction volume pick up industry-wide in the second quarter versus the fourth quarter and first quarter, but we're operating in an environment with significantly less competition.

Great. Thank you.

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 detail about what's in the pipeline and stuff that you're seeing?

Yes. I mean I think what you'll see us acquire a lot of the tenants will be similar. I think there will be a couple of new names that we've tried to get in our portfolio for a long period of time that may come in some smaller portfolios. So we're certainly excited about the credit quality of what you'll see us buy a little bit in the grocery sector, some of the discounters and dollar store area and quick service restaurants is another area that we've seen a little bit more opportunity than we had in the past at cap rates that make sense for us. Typically, that's the ones that we really have tried to do business with the cap rates historically have been a little bit too aggressive for us, but we've seen some movement there. So I think you'll see - it likely won't deviate much from where we've been in the past other than a few new names.

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. And a lot of it - certainly what I think we'll be doing in the future will be at pretty similar cap rates. So I don't think there necessarily needs to be too much of a differentiation there.

Thank you.

[Operator Instructions] 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. So we're essentially taking all of the rent in that 9.3%. So the cap rate on the transaction from the buyer's perspective, it was about a 5.6, 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 an interesting opportunity for them is that they have uncapped CPI bumps, which should be hitting in about 2.5 years. And so when those increases hit, that could be a good opportunity for them to either refinance this out or we could extend terms depending on what we want to do at that point in time. But certainly, there will be a lot of value creation associated with those properties when the CPI bumps hit. And the borrower is a large 7-Eleven developer, so they've got a really strong relationship directly with the tenant, which is how they were introduced to this opportunity and have really good insight as to the performance of the location. So a really strong 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 they - it's north of 3 times.

Okay. And can you remind us like 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. So I mean a lot of that's going to be quick service restaurants, and that was a big part of what we did to the portfolio before we went out and tried to raise capital, both privately and publicly, going back to 2019 is getting all the tenants and locations out of the portfolio that we did not want to own long term. And so what we're left with is in general, a lot of quick service restaurants in a lot of locations that generate the extraordinarily high rent coverage’s, I think higher than what you'd see from maybe some of the sub-investment-grade peers with what we're left with in those - in that portfolio and locations that we feel like the best risk-adjusted return for us was to hang on to those properties.

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.