Greetings, and welcome to the NETSTREIT Corp. Second Quarter 2021 Earnings Call. [Operator instructions] As a reminder, this conference is being recorded. It is now pleasure to introduce your host, Amy An. Thank you, Amy. You may begin.

We thank you for joining us for NETSTREIT's second quarter 2021 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, 2020, and 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 definition, GAAP reconciliation, 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 thank you for joining us today for NETSTREIT second quarter 2021 earnings conference call. I will begin with a review of our investment activity and portfolio metrics for the quarter. And Andy will then provide detail on our second quarter results and balance sheet. But again, our core focus is on strategic growth with high quality tenants and pursuing opportunities where we see the best risk adjusted returns. We continue to target tenants, whose physical locations are critical to their cash flow generation, making them more resistant to ecommerce competitive pressures. More importantly, we focus on tenants with strong balance sheets and proven access to capital. During the quarter, we achieved the acquisition and development volume totaling approximately $121 million, making it our largest quarterly volume since our IPO last August. We completed approximately $117 million of acquisitions at an initial cash capitalization rate of 6.5%, inclusive of all closing costs, and a weighted average remaining lease term of 9.7 years. Over 93% of our second quarter acquisitions were with investment grade rated tenants or tenants with investment grade profiles. Also in the quarter, we provided $4 million of development funding, which included two new projects with total cost expected to be $6 million. Both of these developments are with tenants with investment grade profiles, we anticipate that we will begin to collect rent from these projects by second quarter of 2022. Finally, in the quarter, we sold five assets for $13 million at a weighted average cash capitalization rate of 6.7%. With these dispositions, we've decreased our casual dining exposure from 1.9% to 1.2%. We will continue to look for opportunities to decrease our exposure to industries that are more at risk from retail disruptions from technological advances or shifting consumer behavior. Moreover, we will…

Thanks Mark. And once again, thank you all for your time with us this morning. Let me begin with our results for the second quarter 2021. Yesterday in our press release, we reported a net loss of $0.07; core FFO of $0.18 and AFFO of $0.20 per diluted share for the second quarter. I want to note that these per share results reflect the impact of the equity offering completed in April. And while we set a post IPO record for investment bytes for the second quarter, those acquisitions were on our balance sheet for an average of only 19 days in the quarter. In April, we issued 10.9 million shares of common stock in our first fall one offering, raising $203.6 million in proceeds including the exercise and full of the underwriter's option to purchase additional shares. Proceeds from the offering were used to pay off a $13 million outstanding balance on the credit facility and fund investments in the quarter, with the remainder being held as our $88 million cash balance as of quarter end. We believe this offering was a key step for NETSTREIT as we continue to demonstrate our business strategy. Moving on to our balance sheet; as of June 30, we had $88 million in cash. And our $250 million revolving line of credit was fully undrawn. 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 $175 million term loan. Our net debt to annualized adjusted EBITDA ratio was 2.1x at quarter end well below our 4.5x to 5.5x long term target. Finally, with respect to the balance sheet, in early September, we will be eligible to file a new universal shelf…

[Operator Instructions] Our first question comes from Nate Crossett with Berenberg.

Hey, good morning, guys and congrats on a strong quarter. I was hoping you could maybe comment on the activity so far in 3Q, what's the size of the pipeline right now? And then maybe if you could just touch on competition and pricing. It sounds like you're expecting the yield to be close to what you did this quarter, but any color you could give would be helpful.

Yes, sure. Thanks Nate. Yes, I mean, I think having been public for just about a year now, starting to do a little bit more repeat business, whether it be on the development side or blended extends, and some sellers that we've had a pretty good experience with, so we are seeing a little bit more on the repeat business side, which I think is really helping the pipeline. And again as we've discussed in the past, we like to use our size, as an advantage, and really kind of lay out our opportunity set and pick off the assets where we're getting, we think better than market pricing, and the other more inefficiently priced assets. And the repeat business is really where we see more and more of that. So we've been able to continue to achieve the same cap rates, I think just this quarter, the cap rate was the same as our first quarter as a public company. So we've been pretty pleased with being able to continue to generate similar types of returns quarter in and quarter out. That being said there is a lot of competition for the types of assets that we're looking for, certainly the high quality, investment grade side, they're easier to finance. But I think using our relationships, the way that we have, and really building out a larger pipeline quarter in quarter out has allowed us to continue to get similar types of cap rates and we expect the same here in the future.

Okay, that's helpful. Thanks. I noticed that the 711 concentration went up. And I think that was one that you were selling down before. So I'm just curious. Obviously, it's a great credit. But if you could give a little color on that, that might be helpful as well.

Yes, sure. Yes. And that's right; I think as we scale the business, and the asset base gets a little bit larger maybe more than $2 billion, we think that we should be able to get all tenant concentrations below 5%. And that's kind of more of a long term goal. But we also don't want to turn away great acquisitions. And we had the opportunity to do with sale lease back in California with 711, where we got new brand new 15 year absolute net leases at pretty attractive pricing with attractive bumps. And so we kind of looked at that as additive to the quality of the portfolio. So we will look to decrease exposure, mostly through increasing the size of the portfolio over time. But we also don't think it's likely that we're going to have many more opportunities with 711 at the pricing that we achieve.

Our next question comes from Todd Thomas with KeyBanc Capital Markets.

Hey, thanks. Good morning. First question, just wanted to follow up on investments. And as we think about the year winding down, 2022, I realize you're not giving guidance, but the company's installed bases is increasing. And I'm just wondering, more broadly, how we should think about external growth going forward, whether the strategy is to acquire and grow by sort of a certain percent of the base each year, would you expect to keep the base constant? Just curious if you could comment on investment activity for the company more broadly as we move forward?

Yes, sure. I mean I think, in general, I wouldn't expect to see us drastically ramp acquisitions. I think over time will steadily increase our acquisitions. And most of that is going to come from our opportunities that I think like I mentioned at the top with repeat business increasing those opportunities where we're seeing outside pricing and inefficiently priced assets, we'd like to kind of continue with that similar path. But understanding as we grow the asset base, the acquisitions, appetite is going to need to increase, but really, at our size call it a $1 billion or so of assets adding $90 million net of dispositions per quarter really does allow us to grow AFFO at a pretty favorable clip, as compared to our peers.

Okay, and then for the balance of the year, so you maintain guidance of at least $360 million, you're running a little bit ahead of that pace, it seems just curious with some potential tax policy changes late in the year or otherwise. And sort of in light of the improvement in the company's cost of capital, is there a potential to see sort of a much a larger pace of acquisitions and investments late in the year heading into '22.

Yes, I mean, we're really going to, I think, just stick to our knitting and stick to what's been working for us. I think getting the pricing that we have is really important. The only thing more important to us at this point is the quality of the assets that we've been able to put into the portfolio. Again, I think we will continue to increase acquisitions on the margin over time as we increase our opportunity set. But we don't want to get too far over our skis and start really ramping growth just for the sake of growth because we can, just because we can doesn't necessarily mean that we should. So I think we're pretty comfortable with the approach that we've been taking over the last several quarters.

All right, then, Andy, you mentioned you talked about leverage in the balance sheet, in your prepared remarks. And I'm just curious the ATM language was removed from the guidance, no change in the share count there anything but just wondering what the view around ATM usage was, as the company nears shelf eligibility?

Yes, I mean, well, yes, good. We said 38 to 39 million shares. So that would indicate the potential for some additional shares. Yes, I mean, look, the shelf, we will be eligible to file the shelf in the next several weeks early September. The benefit there is it gives us greater optionality with respect to capital sources; it gives us the opportunity to potentially put in an ATM program so on and so forth. So as Mark talked about diligence on the asset side of the balance sheet, we're going to practice that same diligence on the right side of the balance sheet utilizing all the sources that we have available to us.

Our next question comes from Katy McConnell with Citi.

Hey, guys, this is Parker actually on for Katy. I guess my first question just has to do with the $4 million of development that you did during the quarter that you gave out during the quarter. I was just wondering, from a yield perspective, how that is relative to what you guys are acquiring today?

Yes, sure. And I do think we pick up a little bit on the development side versus acquiring existing assets. And it's really just a great opportunity for us to get brand new leases with credit tenants, which sometimes is a little bit more difficult to just to go out and source in the open market. Those two particular transactions are with investment grade profile tenants, and are in the kind of the low to mid seven cap rate range going in cash cap rates so a little bit more yield than typically what we're getting even on the development side. And remember that on the development side, we're not taking any lease up risk. We're only, we are going to move forward with those transactions if we have a lease in hand, and we're not taking any cost overrun risk as well.

Got it. Okay, thanks. And then just my second questions just about Best Buy, I think you guys acquired a few stores this quarter. How willing re you guys to push sort of the needle on that and continue to grow with them? Are you guys comfortable sort of sitting out where you are now?

Yes, no, I mean, we certainly like Best Buy's business. But I think they've been making some changes, as it relates to how they are thinking about their footprint within their store. So we're extraordinarily cautious with our Best Buy exposure in terms of which ones we're willing to add to the portfolio. And so we're looking at cell phone data, and really trying to get the best foot traffic data locations that we can get with Best Buy, and have conversations with Best Buy and see how committed they are to those locations. We just happen to have I believe it was three in the quarter opportunities to add to our Best Buy portfolio. Quite frankly, we don't have any more in our current pipeline, not to say that we wouldn't add more. But I think the locations that we did add, while we did get three in the quarter are somewhat rare. So I wouldn't expect to see us add much more of our Best Buy to our portfolio.

Got it. And if I can what cap rate were you guys able to get those three assets at just during the quarter?

Yes, and we don't usually give specific cap rates on individual deals, but it was slightly higher than the average cap rate for the quarter.

Our next question comes from Greg McGinniss with Scotiabank.

Hey, good morning. So, Mark, I know you mentioned not passing out some great deals with top tenants. But just curious if there's any issue sourcing investment opportunities with new companies that meet your investment criteria, and maybe said a bit differently, how many potential net lease tenants fit your investment criteria versus those who do business with today?

Yes, sure. It is a bit of a limited universe because we are very stringent on the types of credits that we're willing to add to the portfolio and the real estate quality, which most of retail, quite frankly, is not investable. So it is a somewhat finite universe, we are constantly looking for more that - more tenants that we like that are maybe not investment grade, maybe investment grade profile, we've added a few of those over time, and I would expect to see a couple of new tenants pop into the portfolio over the next quarter or two. So but we are seeing plenty of opportunity for us to grow with the tenants that are in the portfolio, we've got exceptional relationships with most of the tenants that you see us continue to add to the portfolio, which is certainly helpful in getting insight into how they're thinking about their real estate and their growth. So we're pretty comfortable that we're going to continue to be able to add to the portfolio with very similar tenants, as well as very high quality assets.

Okay, thanks. And another one on development for you. And I apologize as I believe you made a comment in opening remarks regarding Q2, 2022. But I kind of missed it. Just curious how much traction you're gaining on the development side and how you're thinking about the longer-term potential investment size looking forward into the next few years from the $4 million today to whatever it might be in the future?

Yes, no, sure. And we are starting to pick up a little bit more. We've got a lot of different ways that we acquire properties, that's been a focus for us, really even going back to when we were private, of building those relationships and trying to get kind of the programmatic type transactions going with tenants that we like and we're starting to get more and more traction there. So I do think it'll grow albeit on the margin with what we're acquiring quarter in and quarter out. And we just really liked the fact that we're getting a new 10-15 year lease, depending on who the tenant is, at a location that they're committed to, and typically getting better pricing. And so we kind of view that is a great way of kind of adding more alpha to the portfolio without taking more beta beta. So I would expect to gain on the margin for that to be a bigger chunk of what we do in the future.

Okay, then just, appreciate that color. And just a final question for me is on the decision to use at least $360 million as the acquisition guidance number. Just curious why you use at least instead of maybe a more traditional net investment range.

Yes, and I mean, obviously we, I think throughout the organization, if want to under promise and over deliver. So we wanted to make sure that we were going to be able to do at least $360 million. So, obviously, you can expect us to do a number in north of $360 million. But we felt like that gave us comfort that we would not be on calls underachieving and depending on what the opportunity set is that comes in we're pretty confident that we're going to be able to hit that number, we really only have 60-75 days of sight into what we're actually going to be closing. So it is a little bit difficult to really give a really firm number, beyond at least $360 million.

Yes. And, Greg, if I could just add to that, and I think as Mark talked about in his prepared remarks, as we really start as we've been executing, and as we continue to prioritize the components of the acquisitions, right. As I think what you're seeing is, quality is always coming first, and 11 consecutive months of 100% rent collections, economics relative to that quality is really a close second. And then either the timing of those comes third, we're really trying to build as bulletproof of triple net retail portfolios as we can out there. So from our perspective, we're very, very confident in our ability, we're very focused on ABR, right. And almost somewhat less confident on the inter quarter impact of those deals, because we're so focused on quality, and those types of things that kind of drive us to something that says at least $360 million as opposed to the traditional, we're increasing our guidance by 10%.

Our next question comes from Ki Bin Kim with Truist Securities.

Thanks and good morning. So just going back to the acquisition questions. Are you finding that your bull's eye for the types of assets and investment grade despite not philosophical the same, right, despite even arranged within that, are you having to move your bull's eye at all because of the competitive pressures? Or are you still finding all the deals that are typically what you would want to own?

Yes, no, it's a great question, Ki Bin. We are seeing maybe a little bit more competition, a little bit higher expectations from some of the sellers. But I do think that is offset with the repeat business that we're doing and really kind of sourcing more acquisitions than we did quarter in and quarter out, and then laying them out and a bell curve and trying to figure out which ones are priced the most inefficiently. And that's allowed us to continue to keep the same types of cap rates since we've gone public, and I think you've seen some of our peers have, you've seen that drop quarter by quarter. I do think that becomes more of a challenge, if we want to start doing a lot more acquisitions. If we want to really ramp the acquisitions, I do think that you might see cap rates drop a little bit on the margin, but we're very focused on our sourcing channels, and then really getting to deal first then creating our own deals, or providing some type of value, whether it's capital to a developer, or a blended extent type opportunity, those are the areas where we feel like we can continue to get the same types of yields that we have each quarter. But yes, to your point, I do think there is a lot of competition out there, because they are very attractive opportunities, very easy to finance. But I do think over time, as we grow, that might become a little bit more difficult, but I don't think we're there yet.

And that actually brings me to my second question; you're hitting a run rate of about $100 million of acquisitions a quarter. What does it take to go to $150 million? So is it as simple as hiring more people? Or like you mentioned, trying to expand the addressable universe of what you really want to own? Just how are you thinking about that as you look year two or three?

Yes, and it's something that we've talked about a lot internally, there's a couple of different ways we can increase to $150 million, we could sacrifice quality, which I don't think we're willing to do. I think the more likely avenue if we were to want to do a lot more acquisitions in the near term. I think as we lay out that bell curve of efficiently priced assets, we'd have to eat a little bit more into that bell curve, and buy some assets that are a little bit more efficiently priced. So I think on the margin, you'd see if it was - using your example $150 million, I think you'd probably see a slight difference in the overall cap rate.

Our next question comes from Linda Tsai with Jefferies.

Hi, it looks like average weighted term went down a little on your acquisitions. Any additional color you could provide? And is this something you'd expect going forward?

Yes, no. And we are focused on keeping around 10 years of weighted average lease term. So we've been in some conversations with our current tenants, especially as we're looking at acquiring more assets and doing blend and extend externally on the acquisition front. We started to include some of the assets that we own within the portfolio to potentially get some early executions on locations that are performing very well. But yes, and I do think that a challenge with investment grade and high quality tenants, typically, the lease terms are a little bit shorter than if we were out just doing sale lease backs where you see a lot of 20 year lease terms. So it is something that is a challenge. But fortunately, I guess one thing I can give you some color on the current pipeline, the lease term is a little bit longer is that is an area that we've added a little bit more focused on.

And then can you talk about how the net lease environment has changed since you went public about a year ago, acknowledging that it was in the middle of a pandemic? And maybe just what you've learned along the way as you've been building and executing upon your pipeline?

Yes, sure. I mean, at the very beginning, I think we were just starting to get - started starting to come out of the pandemic a little bit. And so you still had a number of buyers on the sidelines, you had a lot of people kind of trying to figure out what they wanted to do. But in the areas that we focused that haven't been as impacted by the first round of COVID, hopefully, we're not about to face the second round. But I think those really held up very well. So there is still always a pretty strong bid for those assets. But I would say, on the margin, we've seen a little bit more competition with the small family offices and individual buyers. But we still feel like we're going to be able to execute on our strategy.

If I could just add, and it's just really important to note that despite the changes from our 144A, where we are in giant risk on environment to COVID giant risk off and back currently. We've remained steadfast to our strategy, right, and we've been able to execute, I kind of feel like, despite the fact that Mark, and I and the team have only been together for call it 18-19 months the reality is we've been through a complete cycle of risk and feel really, really confident of the direction that we're going and our ability to continue to produce results.

Thanks. Just one last one, you're at 70% IG tenancy and then another 11%, in IG like tenancy in the rest is more yields driven? Do you have a long term view on what the right balances for being high quality but also driving yield at the same time?

Yes, sure. So and I don't think we're going to change quarter-to-quarter. But we are subject to what the opportunity set is on a quarter-to-quarter basis. So we don't see a giant difference, at least in our mind versus an investment grade profile to investment grade, like a BBB minus credit versus a BB plus credit other than as the delineation of investment grade or not investment grade. So I do think you could see do some double BB type credits or some investment grade profile credits, and see those percentages move around a little bit on the margin. But I think in the past, we've stated kind of the investment grade percentage of the portfolio is likely to stay between 65% and 75%. So we're kind of like right in the middle of that right now. But we are seeing a little bit more alpha that we feel like we can pick up with really not taking any more risk on the investment grade profile side. So we'd like to like to find some more names and add more to that particular bucket.

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

Yes, thanks everyone. We look forward to discussing our progress in the future, hopefully in person. Alright, take care.

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