Greetings, and welcome to NETSTREIT Corp. Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Amy An, Investor Relations. Thank you. You may begin.

We thank you for joining us for NETSTREIT’s fourth quarter and full year 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, 2021 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 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’ll turn the call over to Mark. Mark?

Good morning, everyone. And welcome to NETSTREIT’s year-end 2021 earnings conference call. Before I discuss our activity for the fourth quarter and full year, I’d first like to take a moment to thank NETSTREIT’s employees for their performance during our first full year as a public company. I’m pleased with all that we have accomplished in 2021, while we spent most, if not all of the past year, dealing with the disruption of COVID-19, our employees across all aspects of our business performed seamlessly and exceptionally well. We would not have achieved these results without your hard work and significant contributions. And for that, I thank you. Today, I’m pleased to share that we have moved into our new headquarters in Uptown, Dallas and our entire team is finally together fulltime. Our new space allows us to better collaborate, grow, and best position us to achieve our goals. Now, in addition, I’m looking forward to promoting an environment where we are all proud and enthusiastic to work together, to achieve our common goals. One of our objectives for 2021 was to grow our portfolio with high quality assets and to further diversify our portfolio holdings. The team underwrote and closed over $464 million of gross investment activity in 2021. The portfolio ABR grew to over $71 million, up from $42 million at the end of 2020. During the year, we added 15 new tenants to our roster and three new states to our portfolio. We have stated for our portfolio diversification goals that we want no state or industry to be more than 15% of our total ABR and no tenant to be more than 5%. And we have made significant progress towards those targets. As of year-end, our largest state concentration is in Texas at approximately 11%. Our largest…

Thank you, Mark and once again, thank you for joining us on today’s call. In our earnings release published yesterday after market close, we reported net income of $0.05, core FFO of $0.25 and AFFO of $0.27 per diluted share for the fourth quarter. For the full year 2021, we reported net income of $0.08, core FFO of $0.87, and AFFO of $0.94 per diluted share. At year end, our balance sheet had total debt of $239 million outstanding of which $175 million is from our fully hedge term loan with a remaining balance from our 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 to align with the December 2024 maturity of our $175 million term loan. Our net debt to annualized adjusted EBITDA ratio was 4.2x at year end below our targeted leverage range of 4.5x to 5.5x. Moving on to our capital markets activity. We strengthen and fortified our balance sheet through a series of financing activities last year and early this year. On April 12, 2021, we completed our first follow-on equity offering issuing nearly 11 million shares of common stock at a price of $18.65 per share. We received gross proceeds from the offering of approximately $203.6 million. In September, we simultaneously filed our universal shelf-registration with the SEC and entered into a $250 million ATM program, which allows us to sell shares of our common stock from time to time in an efficient manner. During the fourth quarter, we issued nearly 3.9 million shares of common stock at a weighted average price of $23.36 per share in connection with our ATM program for gross proceeds of approximately $90 million. The vast majority of this volume came…

Thank you. [Operator Instructions] Our first question comes from the line of Greg McGinniss with Scotiabank. Please proceed with your question.

Hi. This is Jason Wayne on with Greg. So Q4 was a strong quarter for acquisitions and strong guidance this year over $480 million. I was just wondering if you could provide an update on your investment activity quarter to date, the size of the acquisition pipeline and kind of cap rate trends you’ve been seeing in the quarter?

[Audio Gap] and it’s a little bit more back end weighted. So I think we’ve closed about half of 120 so far, so maybe a little bit more than that, including development. But we really only have about 90 days of visibility into what will be closing. But with that being said, we’re pretty comfortable with the pipeline likely to add maybe a few new tenants in this portfolio, some growth REIT that we’re pretty excited about and some – and so we feel pretty good about the pipeline in the first quarter.

Great. And then so you have the forward equity offering is about $230 million this year. ATM has $160 million remaining. I’m just wondering if you are looking issued debt this year for any of your funding.

Yes. I mean, that’s something that we’ve been talking about is, potentially turning out some of the credit facility balance towards the end of the year. We’ll have to see what the markets look like. Obviously, we feel really good about the execution that we got on the forward. There’s a – the notable difference in the guidance, why the numbers are the same from when we put it out, the first week in January, relative today – to today is just significantly less funding risk associated with hitting those numbers than we would’ve had otherwise. So, as I said, in my remarks, I feel like with the undrawn capacity on the line, with the undrawn forward and reasonable expectations with respect to ATM usage and leverage feel very confident in our ability to fully fund the $480 million that we’re talking about for the year.

Okay. Thank you.

Our next question comes from the line of Todd Thomas with KeyBanc. Please proceed with your question.

Hi. Thanks. Good morning. Mark, what are the – curious if you could talk a little bit about the 2022 goals for portfolio diversification? Just curious what we should anticipate during the year, if we think about the retail categories or tenant exposures today where you’d like to be at year end.

Yes, sure. So, we’ve set out our kind of longer-term goals. So, we think about that as being more kind of north of $2 billion of assets, which we wouldn’t expect to happen until probably the end of the following year. But we’ve already hit some of those targets. So, we don’t want to have any states with more than 15% concentration. We don’t want any industries with more than 15% concentration both of which we have met. And then as it relates to tenants, we’d like to have all of our tenant concentration down below 5% by the end of 2023 is really how we’re thinking about that. And we’ve made a lot of progress there. You’ve got the Walgreens at 7.3%. So you’ve kind of really seen quarter-after-quarter of us ratcheting down some of that diversification, which is really just increasing the asset base, but it is something that we’re very mindful of.

Okay. And in terms of Walgreens exposure, I guess, being the standout there, will that be accomplished mostly by growing through acquisitions with other tenants? Or are you – would you look to make some selective dispositions? And are there any dispositions really? I know the guidance is $480 million of net investments, but can you talk a little bit about dispositions as well?

Yes, sure. So, Walgreens, we’ll continue to acquire those into the portfolio likely at less than 7% of our acquisitions on a given quarter, which will allow that number to slowly decrease. There is always the possibility that we have an opportunity to sell a Walgreens that are very aggressive cap rate, really the way that we’re thinking about dispositions is if we sell something, we need to replace that on the acquisitions side, as you mentioned. And yes, I think we likely sold more than what we really planned around the time of the IPO, both pre-IPO and post-IPO and feel like the portfolios in really good shape. So kind of the major calling of the inherited portfolio is largely done. But that being said, I think you’ll see maybe a $10 million a quarter is probably a good run rate, some quarters like this quarter will have zero other quarters, we may have a little bit more, a little bit less and then there’s always the possibility that we look at an acquisition that comes in portfolio form, where the only way to get our hands on certain assets that we want to keep long-term is to take some that might not be long-term, long-term holds and then move to sell those out of the portfolio. Similar to the Floor & Decor and Olive Garden ground lease, which we think are really good assets, came along with an LA fitness, 18 months of – the first 18 months are sitting in escrow. So we kind of have just been drawing on that. So we’ve got some of time there. It’s also exceptional real estate in the Lincoln part of Chicago. So that’s a pretty good example of something that we might not have been thinking about selling, because we hadn’t acquired it yet. But it allowed us to get our hands on some more attractive assets that are good long-term holds at attractive pricing.

Okay. That’s helpful. And Andy, what’s the – can you just remind us what the expected cap rate is that’s embedded in the guidance for the 2022 investments?

Yes. I mean, I think that we’re looking at cap rates similar to what we saw in 2021.

Yes. So we’ll have some quarters that are on the low end of that, some that are on the high end of that. I think we range kind of between 6.2% to – 7%, 6%, 8%, something like that. So kind of blended to about a 6.5%, I think that’s probably a good way to think about it on a go forward basis, maybe a hair below that as we have seen a little bit of cap compression, so maybe 6.4%, 6.5%.

Okay. All right. Great. Thank you.

Our next question comes from the line of Joshua Dennerlein with Bank of America. Please proceed with your question.

Yes, good morning, everyone. Mark, I think it cut out when you’re talking about the first question about the pipeline. So maybe if I could just re-ask, what do you see in the pipeline outlook?

Yes, yes, absolutely. I would expect us to continue to add similar names that you’ve seen. We have a couple of new tenants in the quarter coming in on the grocery side, that we’re pretty excited about either investment grade or investment grade profile type grocery operators and another quick service restaurant tenant that that we like a lot. And I think just over overall, the pipeline is strong, we’re feeling like we’re going to come out with a fairly good print in the first quarter that should set us up for the rest of the year, and be able to hit the target of the $480 million of net acquisitions for the year.

Okay, awesome. Thank you. And then I wanted to ask about maybe how you think about using the different tools in that to raise equity. How do you feel about overnights versus ATMs and forwards? Do you have any preference?

Yes. I mean, look, I think that it’s all conditions based at a point in time. We were – I don’t want to say lucky, but we were fortunate that in the fourth quarter we were approached by a very large REIT dedicated investor, while we were active on the ATM, that was very interested in taking a large block of stock, that we were able to raise a little bit of equity around, which really drove to that fourth quarter $90 million. I not anticipate that to be an ongoing thing that was a little bit of right place, right time. With respect to the forward raise, going into the year, we felt very good about the results that we reported yesterday, feel really good about the pipeline on a go-forward basis and really saw some of the geopolitical and financial market risks as being a potential overhang to the equity market. So wanted to take that risk off the table, that’s what we did. I think what the difference there is that puts us in a far better position to be offensive as opposed to defensive go forward. But I think I mean, look, we can’t count on block trades through the ATM. I think regular way issuance is kind of what’s in there and if the block trade comes around, hey, that’s awesome. But it’ll be a combination of ATM, either for cash or forward. I do see some of the forward sales being a larger portion of what we do on a go-forward basis, just because of the efficiency of us being able to draw it down as we need it, as opposed to all-in-one long sum and paying off low cost debt. But all those pieces are part of the puzzle. It just some of it’s just dependent on the market conditions that we see at that point in time. And the opportunity set that Mark and his team are putting out in front of us.

Awesome. Thanks guys.

[Operator Instructions] Our next question comes from the line of Katy McConnell with Citi. Please proceed with your question.

Great. Thank you. Just wanted to follow up on the lighter investment grade exposure in 4Q and wondering if you can share what you are targeting for investment grade status on future deals and how that’s factoring into your cap rate assumptions for this year’s pipeline?

Yes, absolutely. So I think this particular quarter, the fourth quarter, we had a chunkier portfolio transaction that we really thought was going to close in the third quarter and then leaked into the fourth. And so that was largely not investment grade. So I think that had something to do with that mix which is always going to kind of move around a little bit. I think long-term we’re thinking kind of between 60% and 75% is a good way to kind of think about what our actual investment grade will be. Although, we will continue to try to drive the investment grade profile bucket, which is again is tenants with more than $1 billion of revenues and less than two times debt-to-EBITDA. So in our mind typically those are going to be tenants that don’t have any debt, so they don’t have a reason to have a rating and are in some cases even better credits than our investment grade bucket where we can get a little bit better pricing. So we’ll continue to try to drive that bucket a little bit.

Great. Thanks. And then just wondering if you could provide some more color on the development projects that you have underway and maybe expand on your opening comments about seeing more partnership opportunities going forward that could maybe drive development to be a greater part of the external growth strategy?

Yes, absolutely. So we’ve been pretty fortunate to be able to find some pretty good partners, very early on as a public company. We had really expected that to take a little bit longer. And then once you have a development agreement done with a developer, it makes it much easier to do kind of a second, third, fourth deal. So really kind of seeing that feed on itself a little bit. And I’d expect for us to, at least in terms of when we’re expecting rent to commence on those development projects, we think we’ll have two or three of those come online per quarter. So feeling really good about that particular bucket, where we can pick up a little bit more yield, we have a little bit of negotiation into the lease, so we can kind of clean some things up a little bit better and also buying brand new buildings with fresh new leases with tenant that we’re trying to grow with we think is a great compliment to our acquisitions pipeline.

Great. Really helpful. Thanks everyone.

Thank you.

Our next question comes from the line of Ki Bin Kim with Truist. Please proceed with your question.

Thanks and good morning, guys.

Good morning.

Just going back to your balance sheet, I think last couple quarters ago, you mentioned that you’re expecting about 3.5% for future debt raises all in cost. How’s that changed if at all, given what’s happened with the kind of inflation and raise overall?

Yes. Great question, Ki Bin. And to be clarify, I think I said 3.5% to 4% so I mean, we haven’t gotten a fix, in the last couple days, I think we’re probably, if we were to go to the 10-year private placement market, we may able to be a little bit north of that. We are evaluating our strategies for later in the year with respect to turning out some of the credit. And that could be through that private placement market or what appears to be a pretty vibrant term loan market as well. But I don’t know that I’ve seen any indicators that would put it significantly above the top end of the range that we talked about previously.

Got it. And how do you think about forward rate agreements here and to lock in some of the – at least the base rates going forward, does that economic make sense or does the cost of that kind of swap make it…

I mean, I think that it depends on the specifics of the agreement, where we sit right now, based on what I said earlier, we don’t have a public rating, right. Senior unsecured rating where you feel like that 10-year option is always available to you. So for us, if we’re evaluating private placement versus term loan, I don’t want to lock in a 10 year and then end up doing a five or a seven and have to deal with hedging effectiveness and advance settlement of that option. So I’m not sure that it makes sense for us as we sit right here today, but could absolutely make sense for us at some point in time in the future.

Got it. And implicit in your 2022 guidance, what are you expecting for a bad debt leakage?

Yes, so just our generic model, we model 50 basis points of bad debt off the top line. Our actual to this point has been zero. So we’ll see how that plays out on a go forward basis.

Just to clarify those 50 basis points is what you’re starting with, at least for now?

Yes. That’s kind of our – that’s our generic corporate modeling assumption.

Got it. And you don’t see anything that might feed into that. What does your watch list look like today?

We feel pretty confident that there’s nothing in the short-term that will pop up there. But yes, we’re feeling pretty good about the portfolio.

Okay, great. Thank you, guys.

Thanks Ki Bin.

Our next question comes from the line of Nate Crossett with Berenberg. Please proceed with your question.

Hey, good morning guys.

Good morning, Nate.

Hey, just on the development stuff, how much higher are the yields than the straightway acquisitions and then what – I guess kind of demodeling for this year in terms of the volume I guess from the development?

Yes, sure. So we’re taking as close to no risk as possible on those types of transactions. So, we have a lease already signed by the tenant and all cost over runs are born by the developer that we’ve underwritten. So it’s a more conservative approach to development, but we’re picking up 40, 50 basis points on those transactions versus going out in the open market and trying to acquire those assets. And then in terms of quantum, right now we’re kind of in the $40 million, $50 million range. I could see that increasing a little bit over the year as we kind of get into the warmer months of the year.

Okay. That’s helpful. What about just the thoughts on the dividend here? I think it’s been $0.20 since you initiated, so like how should we be thinking about how that moves and when it moves?

Yes, I mean, so obviously the ultimate decision on the dividend lies with our board, Mark and I make our recommendation, our target had been two-thirds to three quarters of our AFFO per share, still early in the year to tell, but feel like we’re on a pretty good path to get some line of sight on dividend increases in the future. Don’t want to get into specific timing just yet, but kind of feel like a lot of the risks that we’ve taken out of the portfolio, what we see with the acquisition and development pipeline, puts us in a pretty good place to start thinking about that on a go-forward basis.

Okay. Maybe just one on just the size of the team, is there any other hires that need to be done at this point kind of achieve what you want to do? Are you guys basically fully ramped in that sense?

Yes. I mean, we’re pretty fully ramped up. There will be a few hires through the year, just as we scale the business on acquisitions, underwriting, asset management, and potentially in accounting. So as you’d expect but I think it’ll be the senior team is fully in place.

Okay. That’s it for me. Thanks.

Thanks Nate.

There are no further questions in the queue. I’d like to hand the call back over to Mark Manheimer for closing remarks.

Thank you everyone for joining us today. We look forward to speaking with many of you soon at the upcoming investor conferences. Take care.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.