Ladies and gentlemen, good morning, and welcome to the NETSTREIT Corp. First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Amy An, Investor Relations. Please go ahead.

We thank you for joining us for NETSTREIT's First Quarter 2024 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, 2023, and our other SEC filings. All forward-looking statements are made as of the date hereof, and NETSTREIT assumes no obligation to update any forward-looking statements in the future. In addition, certain financial information presented on this call includes non-GAAP financial measures. Please refer to our earnings release and supplemental package for definitions of our non-GAAP measures, reconciliations to the most comparable GAAP measure and an explanation of why we believe such non-GAAP financial measures are useful to investors. Today's conference call is hosted by NETSTREIT's Chief Executive Officer; Mark Manheimer; and Chief Financial Officer, Dan Donlan. They will make some prepared remarks, and then we will open the call for your questions. Now I'll turn the call over to Mark. Mark?

Thank you, Amy, and thank you all for taking the time to join us this morning on our First Quarter 2024 Earnings Call. First, I want to extend my thanks to the NETSTREIT team. Our strong start to the year would not have been possible without their fantastic work. We kicked off the year as one of only two REITs to raise follow-on equity in January, while also remaining active on our ATM program. We have raised nearly $230 million of equity year-to-date which gives the team ample dry powder to transact at our current investment pace through year-end. Due to a drastic decrease in competition, we are continuing to pursue investment opportunities at attractive prices. The team remains diligently focused on investing in properties with the strongest tenants in defensive retail sectors that heavily rely on their physical locations to make profit. We continue to see great opportunities with not only investment-grade tenants which now make up a sector-leading 71.1% of our portfolio, but also with investment-grade profile tenants and low-risk sub-investment-grade and unrated tenants. And while the buyer pool has spend, we also continue to execute on strategic dispositions to lower our concentration in certain tenants and/or recycle the capital into investments with longer leases and better rent escalations. In the first quarter, we completed over $129 million of gross investment activity at a blended cash yield of 7.5%, a 30 basis point sequential quarter-over-quarter increase. Acquisitions closed in the quarter were with strong nationally recognized tenants such as Tractor Supply, Dollar General and [ Brickstone ], Firestone to name a few. From a tenant perspective, 84.8% of our investments completed in the quarter were with investment-grade tenants, which includes the completion of 10 new developments. Moving to our disposition activity. We sold 12 properties for $21.6 million…

Thanks, Mark. Looking at our first quarter earnings results, we reported net income of $1 million or $0.01 per diluted share. Core FFO for the first quarter was $22.5 million or $0.30 per diluted share and AFFO was $22.9 million or $0.31 per diluted share, which was a 3.3% increase over last year. Turning to the expense front. We saw total G&A ex onetime severance payments declined 1% year-over-year to $4.85 million, while our cash G&A ex onetime severance payments declined 11% year-over-year to $13.4 million. In addition, with our total quarterly G&A ex onetime severance payments, representing 13% of total revenues in the quarter versus 17% of total revenues in the prior year quarter, our G&A continues to steadily rationalize relative to our revenue base. Turning to the balance sheet. Our total adjusted net debt, which includes the impact of all forward equity as of quarter end, was $395.1 million. Our weighted average debt maturity is 3.9 years and our weighted average interest rate is 4.36%, including extension options, which can be exercised at our discretion, we have no debt maturing until January 2027. During the quarter, please note that we drew the remaining $100 million on our 2029 term loan. As Mark mentioned, we were active on the capital markets front this quarter. Utilizing the constructive macro backdrop that existed in early January, we sold over $198 million Forward Equity at $18 per share and a follow-on offering. Additionally, we remain opportunistic with our ATM program with year-to-date forward sales of $31 million through the end of April, including $2 million sold in March. At quarter end, our liquidity was $638.1 million, which consisted of $22.3 million of cash on hand, $324.9 million available on our revolving credit facility and $290.9 million of unsettled Forward Equity. Including the…

[Operator Instructions] Our first question is from the line of Haendel St. Juste with Mizuho Securities.

So my first question, I guess, is on how should we interpret -- or what should we extrapolate from the first quarter activity and what it means for your capital deployment over the near term. You've mentioned a few times that you can continue to buy at a sustainable pace without getting above your leverage metrics? But I'm curious how we should be thinking about the cap rates and spreads here? Are they indicative of where your cost of capital allows you to buy high grades in the current market?

Yes, sure. I mean I think with our current cost of capital and the opportunity set that we're seeing, I think you can expect us to continue to deploy at a pretty similar pace. As far as what we've interpreted out of what we've acquired so far this year, I think it looks a lot like what we've acquired over the past several quarters. Investment-grade spreads and noninvestment grade spreads have certainly gotten a lot more attractive than what they were. Historically, on the noninvestment-grade side, we've really focused on the very healthy non-investment grade tenants in industries that aren't facing a lot of headwinds with real estate that we think is fungible and rents that we think are replaceable, whether they be noninvestment grade or just more investment-grade profile. I think you may see some more opportunities on the sale lease back side for the remainder of the year. Certainly, in the second quarter, we see a few of those that we think are pretty attractive. We'll see if we get there on pricing. But I think you could see up to as much as half of what we do in the second quarter kind of fit some of that bucket, but really seeing a lot more attractive opportunities on the investment grade side and the -- what I call kind of the healthy noninvestment-grade side.

Yes. And Haendel, it's Dan. As we think about kind of future equity raising or debt raising, look, we've raised, we want to do for the year and frankly, through the first quarter. So we have -- we can be -- we can afford to be fairly patient and see if the market comes to us, whether it's on the capital side or what the opportunity set gets more attractive in terms of higher yields. So that's why we are where we are with the capital position is we want to be able to be opportunistic if something comes available. And we've got plenty of time to write out whatever this capital markets environment may be over the next 3 to 4 quarters.

Got it. Appreciate that. Maybe as a follow-up, just a bit more on how you're think about your ability to achieve your target 75 or 100 basis points of spread here. Should we, I guess, expect you to continue using maybe more term loan versus kind of given where the spot cost 10-year unsecured debt here?

Yes. I mean, look, right now, at just north of $2 billion in gross assets. Looking to the 10-year market is not nearly as efficient as doing -- looking to the bank term loan market. That being said, where we are today with all the Forward Equity that we have, $320 million, you think about the pace that we're on, our near-term capital needs will easily be able to be covered by the Forward Equity as well as our credit facility. We really don't look -- we're really not looking to do anything longer term in nature until we get out to kind of early to mid 2025. And we'll just have to see where the market is for term loans for 7-year private placements, 10-year private placements, whatever it may be, thankfully, we have the capital right now not to have to concern ourselves with that right now.

Got it. Got it. My second question is on Big Lots. I just wanted to check in. They're not in your top 10 tenant list anymore. Curious if you're selling what the market is and just generally where you'd like that exposure to get to?

Yes, sure. Thanks, Haendel. Yes, look, I mean, we continue to monitor what's going on with Big Lots. They closed 48 stores last year, none of which are ours, they also opened another 15. It looks like they've finally rightsized inventories starting to now finally see improvement in margins, their cost-cutting appears to be helping. But at the end of the day, we really need to kind of see the sales bottom out and hopefully start to increase versus have full confidence in their turnaround. So we're really relying on the strong real estate that we've got left after selling off a handful of those locations. Now we've got locations with below-market rents and attractive infill retail corridors. And so that's really our ultimate backstop. But we're open to potentially selling some more. We just don't feel like we have to be price takers with how attractive the real estate is that we're left with. There continues to be a market for those assets. I think we'd really like to see the cap rates to be a little bit more aggressive for us to pull the trigger, but we've got a couple of feelers out in the market. So I would not be shocked to see us move a couple more.

Great. Appreciate the color, guys.

Our next question is from Smedes Rose with Citibank.

I think since your last call with investors, this narrative has kind of just higher for longer, has taken hold. And I was just wondering if you could talk about what you're seeing in terms of seller pricing? Do you think there's more people just retreating at this point, given what I assume is an upward bias in cap rates? Or maybe just talk a little bit about the landscape of what you're seeing?

Yes, sure. No, it's certainly an interesting market, does feel like the expectations have been muted on a lot of cuts coming. We started the year with the expectation, at least from the market that we'd see, call it, 6 or 7 cuts during the year, which is largely why we raised some equity because we kind of didn't see the macro quite the same way. But the seller market at that point in time was still really kind of banking on those rate cuts coming. Now obviously, I think the consensus is that we might get one in December or nothing at all. And so I think there's been a little bit more of an acceptance that we could be in a higher-for-longer market. We've seen a lot more actually opportunities than I would have expected. And that really keeps a lot of our competition on the sidelines. So it allows us to be very selective, allows us to really negotiate terms the way we like to see them where we're not really competing against other people that are trying to buy the assets that we think that we are. So I mean cap rates have continued to move up. What we're seeing in the second quarter, I think, will likely look a lot like the first quarter. But yes, I think there has been a little bit more of an acceptance that the Fed is not going to turn around and just start cutting rates and bring us back to 2021.

Sorry, you said second quarter cap rates should be kind of in line with what you saw in the first quarter? Or do you think it will be -- or you mean the sequential increase will be similar?

I think the rates will be similar in the second quarter than the first. We still have -- depending on what closes, we're still sourcing a few more opportunities in the second quarter, but kind of what we have in the pipeline today looks pretty similar although the lease term, we're getting a much longer lease terms with better rental increases. .

Our next question is from Greg McGinniss with Scotiabank.

On the acquisition side, I'm just curious, should we kind of expect to see more of the same in terms of what you're looking to target from a concept and industry standpoint? Or are there any kind of new concept industries out there that and given your cost of capital, maybe you're now able to address or where cap rates have changed you're now able to address? Or I guess just any changes in terms of industries that you're targeting?

Yes, sure. And I mean you've seen specific mostly to Dollar General. You've seen that concentration move up quite a bit. A lot of that was funding developers that we committed to last year. So I think we've got maybe another call it, 4 or 5 months left of kind of funding some of that, but that's going to be a little bit less than what you've seen in the past. You will see a few new tenants come into the portfolio. We do think it's important for us to increase the diversification not only in the top 20, just broadly across the portfolio. And we are seeing some attractive sale leasebacks and other opportunities that we had in the past. There's a few that we've been active with on the development side that maybe haven't popped into our top 20, but are kind of get close there in the collision space. So I think you will see a few new tenants pop into the portfolio that I think we find to be very attractive and cap rates would have been much lower, call it, 18, 24 months ago that we would not have been able to put in the portfolio.

Okay. And then on that development side, I believe you previously mentioned that you've been able to negotiate escalators into some of those development deals that previously didn't have them. Have there been any other changes on the leasing side in terms of being able to build an escalators or different terms as the financing market has changed?

Yes. I mean, I think not much of a change quarter-over-quarter. But yes, I mean we're getting better rent escalators in leases that historically have been flat. So that's driven a lot of our capital recycling program, bringing in some of those tenants with now longer leases with better rent bumps and then turn around and selling some of the flat leases with less term out of the portfolio and being able to do that slightly accretively has been something that we focused on, but no real big change quarter-over-quarter.

Okay. And final for me. Apologies if you already addressed this. But have you guys talked about bad debt expectations built into guidance for the year?

Yes, we did on the last call. I think as we sit here today, we're still -- on an annualized basis, we're still modeling somewhere between 20 to 25 basis points at the high end of our AFFO guidance range.

Our next question is from the line of Alec Feygin with Baird.

First one for me is, can you just talk about what are the categories that are in the assets held for sale?

Yes, it's a pretty big mix. We've got some of the Big Lots around there and a lot of the Dollar Stores that I mentioned where we're kind of recycling through to improve the escalators, but it's a pretty broad mix of property type.

Got it. And second one is, may provide some color on the current in-place rents for the 19 Family Dollar stores in the portfolio and where you think the market is at for those properties, if you did need to release them?

Yes. I mean you're talking about $90,000 to $100,000 per property, so in annual rent. So very inexpensive rents that we think are largely replaceable. That being said, we've worked very closely with the tenant there and understanding the profitability and their commitment to our sites. So we still feel good that there is -- they could always close a couple if they're going to close as many stores as they're talking about, but certainly pleased to see their first list of 103 locations that none of ours were on that list. But that being said, we do think that a lot of ours are pretty infill locations, and we would have a lot of interest from various different tenants to take those assets at similar rents or potentially even higher rents. .

[Operator Instructions] Our next question is from the line of Joshua Dennerlein with Bank of America.

This is Farrell Granath on behalf of Josh. I wanted to know if you could touch on what you're seeing in investment spreads relative to where you can deploy capital today?

Yes, sure. I mean, I'll take the first piece, which is most recent quarter 7.5 I think you're going to kind of expect to be kind of similar in the second quarter. We really only have visibility going out into the second quarter and not as far as getting into the third. So tough to project beyond that, but certainly gives us a pretty healthy spread off of where we raised capital earlier this year.

Great. And I know you already touched on Big Lots and Family Dollar. I was curious if there's any other color on tenant watch list. .

Yes, sure. I mean nothing on the watch list. To give you a little bit more color than that. I mean, we are focused on the product mix of our tenants, how discretionary that product mix is and who their customer is, and if they're kind of on the lower income type consumer, that's really where we're seeing pressure. The consumer overall is healthy. And so you see a lot of those government numbers come out that look pretty healthy, but it's kind of been a tale of 2 cities where the kind of middle and upper consumer is doing well, but the lower end consumer is certainly struggling. And you see that with some tenants having trouble passing on inflationary costs on to the consumers. I mean Walgreens has been topical. That's why you've really seen their gross margins kind of come in from kind of 22%, 23% to 18-plus percent. So that's really impacting their cash flow. And so we're really making sure that we're getting out ahead of those types of risks. And then looking at the balance sheet of our tenants. Fortunately, there's really not much in there that is of concern. But when a lot of these tenants have to refinance their debt, it's going to be a lot more expensive than it was if they finance themselves a few years ago. And even just the ability to access debt has been is likely to be more challenged for some of these tenants. So that's -- those are the things that we're focused on. But yes, nothing really is popping up that rises to the level of getting on our watch list at this point.

Okay. And I was also curious, is there anything in the market that you're waiting to see? Or what's maybe leading to some hesitancy on providing a net investment guidance?

Yes. I mean I think there's been a lot of volatility in the markets over the past couple of years, obviously. And we really wanted to see cap rates move up. Obviously, we're making some progress there. We really wanted to -- early in the year, we really didn't think it made a lot of sense to come out with a number and then potentially change it 1 or 2x over the year. But I think just overall, for acquisitions, which we haven't given guidance on that, but I think a good way to think about that is if the environment persists in a similar manner, you can expect us to deploy capital at a similar quantum that we did last year.

Our next question is from the line of Todd Thomas with KeyBanc Capital Markets.

This is Antara Nag-Chaudhuri on for Todd Thomas. Apologies if you discussed this already, but could you discuss your current investment pipeline and where it stands just thinking about 2Q and 3Q volumes?

Yes, sure. I mean I think the volumes will probably continue to be spread fairly evenly over the year if market conditions continue to be similar. And so I don't think you'll see much of a change in yield or -- or how much we deploy in the second quarter, third quarter, probably a little bit too far out for us to figure out, but you may see a couple of chunky deals that are in the sale leaseback category and some that we're developing a little bit more or funding development for a little bit more than we have in the past.

Okay. Got it. And on disposition pricing, are you still able to achieve a sub-7 cap rate? Or are disposition cap rates trending higher? .

They're trending higher a little bit on the margin. And I think depending on what we sell, it's going to drive that a little bit. But cap rates have moved up a little bit. I think really the issue has been on the disposition side and us getting kind of figuring out how we want to approach dispositions is there just aren't as many buyers. And so that helps us on the acquisition side where we're not really competing with anybody for acquiring the properties that we want to acquire. But then on the disposition side, it takes a little bit longer and the buyers have been a little bit flakier than they've been in the past. So that's something that we're just making sure that we're staying on top of costs and not incurring a bunch of debt deal costs. But cap rates have moved up a little bit on dispositions. But I think what we're looking at potentially selling in this quarter very likely could be below 7%.

As there are no further questions, I now hand the conference over to Mark Manheimer for his closing comments. Mark?

Well, thank you, everyone, for joining. I really appreciate the support, and have a great day.

Thank you. The conference of NETSTREIT Corp has now concluded. Thank you for your participation. You may now disconnect your lines.