NETSTREIT Corp. Q2 FY2025 earnings call

• Tenant diversification improved through accretive dispositions, ahead of year-end goals.
• Actively sourcing external growth opportunities across various tenants and industries.
• Portfolio tenants remain healthy with heavy concentration in necessity and service industries.
• Enhanced disclosure on de minimis credit losses and portfolio risks.
• Raised over $46 million via ATM program this quarter.
• Increased AFFO per share guidance midpoint to $1.29-$1.31 and net investment guidance to $125M-$175M.
• Second quarter gross investments totaled $117.1M at 7.8% cash yield, with a weighted average lease term of 15.7 years and over 1/4 of acquisitions involving investment-grade tenants.
• Portfolio has 705 properties, 68.7% ABR with investment-grade tenants, weighted average lease term remaining 9.8 years, and 1.2% ABR expiring in 2026.
• Updated disclosure shows unit-level rent coverage at 3.9x.

NETSTREIT ended the second quarter with investments in 705 properties leased to 106 tenants across 27 industries in 45 states. 68.7% of total ABR was leased to investment-grade or investment-grade profile tenants. The weighted average lease term remaining for the portfolio was 9.8 years, with just 1.2% of ABR expiring through 2026. Dispositions totaled $60.4 million across 20 properties at a 6.5% blended cash yield, while gross investments during the quarter were $117.1 million at a blended cash yield of 7.8%.

• AFFO per share guidance range increased to $1.29 to $1.31 from $1.28 to $1.30.
• Net investment activity guidance range raised to $125 million to $175 million from $75 million to $125 million.
• Recurring cash G&A expected to be between $15 million to $15.5 million for 2025.
• Rent loss guidance assumes ~25 basis points of unknown rent loss at midpoint.
• Midpoint assumes slightly less than $0.01 of dilution from treasury stock method.
• Quarterly cash dividend of $0.215 per share declared, a 2.4% increase from the prior quarter.

• Market uncertainties affecting cap rates and investment opportunities.
• Credit risks related to potential rent loss and tenant defaults.
• Debt-related risks, including leverage levels and debt maturity timelines.
• Uncertainty in disposition outcomes and competition from new market entrants.

Q: Great quarter. I wanted to ask you a question, I guess, Mark, a big picture one, and it kind of dovetails on your prepared remarks. The stock is up 30%. Your WACC and investment spreads have improved pretty dramatically. So I guess, can you talk a bit more about how this improved WACC impacts the range as capital deployment alternatives available to you now? And how much and where you can deploy capital. Your initial guide, obviously was pretty conservative, even though the updated acquisition that keeps below where you've been in some other quarters recently. So I was just curious on some thoughts on that front?

A: Yes, sure. So thanks, Haendel. Yes, it's going to be -- it's going to continue to be pretty fluid as we continue to monitor our cost of capital. And I think as it relates to our ability to deploy capital in and around the cap rates we've been maybe not this quarter, which I think was maybe a little bit of an outlier at 7 to 8, I think, kind of more normal for us in this environment, it's probably 7.4%, 7.5%, something like that. But for us to be able to deploy net $150 million to $200 million would be pretty easy. If it's going to come down to our cost of capital and hopefully, we can continue to see improvement there.

Q: Just a follow-up to the first question. Mark, you answered this a little bit, and I'm not sure if you can give any more color here. But just as we think about, in the second half of the year, you said IG percentage is going to increase and cap rates are going to tighten a little bit and your increased investment guidance. How much of your new investment guide has some sort of conservatism for the uncertainty about your access to equity capital and maybe if the opportunity arises here in the near future for you to lock in more equity capital. Where do you think that investment guide could go to? Or what do you think the opportunity set is for you all?

A: Yes. I mean, I think the opportunity set is pretty massive right now. We're -- the team is very excited to be able to start to really access the acquisitions market a little bit more than we have more recently. And yes, I mean, I think right now with the team we have in place, the market as it sits today, deploying $150 million, $200 million net acquisitions each quarter and around the cap rates that we've been at with a similar mix of product is certainly doable, but we're going to continue to be mindful about where our equity is trading and our cost of capital.

Q: Just looking at the balance sheet. You have about $58 million held for sale. Will this be all done disposed of this year? And will this be the last of the heavy dispositions?

A: Yes. I mean, I think that we have a decent amount of that we're still doing. So I mean, in the last few quarters have been pretty heavy. I think the third quarter will be pretty heavy again. We'll start to moderate a little bit in the fourth quarter. We can never guarantee that anybody that we're trying to sell a property to is actually going to close. So I can't get guarantees that will all be gone. But I'd say the lion's share of that should be gone. And then when you look towards next year, I would expect us our disposition pace to moderate more closely to what it was maybe 2, 3 years ago.

Q: I was wondering if you could just talk a little bit more about competition in the deal market. We've seen new entrants, I would say, from nontraditional net lease investors. And I understand it's a deep liquid market, but I'm just curious if you started to bump into any of these new buyers in the marketplace or kind of where you're seeing them show up as you look at the deal pipeline and future transactions?

A: Yes, I mean, good question. We've certainly heard a lot about some new entrants are aware of some capital that has been deployed by a number of them, but we just really have not run into them at all on the acquisition side. And so I think most of the deals that we're looking at are pretty small bite-size deals or their relationship deals where really the only negotiating that we're doing is with the tenants and then where the tenant and the seller trying to figure out where they're willing to park with their properties and less so in getting ourselves in bidding words anytime we see those opportunities, we'll come in and we'll bid, but we're not really interested in paying the top price for our deals we want to get the best risk-adjusted returns. And from our perspective, the largely marketed deals typically don't really yield those opportunities too well. And so I'm pretty aware of a number of the new entrants. And I think their strategies don't really line up too much with ours. So I'd be surprised if we run into them very frequently. I'm sure there will be a situation here or there where we see them, but I don't think it's going to have much impact on our capital deployment.