NETSTREIT Q2 2024 Earnings Report

NETSTREIT EPS Results

• Actual EPS: -$0.03
• Consensus EPS: $0.30
• Beat/Miss: Missed by -$0.33
• One Year Ago EPS: $0.30

NETSTREIT Revenue Results

• Actual Revenue: $39.57 million
• Expected Revenue: $39.31 million
• Beat/Miss: Beat by +$260.00 thousand
• YoY Revenue Growth: N/A

NETSTREIT Announcement Details

• Quarter: Q2 2024
• Date: 7/29/2024
• Time: After Market Closes
• Conference Call Date: Tuesday, July 30, 2024
• Conference Call Time: 11:00AM ET

NETSTREIT (NYSE:NTST) is a real estate investment trust that specializes in the acquisition and management of single‐tenant, net lease retail properties across the United States. The company targets assets leased to investment‐grade or creditworthy tenants under long‐term, triple‐net leases, which generally shift property‐level expenses—such as taxes, insurance and maintenance—to the tenant. This business model is designed to generate predictable, stable income streams and to limit landlord responsibilities.

NetSTREIT’s portfolio encompasses a diversified mix of essential retail and service properties, including quick‐service restaurants, convenience stores, banks, automotive service centers and medical clinics. By focusing on everyday needs businesses with strong brand recognition and resilient cash flows, the company seeks to mitigate vacancy risk and inflationary pressures. Its holdings span multiple regions of the country, spanning primary and secondary markets from coast to coast.

Since its initial public offering in December 2019, NetSTREIT has grown through strategic acquisitions of high‐quality, single‐tenant net lease assets. Headquartered in McLean, Virginia, the company is managed by a team of professionals with deep experience in net lease investing and property management. NetSTREIT continues to pursue accretive transactions that bolster portfolio diversification and support long‐term shareholder value.

NETSTREIT Q2 2024 Earnings Call Transcript

Key Takeaways

• During Q2, NetStreet deployed $116 million in acquisitions at a blended cash yield of 7.5%, focusing on sale-leaseback deals with an average 16.7-year lease term and adding top-tier tenant Lifetime Fitness assets at accretive cap rates.
• Core FFO rose 6% year-over-year to $23.4 million ($0.31/share) and AFFO increased to $23.8 million ($0.32/share) while recurring G&A expenses declined by up to 13%, supporting maintained 2024 AFFO guidance of $1.25–1.28 per share.
• The company incurred a $2.8 million net loss after insurance recoveries due to a business email compromise fraud incident, but has implemented enhanced controls to prevent future occurrences.
• NetStreet’s portfolio at quarter-end included 90 tenants across 26 industries with 83% leased to investment-grade or profile tenants, a weighted average lease term of 9.5 years, and less than 4% of leases expiring through 2026.
• Management highlighted minimal renewal risk from Walgreens and plans to re-tenant one affected Big Lots location with strong market interest, underscoring its proactive asset-management approach.

Presentation

[Operator]

Greetings, and welcome to the NETSTREIT Corp second quarter 2024 earnings call. At this time, all participants are in the listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Amy An. Thank you. You may begin.

[Amy An, Director of Investor Relations at NETSTREIT Corp]

Thank you for joining us for NETSTREIT's second 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 31st, 2023, and our other SEC filings.

[Amy An, Director of Investor Relations at NETSTREIT Corp]

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?

[Mark Manheimer, CEO at NETSTREIT Corp]

Thank you, Amy, and thank you all for joining us this morning on our second quarter 2024 earnings call. We had a steady second quarter, completing over $116 million of gross investment activity at a blended cash yield of 7.5%. A larger portion of our acquisitions this quarter were sale-leaseback transactions, as we have seen more attractive risk-adjusted returns from our opportunity set in that area. Due to the difference in sourcing channels this quarter, our acquisitions had an attractive rent growth profile, with longer lease terms at 16.7 years average remaining lease term. We have a new top 10 tenant this quarter after two property additions with Life Time Fitness, a premier health club provider whose operations have proven resilient in the current economic climate due to the chain's focus on the more affluent customer.

[Mark Manheimer, CEO at NETSTREIT Corp]

This direct sale-leaseback was part of a larger package, which allowed us to select the two best assets from the group at highly attractive price points. One of the assets is a former United States Tennis Association location in the northern suburbs of Atlanta, which has been expanded and upgraded by Life Time over the past few years. The other asset is another infill location in Austin, Texas, which consistently performs as one of the top five most profitable locations in the Life Time chain. While we have seen a number of sale-leaseback opportunities with Life Time over the past few years, this was the first opportunity that gave us access to some of their most attractive real estate at accretive cap rates and an appropriate basis. We may selectively add to this tenant concentration if we can continue to acquire top-performing assets at favorable pricing with a reasonable basis.

[Mark Manheimer, CEO at NETSTREIT Corp]

On the development front, we commenced rent on six projects totaling $12 million. Our current development pipeline consists of 12 projects with a total estimated cost of $39.6 million, which includes estimated remaining funding of $12 million. Moving on to dispositions, we continue to execute on strategic asset sales to recycle capital into investments with longer leases and better rent escalations, and decreasing our exposure to certain tenants. We completed six dispositions in the quarter for total proceeds of $13 million at a blended cash yield of 6.8%. At quarter end, our portfolio consisted of 649 investments, with an ABR of $148 million. Our 90 tenants operate in 26 industries across 45 states, with 83% of our portfolio leased to investment-grade or investment-grade profile tenants.

[Mark Manheimer, CEO at NETSTREIT Corp]

Our weighted average lease term remaining on the portfolio is 9.5 years, with less than 4% of leases expiring through 2026. As we look to further improve the diversity of our portfolio, we will continue to explore all acquisition sourcing channels where we can get the best risk-adjusted returns, including sale-leaseback opportunities, that give us access to well-located real estate, where the tenant generates significant cash flows at a very high rent coverage. While having a large number of publicly traded companies in our portfolio has created headline noise for us most recently, we believe the economic impact to our cash flow generation should be negligible over the long term. As a reminder, we do not only rely on corporate credit of our tenants, but also the unit-level performance of our assets and the quality of our real estate collateral.

[Mark Manheimer, CEO at NETSTREIT Corp]

The two most topical tenants in the news have been Walgreens and Big Lots. As it relates to Walgreens, we have just one lease expiring before 2029, and it is a high-performing asset with de minimis renewal risk. As mentioned in the past, we maintain an ongoing and constructive dialogue with Walgreens, which allows us to proactively asset manage our stores in real time. That said, we continue to believe we own some of the better-performing stores, which should limit our downside risk. With regard to Big Lots, they recently announced the closure of more than 10% of their stores. We have one location on that list, and based on our assessment of the market, we are confident in our ability to retenant the location with potential upside in rent.

[Mark Manheimer, CEO at NETSTREIT Corp]

The remainder of our Big Lots stores generate better than average foot traffic, with rents that we believe are at or below market, with attractive real estate fundamentals. As we look out to the remaining half of the year, we are focused on further enhancing our portfolio's diversification with tenants that have strong management teams and operate in defensive industries. Before I hand the call over to Dan, I want to discuss the fraud incident that occurred during the quarter. The company was the victim of a criminal scheme involving a business email compromise of an employee that led to two fraudulent transfers totaling $3.3 million to a third party impersonating one of our development partners. The result was a $2.8 million dollar loss net of insurance recoveries.

[Mark Manheimer, CEO at NETSTREIT Corp]

When we learned of the issue, we took immediate action, including blocking access to the compromised account and launching a review with the assistance of third-party experts. Our investigation has determined this isolated event poses no further threat to the company or its partners, and we believe we have taken the appropriate steps to prevent this from occurring again. With that, I'll hand the call to Dan to go over our second quarter financials and then open up the call for your questions.

[Daniel Donlan, CFO at NETSTREIT Corp]

Thank you, Mark. Looking at our second quarter earnings, we reported a net loss of $2.3 million, or $0.03 per diluted share. Core FFO for the second quarter was $23.4 million, or $0.31 per diluted share, and AFFO was $23.8 million, or $0.32 per diluted share, which was an over 6% increase versus last year. Turning to the expense front, total recurring G&A declined 8% year-over-year to $4.6 million, while recurring cash G&A declined 13% year-over-year to $3.3 million. In addition, with our total recurring G&A representing 12% of total revenues in the quarter versus 16% of total revenues in the prior year quarter, our G&A continues to steadily rationalize relative to our revenue base.

[Daniel Donlan, CFO at NETSTREIT Corp]

Turning to the balance sheet, our total adjusted net debt, which includes the impact of all forward equity as of quarter end, was $464 million. Our weighted average debt maturity is 3.6 years, and our weighted average interest rate is 4.43%. Including extension options, which can be exercised at our discretion, we have no debt maturing until January 2027. During the quarter, we sold 1.6 million shares, all on a forward basis, from our ATM program for a net equity value of $29 million. At quarter end, our liquidity was $569 million, which consisted of $14 million of cash on hand, $302 million available on a revolving credit facility, and $254 million of unsettled forward equity.

[Daniel Donlan, CFO at NETSTREIT Corp]

Turning to leverage, our adjusted net debt to annualized adjusted EBITDAre was 3.4x at quarter end, which remains well below our targeted levered range of 4.5x-5.5x. Moving on to guidance. We are maintaining our 2024 AFFO per share guidance of $1.25-$1.28. We also continue to expect cash G&A to range between $13.5 million-$14.5 million, which is exclusive of transaction costs and one-time severance payments. Lastly, on July 23rd, the board declared a quarterly cash dividend of $0.21 per share, which represents a 2.4% increase from the prior quarter. The dividend will be payable on September 13th to shareholders of record as of September 3rd. Based on the dividend amount, our AFFO payout ratio for the second quarter is 66%.

[Daniel Donlan, CFO at NETSTREIT Corp]

With that, operator, we will now open the line for questions.

[Operator]

Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question is from Wes Golladay with Baird. Please proceed with your question.

[Wes Golladay, Senior Research Analyst at Baird]

Hey, good morning, guys. Can you talk about what categories are in the acquisition pipeline and the deal for sale assets?

[Mark Manheimer, CEO at NETSTREIT Corp]

Yeah, sure. So, you know, it's a pretty big mix of, of, different types of transactions that we're looking at. There are some sale-leasebacks, some, you know, still some, you know, we're finishing up some more, developments. So we have a handful of dollar stores left to, left to close. But quick service restaurants, you know, Tractor and Supply, kind of, you know, pretty, pretty typical from what, from what you've seen in the past.

[Wes Golladay, Senior Research Analyst at Baird]

Okay, and then when you go back to the Big Lots comment, you mentioned potential upside in rent. I know you have a low rent overall for the Big Lots. Can you talk about where the rent is for the asset that was, I guess, closed? And are you looking for term income and any CapEx needed?

[Mark Manheimer, CEO at NETSTREIT Corp]

Yeah, sure. So the rent on that location is $5.29 foot, so pretty low rent, pretty attractive, you know, real estate. And, you know, it has not closed yet. They just, you know, they came out with a closure list indicating 149 stores that will close. That is on that list, so they are likely to gonna, you know, start some going out-of-business sales, et cetera, so that's gonna take a little bit of time. And then we would just look to re-tenant the asset in the event that we take it back if they, you know, if they file bankruptcy at some point in time. But there's still seven years of lease term on there.

[Mark Manheimer, CEO at NETSTREIT Corp]

So if they, you know, if they were to reject the lease, we would get some, we'd get a lease termination payment, and then we would look to re-tenant the asset. But we've already been out in the market talking to some tenants, as well as a broker that's pretty familiar with the location, and, you know, there's already some interest in that location.

[Wes Golladay, Senior Research Analyst at Baird]

Okay, and then Stop & Shop has been in the news. How do you feel about your exposure there, and are there any other tenants on your watchlist?

[Mark Manheimer, CEO at NETSTREIT Corp]

Yeah, sure. So yeah, Stop & Shop, you know, we've got two locations, which is a little bit less than 2% of revenues. You know, they're—I think they announced 32 closures that they're gonna be going through. None of ours are affected by that, and, you know, we don't really see any risk to our locations. We have one in Beekman, New York, that is currently getting extended, and they're taking, you know, their five-year option, and then one in Somers, New York as well. That's one of their top-performing assets that has some term on it. So really don't see any risk associated, you know, with that tenant. And then, of course, you know, Big Lots, you know, we certainly are paying attention to what's going on with them.

[Wes Golladay, Senior Research Analyst at Baird]

Okay, thanks. I'll hop back in the queue.

[Mark Manheimer, CEO at NETSTREIT Corp]

Thanks, bye.

[Operator]

Thank you. The next question is from Smedes Rose with Citi. Please proceed with your question.

[Smedes Rose, Director at Citi]

Hi, thank you. I just wanted to ask you a little bit just about overall acquisition activity, 'cause I guess, at least relative to our expectations, we were surprised to see that the pace of activity slowed, kind of sequentially. And it seemed, I was just trying to square some of your remarks in the first quarter, where you kind of thought activity would be in line or ahead. And I'm just kind of wondering, you know, maybe what were some of the dynamics that you saw during the quarter that caused overall activity to slow? And just wondering if you could maybe provide an update on what you've seen or, you know, kind of your pipeline thus far in the third quarter.

[Mark Manheimer, CEO at NETSTREIT Corp]

Yeah, sure. You know, I think the pace has been pretty similar. I think maybe slowed down a little bit on the margin. But we've just been very selective in terms of what assets we're willing to take into the portfolio and just trying to be prudent with the capital that we've raised back in January. But I would expect us to have a similar pace that we did last year, you know, this year, as we look out for the next, you know, 60, 90 days.

[Smedes Rose, Director at Citi]

Okay. And then could you just maybe talk a little bit more about the Life Time assets? I mean, obviously brought the overall investment grade profile of your investments down. Would you expect over time, you know, that that's going to move back into the low to mid 80% of your total investment activity or?

[Mark Manheimer, CEO at NETSTREIT Corp]

Yeah, I mean, I think we're maybe a little bit less dogmatic about whether, you know, something's investment grade or not investment grade, or investment grade profile. We're kind of looking at not only the corporate credit, you know, what industry that tenant's in, what headwinds or tailwinds that might be affecting that individual tenant or that industry, how profitable the locations are. And then, of course, in the event that we ever have to take a property back, like you're seeing with Big Lots, that we're going to be able to backfill that location and replace the rent. So it's, you know, kind of a lot of different factors that kind of go into what we're, you know, looking at buying.

[Mark Manheimer, CEO at NETSTREIT Corp]

Right now, you know, we're seeing more on the sale-leaseback side, which is going to be typically some investment-grade profile, some sub-investment grade, occasionally an investment-grade tenant. There's, you know, kind of a large transaction right in the market right now that's with an investment-grade tenant. And so, you know, I think it really had more to do with our sourcing channels, where we were getting the best risk-adjusted returns last year, which was, you know, we did a lot of blend and extend two years ago, and then last year we were doing more on the development side. Those just happened to be more with investment-grade tenants.

[Mark Manheimer, CEO at NETSTREIT Corp]

And so, you know, from the time of our IPO, we came out and said, we're, you know, we'll, we'll use it as a guidepost for investors, saying we'll be between 60% and 70%, you know, actual investment grade, which, you know, we've kind of kept to that. We kind of creeped over 70% there for a little while, but I think we're likely to stay somewhere around that range.

[Smedes Rose, Director at Citi]

Okay. Thank you. Appreciate it.

[Operator]

Thank you. The next question is from Haendel St. Juste with Mizuho. Please proceed with your question.

[Ravi Vaidya, VP at Mizuho]

Hi, good morning. This is Ravi Vaidya on the line for Haendel. What's the bad debt reserve that's currently embedded in your guide right now? And, why not raise the guide at this point, given that it seems that you're above pace from an acquisition standpoint versus last year?

[Daniel Donlan, CFO at NETSTREIT Corp]

Hey, Ravi, good question. On the credit loss, as we started the year, we said at the low end of guidance, we were modeling 100 basis points, and at the high end of guidance, we were modeling basically nothing. As we've gotten through six months, we're now modeling 50 basis points at the low end and essentially nothing at the high end. As far as the decision not to raise guidance, you know, with five months left in the year, we were comfortable, you know, leaving the midpoint at $1.265, namely because with almost 15 million shares unsettled through our forward sale agreements, you know, the dilution associated with those, depending on our stock price, can have a meaningful impact on the share count and therefore our earnings per share.

[Daniel Donlan, CFO at NETSTREIT Corp]

We just wanted to see a couple more months of trading, as well as a couple more months of activity, before revisiting our guidance, you know, in October.

[Ravi Vaidya, VP at Mizuho]

Got it. That's helpful. Just, just one more here. Would you say that your acquisition strategy has shifted? Is there now more of a focus on experiential real estate rather than the dollar stores and pharmacies that currently make up a large part of the portfolio?

[Mark Manheimer, CEO at NETSTREIT Corp]

No, I wouldn't say that our strategy has really shifted at all. In fact, we looked at a number of, you know, Life Time sale-leasebacks over the past, you know, call it three or four years. Those traded, you know, one traded at a five nine, and the other traded in the sixes. So we just felt like the pricing was a little bit more aggressive and the assets didn't perform quite as well as the assets that we were able to get here. So this was just a unique opportunity, I think, to grow with a tenant that we think is, you know, you know, a very, very strong tenant with, you know, very high quality, with high quality real estate.

[Mark Manheimer, CEO at NETSTREIT Corp]

And yeah, I mean, the Austin location, you know, consistently generates top five cash flows across their entire chain. And then the Atlanta asset is somewhat unique in that it's, you know, just, you know, in the Peachtree Corners suburb, just north of Atlanta. We acquired that for about $800,000 an acre. And it is zoned so that you could convert it to residential. So even if we ever took that asset back, we would actually make money on that asset. So somewhat unique, you know, characteristics about that transaction. But, you know, we are always looking at the quality of the real estate, the unit level performance, as well as the corporate credit, and felt like that fits very well within our portfolio.

[Mark Manheimer, CEO at NETSTREIT Corp]

We were just priced out on the last several transactions with Life Time in the past.

[Ravi Vaidya, VP at Mizuho]

Got it. That's helpful. Thank you.

[Operator]

Thank you. The next question comes from Greg McGinniss with Scotiabank. Please go ahead.

[Greg McGinniss, Director at Scotiabank]

Hi, good morning.

[Mark Manheimer, CEO at NETSTREIT Corp]

Morning.

[Greg McGinniss, Director at Scotiabank]

What do you think has changed at Life Time or on the demand side for those assets that the boxes are now pricing at an attractive basis for you? And are there other non-IG operators that you're now looking to pursue, so it might see a historical bias towards investment grade or equivalent acquisitions start to shift?

[Mark Manheimer, CEO at NETSTREIT Corp]

Yeah, so I mean, I would say what has changed with Life Time is really just what has changed across the entire market. You know, obviously, interest rates have an impact there, but there's just, you know, such little competition out in the market versus where we were two, three years ago, where there was private equity, there was a lot of 1031 buyers, some, you know, large family offices that could write really big checks. Most of those are completely sidelined. So you have, you know, a handful of public REITs that are still active, but, you know, I think that is really the demand side, it has kind of fallen off with not as many buyers on the competition side.

[Mark Manheimer, CEO at NETSTREIT Corp]

So I think that's really what's driving the situation with Life Time. Yeah, I mean, I think, you know, we're always looking for, you know, new tenants. We're open to sale-leaseback opportunities. We're open to really every different channel that we acquire assets through. And you know, right now it does seem to be that the sale-leaseback channel is a little bit more attractive, where we're getting very high-quality real estate at a very low basis, with high rent coverage, with tenants that are growing that we think have, you know, have blue skies ahead of them. So certainly looking at a number of those types of opportunities.

[Mark Manheimer, CEO at NETSTREIT Corp]

But then we're also looking at, you know, a lot of, you know, grocery store, you know, transactions and other investment grade type tenants that you've seen us acquire in the past.

[Greg McGinniss, Director at Scotiabank]

Okay. And on those Life Times, are you getting PNLs on those? And can you disclose the rent coverage?

[Mark Manheimer, CEO at NETSTREIT Corp]

We do get unit level coverage. I'll just say that, you know, they are very high.

[Greg McGinniss, Director at Scotiabank]

Okay, thanks. And, one more just on the balance sheet. So given the increasing expectations, we'll see, hopefully, that, debt costs are coming down with rate cuts, how are you thinking about the $150 million accordion remaining on the, the term loan versus just issuing a new loan? And if you were to tap the accordion, do you plan on, on swapping that?

[Daniel Donlan, CFO at NETSTREIT Corp]

Yeah. Hey, Greg. You know, we would look at doing both. It kind of just depends on, you know, where bank demand is. You know, the five-year swap rate today is, you know, around 380 basis points. Our spread over that swap rate is about 125 basis points. So, you know, all in, you're looking at, you know, very low 5%. I think, you know, I don't think we're looking at doing anything, though, on that front, until we get out to 2025. You know, our credit facility comes due in August of 2026, and typically you start to look to recast that and look at the rest of your term loan debt at the same time.

[Daniel Donlan, CFO at NETSTREIT Corp]

So that's probably an early 2025 event. So it's a little too early to say what we may or may not do, but our preference certainly is to continue to push out our debt maturities, you know, throughout the course of the next few years.

[Greg McGinniss, Director at Scotiabank]

Okay, thank you.

[Operator]

Thank you. The next question comes from Upal Rana with KeyBanc Capital Markets. Please go ahead.

[Upal Rana, Senior Equity Research Analyst at KeyBanc Capital Markets]

Great. Thank you for taking my question. I'm assuming you have largely completed 3Q investment pipeline and wanted to get your sense of where cap rates and volumes are trending so far. And, are you seeing the early indication of where cap rates could shake out for your 4Q pipeline?

[Mark Manheimer, CEO at NETSTREIT Corp]

Yeah, always difficult for us to project too far out. But yeah, I mean, I think third quarter likely to see cap rates. I think they've really flattened out. So you saw us, you know, you know, post a similar cap rate, second quarter as we had first quarter. We don't think they're necessarily going up here in the short term, but, you know, these things can certainly change, you know, pretty quickly.

[Upal Rana, Senior Equity Research Analyst at KeyBanc Capital Markets]

Okay, got it. Thank you. And then, you know, could you provide some color on the current in-place rents on the 27 Walgreens that you have and where you think the market is as for those properties?

[Mark Manheimer, CEO at NETSTREIT Corp]

Yeah, so we're about $21 a foot on average. And I think, you know, they're all a little bit different, but, you know, I think we're, you know, probably slightly above market.

[Upal Rana, Senior Equity Research Analyst at KeyBanc Capital Markets]

Okay. Got it. Thank you.

[Operator]

Thank you. The next question is from the line of Joshua Dennerlein with Bank of America. Please go ahead.

[Farrell Granath, Equity Research Associate at Bank of America]

Hi, good morning. This is Farrell Granath on behalf of Josh. I just wanted to ask, I guess, in terms of the spread that you're seeing between IG and non-IG, just curious if you could comment on that and if you're seeing any shift at all in terms of cap rates and pricing.

[Mark Manheimer, CEO at NETSTREIT Corp]

Yeah, no, that's a really good question. So, historically, what we've seen in, in the difference between non-investment grade versus [audio distortion] investment grade, that, in what we've acquired, it's really only been a 40 basis points or 50 basis points, so, you know, pretty tight. But what we're currently seeing, and of course, there's a lot of factors that influence, you know, you know, cap rate, not just the, you know, whether it's investment grade or not. But we're seeing that a little bit wider than what we saw over the past four years.

[Farrell Granath, Equity Research Associate at Bank of America]

Great. And I guess also just kind of thinking bigger picture, given the consumer being under pressure, are you seeing this specifically impact the stores in your portfolio? And are you receiving, financials for a certain percentage of your portfolio, that you've been monitoring?

[Mark Manheimer, CEO at NETSTREIT Corp]

Yeah, no, that's a great question. So that's really where you're seeing, you know, any level of distress, is the lower income consumer combined with anything that's, you know, discretionary. So, where people are getting squeezed with inflation, they're kind of looking at their, you know, their monthly budget and saying, "To make this work, I can't spend money on the discretionary items. So I'm gonna have to..." You know, obviously, you have to buy what you need. So, and that's really Big Lots, you know, that's, you know, their consumer is kind of, you know, kind of the mid to lower income consumer. A lot of what they sell is discretionary, so you've, you know, seen them really struggle since inflation started really kicking in.

[Mark Manheimer, CEO at NETSTREIT Corp]

And that's really the big driver with Walgreens is that their, you know, their consumer is, you know, looking around the store and saying, "I don't need to buy a lot of what you have here," and they're pushing back on pricing. And so you've seen the margins as it relates to Walgreens shrink from 23%, which was pretty steady for a long period of time, down to 18%, and that's, you know, heavily inflation driven with a lower-income consumer.

[Farrell Granath, Equity Research Associate at Bank of America]

Okay, thank you so much.

[Operator]

Thank you. We have a follow-up question. Sorry, the next question comes from Ki Bin Kim with Truist Securities. Please go ahead.

[Ki Bin Kim, Managing Director of U.S. REIT Equity Research at Truist Securities]

Thank you. Good morning. On the Life Time assets, can you just talk about the average age of those assets?

[Mark Manheimer, CEO at NETSTREIT Corp]

Yeah, I mean, they're you know, you know, fairly new. The one in Atlanta is, you know, kind of getting redone. It used to be the you know, United States Tennis Association location, so that's gotten a pretty big makeover, so it's essentially a pretty new building, and then Austin is only a few years old.

[Ki Bin Kim, Managing Director of U.S. REIT Equity Research at Truist Securities]

Okay, great. And on your cost of capital, I mean, obviously, you guys are have a great balance sheet and an excellent position, but your equity price isn't quite, you know, efficiently priced. How should we think about this going forward? I know you have some runway to continue to buy, but thereafter, how do you think about funding your next round of deals?

[Daniel Donlan, CFO at NETSTREIT Corp]

Yeah. Hey, Ki Bin. You know, with our leverage at 3.4x, you know, we can execute on our plan for the rest of the year and still end the year at or below the low end of our targeted range of 4.5x-5.5x. So we do have plenty of runway, as you know, but you know, right now, we can achieve spreads just slightly north of 100 basis points, which means we can probably grow, you know, earnings year-over-year, somewhere around 2%-3%.

[Daniel Donlan, CFO at NETSTREIT Corp]

I don't think we're in a rush to raise equity, but we're confident that, you know, as we continue to execute our plan, that you know, our cost to equity will start to improve, particularly relative to the peer group, given the embedded cash flows that we have, and the strength of our portfolio. But for now, you know, we're being very, very judicious with how we manage our equity capital.

[Ki Bin Kim, Managing Director of U.S. REIT Equity Research at Truist Securities]

Okay. Thank you, guys.

[Mark Manheimer, CEO at NETSTREIT Corp]

Thank you, man.

[Operator]

Thank you. The next question is a follow-up question from Wes Golladay with Baird. Please proceed with your question.

[Wes Golladay, Senior Research Analyst at Baird]

Thanks for taking the follow-up. If we're to look at your Walgreens exposure, 5.9% of ABR, how much do you think is at risk of closing, just being dark and vacant? And then how much term would you have on those leases? And do you have an estimate of, you know, what the, you know, I guess, the net value at risk of those Walgreens would be?

[Mark Manheimer, CEO at NETSTREIT Corp]

Yeah, I mean, always tough to predict, you know, you know, what they're gonna do. They definitely have mentioned they're taking a look at a large swath of their properties, and they're gonna try to turn them around. I think it's, you know, prudent for them to do portfolio reviews. I think, you know, quite honestly, it's a little bit overdue. But yeah, I mean, we're in constant conversations with Walgreens. And, you know, they give us pretty good insight as to what they're thinking, as it relates to their stores. You know, if they're generating positive cash flow and if they're, you know, locations that they're committed to long term.

[Mark Manheimer, CEO at NETSTREIT Corp]

A large number of the transactions that we did with Walgreens, if you recall, were blend-and-extend opportunities, so where we, you know, would go out and buy a short-term lease and get it extended before we closed. So showing that they are committed to the locations long term. Obviously, things have gotten a little bit worse for them, as you know, we just discussed their margins. So that, you know, I think that that list is probably grown, and with their new CEO, I think, you know, looking at a larger portion of the stores and, you know, which I think is fair. But that being said, we've got, you know, nine years weighted average lease term, and, you know, locations that generally do pretty well.

[Mark Manheimer, CEO at NETSTREIT Corp]

And, you know, we know the location that's coming up in 2028 is one of the better performers in the chain and not, you know, not something that they're considering. So, yeah, I mean, I think, you know, it could be ratable, you know, over time, where we could take, you know, a store or two, you know, over the next, you know, six or seven years, but it's just not gonna have a meaningful impact on earnings.

[Wes Golladay, Senior Research Analyst at Baird]

Okay, thanks for that. Then just one last one on the fraud issue. Is this the last we're gonna hear of it? Is there anything changing on the internal controls, or is it just a one-time event, and when we get to the third quarter, everything will be just in the rearview?

[Mark Manheimer, CEO at NETSTREIT Corp]

Yeah, that's exactly correct. You know, we immediately rectified the situation, reiterated the importance of following our existing processes and how not to deviate from the preset procedures. Secondly, you know, we enhanced our procure-to-pay procedures by adding certain redundancies to the process. And lastly, this was company-wide, we stressed the importance of remaining vigilant and skeptical of potential fraud in the workplace. So we would 100% tell you that we believe this is a one-time event, and we've done everything we can to prevent it from occurring in the future, in our view.

[Wes Golladay, Senior Research Analyst at Baird]

Okay. Thanks, everyone.

[Mark Manheimer, CEO at NETSTREIT Corp]

Thanks.

[Operator]

Thank you. Before we take the next question, a reminder to all participants that you may press star one to ask a question. The next question comes from Greg McGinniss with Scotiabank. Please proceed with your question.

[Greg McGinniss, Director at Scotiabank]

Hello again. Given the two Life Times at around $70 million, I guess we were somewhat surprised by overall acquisition volume this quarter. Were there deals that fell through or pushed out? And what gives you the confidence, transaction volume going forward, will be in line with what we've seen historically, absent these larger deals, or are there other higher-ticket assets you're pursuing?

[Mark Manheimer, CEO at NETSTREIT Corp]

Yeah, and to be clear, it wasn't $70 million. It was, you know, well, yeah, less than that. But yeah, I mean, it's pretty normal for us to, you know, have quarters where we do a lot of onesie-twosies, you know, small portfolios. And then we've had, you know, portfolios larger than that, where we, you know, we did some sale-leasebacks with 7-Eleven in the past, you know, up to a little bit more than $70 million. So we're kind of looking at what's our opportunity set, what can we close in the quarter, and then we try to chop off the, you know, the least efficiently priced assets and get the best risk-adjusted returns we can.

[Mark Manheimer, CEO at NETSTREIT Corp]

We kind of have an idea of where we sit at all times during the quarter. So, you know, we're very comfortable that we can continue the same pace that we have for the past four years.

[Greg McGinniss, Director at Scotiabank]

Okay, thank you.

[Mark Manheimer, CEO at NETSTREIT Corp]

Thanks, Greg.

[Operator]

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

[Mark Manheimer, CEO at NETSTREIT Corp]

Thanks, everybody, for joining us today. I hope you have a great rest of your summer, and we look forward to speaking again in the future.

[Operator]

Thank you. This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.

Participants

Executives

• Amy An, Director of Investor Relations
• Daniel Donlan, CFO
• Mark Manheimer, CEO

Analysts

• Farrell Granath, Equity Research Associate at Bank of America
• Greg McGinniss, Director at Scotiabank
• Ki Bin Kim, Managing Director of U.S. REIT Equity Research at Truist Securities
• Ravi Vaidya, VP at Mizuho
• Smedes Rose, Director at Citi
• Upal Rana, Senior Equity Research Analyst at KeyBanc Capital Markets
• Wes Golladay, Senior Research Analyst at Baird