NETSTREIT Corp. (NTST) Earnings Call Transcript & Summary

Greetings, and welcome to the NETSTREIT's Second Quarter 2026 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Matt Miller, Capital Markets Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining us for NETSTREIT's Second Quarter 2026 Earnings Conference Call. On today's call, management's remarks and responses to your questions may contain statements considered forward-looking under federal securities laws. These statements address matters subject to risks and uncertainties that may cause actual results to differ from those discussed today. For more information on these factors, we encourage you to review our latest Form 10-K and other SEC filings. All forward-looking statements are made as of today's date, and NETSTREIT assumes no obligation to update them 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, reconciliations to the most comparable GAAP measures and an explanation of their usefulness to investors. These materials can be found in the Investor Relations section of the company's website at netstreit.com. Today's call is hosted by NETSTREIT CEO, Mark Manheimer; and CFO, Dan Donlan. They will make some prepared remarks followed by a Q&A session. With that, I'll turn the call over to Mark.

Thank you, Matt, and good morning, everyone. We appreciate you joining us today to discuss NETSTREIT's Second Quarter 2026 results. I want to begin by thanking our entire team for their outstanding execution and dedication. We have now grown the portfolio to over $3 billion in assets, and we continue to see an elevated number of high-quality opportunities at accretive pricing, which should provide for an increasingly attractive growth backdrop as we head into 2027 and beyond. In the second quarter, we saw continued acceleration on the investment front. We closed $298.9 million of gross investments driven by well-priced assets in our core necessity and service-based sectors, including quick service restaurants, grocery, convenience store, auto service and other essential retail categories. These investments were completed at a blended cash yield of 7.4% with a weighted average lease term of 9.8 years. As a complement to this, we executed targeted dispositions at a 6.8% blended cash yield, the proceeds of which were recycled into higher quality, longer duration opportunities that enhance our portfolio quality and further reduce select tenant and industry concentrations. This robust start to the year reflects the depth of our sourcing platform and our team's ability to move quickly across a wide swath of opportunities while still staying disciplined in our underwriting criteria. With that in mind, we have seen an uptick in portfolio transactions in recent months, which historically have priced away from us given the large premiums these deals typically command. That said, we were successful in a couple of instances this quarter, which has fortuitously carried over into the third quarter. As a result, we have gained additional exposure without sacrificing our investment spreads through various high-quality tenants like Chick-fil-A, Sprouts and Quick Trip that usually price too aggressively for us in the one-off market. Also of note this quarter was the UPREIT acquisition of 20 Speedway properties that we previously invested in via a first mortgage in early 2023. This was a great example of our creative structuring within our debt program, providing a path to direct fee ownership at cap rates that are significantly above market. More specifically, we acquired the Speedway assets at a 6.75% initial cash yield, which we see as a strong risk-adjusted yield, given the long-term leases, the investment-grade credit support high unit level rent coverage and the low basis in these assets. Turning to the portfolio. We ended the quarter with 859 investments leased to 156 tenants across 28 industries in 46 states. Our weighted average lease term is 10 years, and the percentage of investment grade and investment-grade profile tenants is 56.5% of ABR. Unit level rent coverage across the portfolio remains healthy at 3.8x. As expected, occupancy increased to 100% with the backfill of our loan vacancy, a former big lab location with A-rated T.J. Maxx at a more than 20% increase in rent. While vacancies have been extraordinarily rare in our portfolio, we believe this execution highlights the strength of our asset management team and underwriting process. From a balance sheet perspective, we continue to maintain a conservative and flexible capital structure. Following the capital markets activities in the quarter, our leverage remains an industry-leading 3.2x. With substantial liquidity under our revolving credit facility and the benefit of our previously raised forward equity, we are well positioned to fund accelerated growth without compromising our leverage targets. Turning to guidance. Given the aforementioned strength of our balance sheet and continued momentum in our investment pipeline, we are increasing our full year 2026 net investment activity guidance range to $700 million to $800 million. We are also increasing the bottom end of our AFFO per share guidance to a new range of $1.37 to $1.39. In summary, the second quarter continued upon our excellent start to 2026, highlighted by strong momentum on the investment front and opportunistic capital raising, which has prefunded our equity needs for the remainder of 2026. We believe our focus on healthy tenancy, strong unit level performance, high-quality real estate, proactive portfolio management and a low leveraged balance sheet continues to position NETSTREIT for sustainable long-term growth and value creation. With that, I'll turn the call over to Dan to review our second quarter financial results in greater detail. We will then be happy to take your questions.

Thank you, Mark. Looking at our second quarter earnings, we reported net income of $6.3 million or $0.06 per diluted share. Core FFO for the quarter was $34.2 million or $0.33 per diluted share and AFFO was $35.5 million or $0.35 per diluted share, which was a 6.1% increase over last year. Turning to the expense front. Our total recurring G&A in the quarter increased 6.7% year-over-year to $5.8 million, which similar to last quarter has mostly resulted from staffing increases that occurred over the course of 2025. That said, with our total recurring G&A representing 9.5% of total revenues this quarter versus 11.3% in the prior year quarter, our G&A continues to rationalize relative to our revenue base. Turning to the capital markets. We remained opportunistic on the ATM front, raising 9 million shares or $183 million of net proceeds as our cost of equity continued to improve throughout the quarter. Turning to the balance sheet. Our adjusted net debt, which includes the impact of all forward equity, was $672.2 million. Our weighted average debt maturity was 3.6 years, and our weighted average interest rate was 4.3%, including extension options, which can be exercised at our discretion, we have no material debt maturing until February of 2028. In addition, our total liquidity was $1.1 billion at quarter end, which consisted of approximately $20 million of cash on hand, $301 million available on our revolving credit facility and $714 million of unsettled forward equity and $50 million of undrawn term loan capacity. From a leverage perspective, our adjusted net debt to annualized adjusted EBITDA was 3.2x at quarter end, which remains comfortably below our targeted leverage range of 4.5 to 5.5x. Moving on to 2026 guidance. We are increasing the loan to our AFFO per share guidance to a new range of $1.37 to $1.39 and increasing our net investment activity guidance to $700 million to $800 million. We now expect cash G&A to range between $16.5 million and $17 million, exclusive of transaction costs and severance payments. In addition, the company's AFFO per share guidance range now includes $0.05 to $0.08 per share of estimated dilution or 3.6 million to 5.9 million shares for the full year due to the impact of the company's outstanding forward equity calculated in accordance with the treasury stock method. Lastly, on July 16, the Board declared a quarterly cash dividend of $0.225 per share. The dividend will be paid on September 15 to shareholders of record as of September 1. With that, operator, we will now open the line for questions.

[Operator Instructions] And your first question comes from Haendel St. Juste with Mizuho Securities.

First one is just on the implied volume for acquisitions into the back half of the year seems to suggest a pretty meaningful deceleration. So I guess I'm curious if it's conservatism, the volatility of the macro, maybe something else we're missing? So maybe shed some color on that. And if the macro volatility is impacting your conversations at all from a pricing or maybe having deals take a bit longer. So curious on how that all is playing out and what's your expectation to the back of your are.

Yes. Thanks, Haendel. Yes, I think there is a little bit of conservatism built into that, but there's also -- we don't want to have target out there with capital that we haven't raised yet. So if we do choose to raise a little a little bit more capital, I think there's likely some upside to that. But is it more broadly relates to what we're seeing out in the market. I don't recall a healthier acquisitions market than what we're seeing right now really across all the different avenues that we look to add properties, whether that be sale leasebacks or even portfolio deals, as I mentioned in the prepared remarks, the one-off market, blend and extends, we're really kind of clicking on all cylinders. So there's really a great opportunity set with very attractive pricing that we're seeing. And then we're following the macro and kind of what's going on geopolitically. That's obviously had some impact on interest rates. We have not yet seen that have much of an impact on cap rates. But I would imagine if that's sustained, and we continue to see upward pressure on the 5-year and the 10-year that could potentially move up cap rates, but we just have not seen that yet.

Got it. Got it. That's great color. And then my second question, I guess it pertains to some comments you made earlier in your discussion. You referred to some higher tenant credit tenants like [indiscernible], I think you mentioned Sprouts. So I guess I'm curious, we've seen your high-grade share trickle down over the last couple of quarters as you've pursued kind of optimizing your risk-adjusted growth. But your cost of capital must improve. You're now, I guess, able to underwrite deals that perhaps you weren't able to do 6, 12 months ago. So curious if your strategy, your IG capital deployment strategy might be evolving here and if we might see that start to tick up a little bit. So curious on your thoughts on that.

Yes, it's a good question. I think it's really the dynamic that there's been just a large number of portfolios that have crossed our desk and that we've had the opportunity to try to tackle. It's -- I think it's too difficult for 1 or 2 shops that historically have really paid up for those portfolios to take them all. And so a few of those have kind of come our way, which has allowed us to get some of those assets that historically maybe we wouldn't have been able to. But as it relates to this quarter being a little bit high on the investment grade, investment grade profile, a good chunk of that was the Speedway, OP unit transaction that we did this quarter. So I think that may be more of a one-off. We're just going to continue to try to find the best risk-adjusted returns. And right now, that has not really evolved other than the portfolio dynamic, which we have seen a little bit of that in the third quarter as well. But I'd expect us to kind of stick around that 30%, 35% investment-grade profile, assuming the market dynamics continue.

Your next question comes from John Kilichowski with Wells Fargo.

Maybe could you guys talk about the composition of what you bought in the quarter outside of the Speedway deal. And then Mark, you talked about some portfolios out there. Could you talk about the sectors that you're seeing some opportunity?

Yes, sure. Yes, I think the sectors that have kind of shown up in some of the portfolio deals are similar, but there's maybe a few names. We mentioned QuickTrip routes articulate that -- that are in our portfolio, we just didn't have much of a concentration there, but it's created a unique opportunity for us to add some of those. But then we've also added some other names like Tire Discounters some of the Darden brands that the cap rates have historically been pretty aggressive. There are some Brinker or Chili's assets as well we've added during the quarter, which haven't really been in our mix over the past, call it, a couple of years. So it's very similar sectors, just maybe some other tenants that don't trade as much in the one-off market. And I think that's likely -- the reason why I think we're seeing so many of these portfolio deals, as you recall, maybe in 2021 when interest rates were near 0, and cap rates were at all-time lows, you had a lot of players enter the space look at putting financing on those transactions, get a really nice cash on cash, even though the cap rates were low because they could borrow so cheaply that debt's coming due, typically a 5-year term on most of that bank debt that comes due. The refi looks a lot different. So selling the portfolio makes a lot more sense. And so we're just seeing a lot of opportunity there. And I think that's probably what's driving a lot of that. Each deal has got its own idiosyncratic reasons for why it comes to market or why it crosses our desk. But I think that's 1 theme that we've seen a little bit of. But yes, I mean, I think the mix in terms of sectors has been very similar to what we've tried to pull in the portfolio. And then we've also gotten a little bit creative when we're buying some of these portfolios and simultaneously sold some assets at the same time. Some of these portfolios had some banks and things in there that maybe were not as big of a fan, but they still trade at pretty good cap rate, so that can allow us to kind of juice or our net cap rate a bit while I think kind of getting a better risk-adjusted return. So we've gotten a little bit creative in some of those situations. But I think in terms of if you look at the categories and the industries that we've added to, it looks pretty similar to what we've done. It's just been a little bit different in how we've gotten into those transactions and added further tenant diversity to the portfolio.

Got it. That's very helpful. And I guess that leads me into my next question, which would be a little bit chunkier on the disposition side in 2Q. Is that related to the Speedway deal? And if we were to see more portfolio deals and net investments climbing if you're able to do that, would you also expect kind of that disposition number to run a little bit more elevated?

Yes. And that's a good question. So on the portfolio deals, if it's going to be a diversified portfolio, we're likely to -- we've been very active on the disposition side. So that's allowed us to really build some relationships with some people to sell to that we can rely on that perform. So I would -- I think you may see dispositions elevated a little bit in the event that we do some more portfolio deals. But each quarter is going to be a little bit different. So it's hard to predict, but we've seen third quarter a little bit similar to second quarter and that we've done some portfolio deals and also been able to sell some of the assets that maybe we didn't want to own long term.

Next question comes from Jay Kornreich with Cantor Fitzgerald.

I just want to go back to the forward equity. The treasury stock in Method County caused, I guess, 2 more cents of dilution this quarter as it relates to the annual guidance. So just wondering when do you think that could hit a peak? And then just in general, as you seemingly have more than enough equity to meet your near-term investment needs really well into next year, yet your cost of equity continues to improve. I guess, what is your appetite to continue tapping incremental forward equity at these levels?

Yes, Jay, I appreciate the commentary. From a -- if you look at our total shares outstanding relative to the weighted average share count, I think it's kind of at 38% today. That should normalize close to 15% as we get out through the course of 2027. So now it remains to be seen where the kind of the stock price grows relative to the outstanding forwards. But certainly from a standpoint on a percentage basis, the outstanding forwards will normalize, again, closer to 15%. And so I think what you'll probably see is that the amount of TSM dilution probably peaks in third quarter, just kind of depends on where the stock price goes and then we'll kind of drop off from there not only nominally, but on a percentage basis as well. So I think that answers the first part. I think the second part on kind of equity, you're right, we don't need to do anything if we don't choose. But I think to the degree that the the investment market remains as robust as it has. I think we'll likely utilize the at some point in time in the third and potentially in the fourth quarter just to stay well ahead of our capital needs. But I think we can certainly choose to be selective given where our leverage is. And we saw a kind of big front half coming for us, and so we wanted to get out ahead of that. And with the S&P 600 inclusion, we had a ton of liquidity coming to the name, and we wanted to take advantage of that in the back half of June. So it also kind of accelerated our needs relative to kind of what we were expecting when we put out guidance in April of this year.

I appreciate that, Dan. All helpful. And just going off the comment about the inclusion to S&P 600 recently, which should bring liquidity and additional passive investors to the name. I guess are there any other incremental, I guess, corporate goals we should be monitoring for other -- either index inclusion, new credit ratings, unsecured bond issuance or anything else we should just have on the radar?

Yes. I mean as far as index inclusion, nothing comes to mind. Hopefully, we stay in the 600 a very long period of time because that results in quite a hefty ownership amongst passive funds. I think the next kind of -- there's a lot of corporate goals, but as it pertains to kind of the credit rating or additional credit ratings. We already have a BBB- from Fitch. We're likely to go out to other agencies sometime early next year, which would then open us up to the public bond markets, which is something we're very excited about potentially tapping in 2027. So I think that should be -- that's kind of the intermediate-term goal for us.

And your next question comes from Michael Goldsmith with UBS.

I guess just with the improved cost of capital, you talked a little bit about getting into some portfolio deals and getting maybe a little bit of higher quality tenants that maybe that you normally would have. Is that maybe at the expense of kind of -- like does that come at the expense of maintaining larger spreads in some of the more traditional tenants that you've been interacting with in the past? Or is this just like, hey, for the same price that we would pay for some -- what would be traditional, we're able to improve the quality of our cabin base?

Yes, Michael, I mean, I think, quite frankly, we were a little bit surprised that some of the portfolio deals we were able to get at the pricing that we did. But I think that's really driven by the fact that there were just so many portfolios that came to market in a pretty short period of time. So it made it difficult for some others to just buy them all. And so I would have thought that would have been a very unique quarter, but we're seeing a similar dynamic play out in the third quarter. But yes, I mean, I would say that if you look at the cap rate that we achieved this quarter, and I think really what drove that down to a 7.4% from a 7.5%, which is minimal was the Speedway deal at 6.75%, the UPREIT deal that we did that kind of drove that down. You take that out, and we're probably 7.5%, 7.6%. So we really didn't have to deviate on pricing. We don't expect that to happen in the third quarter either. And so as long as that dynamic continues to play out in the market, we're going to participate. If it doesn't, we can surely transition quickly into a more similar approach that we had in the fourth quarter and first quarter.

Yes. And Michael, a lot of the 7.4% was rounding and sometimes the 7.5% is rounding. So the delta between kind of where we've been transacting is actually less than 10 basis points when you factor in rounding.

Got it. And my follow-up is you continue to move into grocery with Sprouts and the penetration of that within your portfolio of grocery overall remains elevated. Today, Albertsons reported and stock is down quite a bit with the company noting that for grocery faced increasing pressure from softer industry unit trends and a more cautious consumer. So clearly, not all grocers are equal, but how are you feeling about the grocery within your portfolio? And just -- and any update from the tenants within the grocery category would be helpful.

Yes, sure. So obviously, we pay attention to what's going on with the consumer and kind of what the margins we see across the board with grocery. And really, what we're seeing is kind of the larger operators have been able to kind of push pricing a little bit more and hold up a little bit better. Certainly having a very conservative balance sheet is extremely important in that industry. You don't want to combine any operating leverage with financial leverage. And so we feel really comfortable with the grocery assets that we have. They generate very strong sales, which kind of flows through to the bottom line with very high rent coverage in that sector. And so as long as we feel like we're buying good assets at or below market rents with high rent coverage, we like the industry, but you do have to be careful not to just partner with any operator and be careful about which assets that you're buying. But we feel really strong about the assets that we have in that sector and the rent coverage that we have.

Your next question comes from Smedes Rose with Citi.

You had mentioned conservatism in the kind of guide potentially for the back half of the year on acquisitions. How much visibility do you have now that we're towards the end of July in the pipeline? And where does that pipeline stand today versus where it stood on average over the last year or so?

Yes, sure. Yes. I mean we're seeing a very healthy acquisitions market. I think we're sitting in a very similar spot that we were 3 months ago on this call. So no real reason to think that we should expect to see any real slowdown in the third quarter. And that's really -- I mean, we've -- we still have some sourcing to do for the third quarter, but a lot of that is done. We have virtually no visibility into the fourth quarter and not only deals that we'll be able to access, but then also what the macro is going to look like and where cap rates are, and we don't want to overextend ourselves, especially if there is the possibility of cap rates going up, we want to have that flexibility.