NetSTREIT Corp. 2026 Q3 Earnings Call

Good morning, and thank you for joining us for NETSTREIT's Third 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 law. 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 third quarter 2026 results. Before I get into the numbers, I want to recognize the hard work of our team across acquisitions, asset management, accounting, and capital markets. Their discipline and focus have allowed us to stay both active and selective in a quickly changing transaction environment. We are pleased to report another solid quarter of investments leased to high-quality net lease tenants. While higher interest rates have raised capital costs across the net lease sector, our smaller relative denominator, low leverage, and strong liquidity are true differentiators for NETSTREIT. We can afford to remain discriminating in our investment decisions, and yet we still have considerable capital capacity to fund an increasingly attractive opportunity set from a nominal yield perspective as the market evolves.

In the third quarter, we completed strong gross investment activity of $273.1 million at a 7.4% blended cash yield with a weighted average lease term of 13 years. Approximately 44% of the annualized base rent from these investments was derived from investment-grade and investment-grade profile tenants. These investments are focused around our core necessity and service-based retail categories, which we believe should prove resilient in any macroeconomic backdrop. Year to date, gross investments have totaled $811 million at the same 7.4% blended cash yield, which is well ahead of $657.1 million we completed for all of 2025. This meaningful increase in volume speaks to the scalability of our platform and our team's ability to ramp up when market conditions are favorable. During the third quarter, we also executed dispositions of $39.5 million at a 7.2% cash yield and had $28.2 million of loan repayments.

In the near term, we intend to remain active on asset sales to prudently manage the risk profile of our assets and lease maturities in order to maximize cash flows for the long term. Looking at the broader market, we believe cap rates are likely to increase moderately in the short term as higher financing costs continue to work through the system. A meaningful portion of the buyer universe, particularly smaller private buyers, have historically relied on higher leverage and more expensive debt to make deals pencil. As that capital has become less available and more costly, these buyers are increasingly being shut out of the acquisition market. At the same time, larger institutions have materially less dry powder today. This dynamic is precisely why we operate with lower leverage and look to pre-fund our capital needs several quarters in advance.

It preserves our flexibility and gives us the optionality to step up and take advantage of market disruption when and if it materializes, rather than being constrained by balance sheet capacity. Turning to our portfolio, we had 913 investments at quarter end, generating $246.3 million of ABR, leased to 158 tenants across 28 industries in 46 states. With just one vacant asset at quarter end, our occupancy was 99.9%, our weighted average lease term was 10.1 years, and investment-grade and investment-grade profile tenants represented over 58% of ABR. From a diversification standpoint, our top 10 tenants now represent 29.2% of ABR versus 37.9% at this time last year. Furthermore, the unit level coverage of our portfolio improved to 3.9 times and was just 3.4% of ABR having less than 1.5 times coverage. We are well insulated should a weaker economy more broadly dampen retail sales.

From a capital markets perspective, we secured $550 million of additional financing commitments and extended our weighted average debt maturity profile with no major debt maturities until 2029. Total liquidity at quarter end exceeded $1.25 billion, including significant undrawn revolver and term loan capacity, along with unsettled forward equity. Leverage remains conservative, with adjusted net debt to annualized adjusted EBITDAre of 3.7 times. Turning to guidance, we are maintaining our full-year 2026 AFFO per share guidance range of $1.37 to $1.39. We now expect 2026 net investment activity of at least $800 million, which is modestly up from our prior range of $700 million to $800 million. In summary, the third quarter demonstrated the strength of our platform, the resilience of our portfolio, and the flexibility of our balance sheet.

We remain optimistic about our growth prospects, given our capital runway through 2027 and the continued availability of attractive opportunities. With that, I will turn the call over to Dan to review the third quarter financial results in greater detail. We will then be happy to take your questions.

Thank you, Mark. Looking at our third quarter earnings, we reported net income of $8.5 million, or $0.08 per diluted share. Core FFO for the quarter was $36.6 million, or $0.34 per diluted share, and AFFO was $37.5 million or $0.35 per diluted share, which was an increase of 6.1% over last year. Turning to the expense front, our total recurring G&A in the third quarter increased 3.3% quarter-over-quarter to $6 million. From a G&A scale perspective, our total recurring G&A represented 9.1% of total revenues this quarter versus 10.6% in the prior year quarter. As such, G&A continues to rationalize relative to our revenue base. Turning to the capital markets, we remain opportunistic on the ATM front, raising 1 million shares for $21 million of net proceeds.

In addition, we settled 24 million shares for nearly $420 million in net proceeds, which was significantly more than we anticipated when we reported second quarter earnings back in July. While this will help to reduce future dilution from the treasury stock method as the remaining unsettled forward balance has a weighted average gross price of $20.09, we are now starting the fourth quarter with considerably higher share count versus our prior expectations. From a debt perspective, we paid off our $200 million term loan due February 2028 with proceeds from draws on our 2031 and 2032 term loans, and simultaneously transferred over the swaps from the 2028 term loan to these new draws. As such, when including extension options, which can be exercised at our discretion, we have no material debt maturing until 2029.

In addition, we also raised a new $400 million seven-year delayed draw term loan due September 2033, which remains fully undrawn as of today. We intend to draw down on this term loan over the course of 2027 to fund future net investment activity and term out our revolving line of credit. Turning to the balance sheet, our adjusted net debt, which includes the impact of all forward equity, was $853.7 million. Our weighted average debt maturity was four years, and our weighted average interest rate was 4.26%. In addition, our total liquidity was $1.3 billion at quarter end, which consisted of approximately $42 million of cash on hand, $500 million available on a revolving credit facility, $312 million of unsettled forward equity, and $400 million of undrawn term loan capacity.

From a leverage perspective, our adjusted net debt to annualized adjusted EBITDAre was 3.7x at quarter end, which remains comfortably below our leverage comfort zone of 4.5x to 5.5x. Moving on to guidance, we are maintaining both our full year 2026 AFFO per share guidance range of $1.37 to $1.39 and our recurring cash G&A range of $16.5 million to $17.5 million. As Mark stated earlier, we now expect 2026 net investment activity to be at least $800 million. In addition, our AFFO per share guidance now includes approximately $0.035 to $0.04 per share of estimated dilution, or 2.8 million to 3.1 million shares, due to the impact of the company's outstanding forward equity calculated in accordance with the treasury stock method. This compares to the prior range of $0.05 to $0.08 per share of estimated dilution.

However, due to our deliberate decision to settle 2.4 million forward shares in the third quarter, our estimated weighted average share count for 2026 is now approximately 2 million to 2.3 million shares higher than previously anticipated, which has an estimated dilutive impact of $0.025 to $0.03 per share. In short, the positive impact to 2026 from having less dilution from the treasury stock method has been more than offset by our decision to settle more forward shares this quarter. Lastly, on October 15th, the board declared a quarterly cash dividend of $0.225 per share. The dividend will be paid on December 15th to shareholders of record as of December 1st.