Ladies and gentlemen, greetings, and welcome to the NETSTREIT Corp Fourth Quarter 2022 Earnings Conference Call. At this time, all participant lines 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 you to Randy Haugh, Capital Markets. Please go ahead.
We thank you for joining us for NETSTREIT's Fourth Quarter and Full- Year 2022 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, 2022, and our other SEC filings.
All forward-looking statements are made as of the date hereof. 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, GAAP reconciliations, 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 Interim Chief Financial Officer, Lori Wittman. They will make some prepared remarks. Then we will open the call for your questions. Now I'll turn the call over to Mark, Mark.
Good morning, everyone, and welcome to our year-end 2022 earnings conference call. We are pleased to share with you strong results NETSTREIT achieved in 2022, despite an increasingly difficult macroeconomic backdrop. High inflation, rising interest rates, and prevailing recession concerns did not prevent us from executing our growth strategy. Before I go any further, I would like to say how proud I am of our team's commitment, determination, and ability to be nimble and creative during such macroeconomic volatility. Despite this backdrop, we have had a very active year, locking in significant portions of our capital structure by accessing the capital markets in a prudent manner when markets were supportive.
In 2022, we raised over $1 billion of capital, providing the means for us to continue to grow through acquisitions and developments that meet our quality and return thresholds, which gives us confidence as we look ahead to 2023. Lori will discuss our capital raising activity in more detail later on the call. During the quarter, we completed approximately $104.1 million of gross investments, bringing the year-end total to $507 million. Investments in the quarter, including one completed development, had an average yield of 6.9%. Excluding development, acquisitions completed in the quarter had an initial cash cap rate of 7% and had a weighted average remaining lease term of 11.2 years. Notably, over 97% of these acquisitions were with investment grade and investment grade profile tenants.
Importantly, our growth supported our ability to deliver best-in-class AFFO per share growth of 23.4% during 2022. As we previously indicated, investment activity was lighter in the fourth quarter than earlier in the year, as we took a more prudent approach to capital deployment due to the disconnect between capital markets and property markets created by the rapid rise in interest rates in 2022. We have and will continue to be disciplined on asset pricing and capital raising as our team continues to demonstrate its exceptional ability to find acquisitions from a variety of sources at cap rates above those found in the broader market without compromising on credit and real estate quality. It is important to highlight that we have proven that we can be very nimble and creative in sourcing opportunities through non-traditional channels.
For example, we are looking at providing capital to tenants, developers, and other landlords in ways that take advantage of market dislocations, resulting in outsized risk-adjusted returns. While the overall number of transactions industry-wide is likely to be significantly lower in 2023, similar to the back half of 2022, we are also seeing less competition and see a vacuum where other types of typically low yielding capital providers have historically operated. While our main focus remains on well-priced, high quality acquisitions, we will also on occasion step in as a senior secured lender. Loans will be backed by high quality investment grade properties at safe LTVs and at yields considerably higher than the cap rates required to acquire the assets. This multi-pronged approach has led to a very strong pipeline of opportunities at very attractive risk-adjusted returns.
Our discipline, creativity, and excellence in execution make us confident that we can continue to create meaningful shareholder value for the foreseeable future. Further, we feel extremely confident in the stability of our portfolio. We have maintained proper risk management guardrails, including a stringent underwriting process and continuous credit monitoring. This has enabled us to curate a base of high quality properties leased to strong credit tenants in stable industries best positioned to perform through any cycle. We demonstrated the success of this strategy and diligent execution through COVID, when our portfolio outperformed all publicly traded net lease companies, resulting in 100% rent collections from the time that we went public at the height of the pandemic.
This rate of collection still continues today. At year end 2022, our portfolio is comprised of 427 leases with 80 tenants, contributing approximately $99 million of annualized base rent. The portfolio had a weighted average lease term remaining of 9.5 years, with approximately 80% of ABR represented by tenants with investment grade ratings or investment grade profiles. The portfolio is 100% occupied. A key part of our execution is selling assets where the risk-adjusted value no longer meets our criteria. In 2022, we accretively sold 7 properties for over $25 million. Turning to our lease expiration schedule, we have no lease expirations in 2023, and only 0.3% of total ABR expires in 2024.
As we look to 2023 and beyond, I want to reaffirm our commitment to our growth strategy as we continue to focus on execution and scaling our high quality, best in class portfolio. We are seeing no shortage of opportunities and believe we will continue to prove our team's ability to source the best risk-adjusted pricing of net lease assets in any market environment, as we have over the past three years. Before closing my remarks, I wanted to provide a brief update on our CFO search. We have continued to progress in our search for a permanent CFO. We have a number of strong candidates and are focused on finding the right person. With that, I'll turn the call over to Lori to go over our fourth quarter financial results and 2023 guidance.
Thank you, Mark, and thank you all for joining us on today's call. In our earnings release published yesterday after market close, we reported net income of $0.05, core FFO of $0.28, and AFFO of $0.29 per diluted share for the fourth quarter. For the full-year of 2022, we reported net income of $0.16, core FFO of $1.10, and AFFO of $1.16 per diluted share. As Mark said earlier, AFFO growth was 23.4% year-over-year. The portfolio's annualized base rent grew to over $99 million in the fourth quarter, up from $71.2 million at the end of 2021, a 39% increase from the prior year.
Interest expense increased to $3.5 million in the fourth quarter of 2022, and $9.2 million for the full-year, up from $1 million and $3.7 million, respectively, in the prior year, due to higher borrowing costs and increased debt balances. G&A increased to $5.4 million in the fourth quarter and $19.1 million for the year, compared to $3.9 million and $14.8 million, respectively, in the prior year, primarily due to the impacts of fully building out the team and the platform. At year-end, our balance sheet had total debt of $496.5 million, with a weighted average term of approximately 3.7 years and a contractual interest rate, including the impact of fixed rate swaps of 3.35%.
Our net debt to annualized Adjusted EBITDA after giving consideration to the settlement of shares pursuant to the forward sales agreements executed during the year was 3.4 times, well below our targeted leverage range of 4.5-5.5 times. Excluding our forward shares, our net debt to annualized Adjusted EBITDA was 5 x. Moving on to our capital markets activity, as Mark mentioned in his opening comments, we had a very active year as we strengthened and fortified our balance sheet through a series of financing activities. In January of 2022, we entered a forward sale agreement of 10.35 million shares of common stock at a public offering price of $22.25 per share, receiving total net proceeds of $216 million. These shares were all settled in 2022.
In August of 2022, we entered into another forward sale agreement of 10.35 million shares of common stock at a public offering price of $20.20 per share. In 2022, we settled 3 million shares, receiving net proceeds of $57 million. At year-end, we had 7.4 million unsettled shares remaining. Also in August, we closed on a $600 million sustainability-linked senior unsecured credit facility, which consisted of a $400 million senior unsecured revolving credit facility and a new $200 million senior unsecured term loan with an additional $400 million accordion. The revolver will mature in August of 2026, with the option to extend for an additional year, while the term loan will mature in February of 2028.
The term loan is fully hedged at an all-in rate of 3.88%. The company's existing $175 million term loan, which at year-end was fully hedged at an all-in LIBOR-based rate of 1.36%, has now been swapped to an all-in SOFR-based rate at 1.37% and matures in December 2024. All of our term debt is now fixed at an average all-in fixed rate of 2.74%. During the year, through our ATM program, we issued approximately 0.3 million shares of common stock at a weighted average offering price of $21.02 per share for net proceeds of approximately $5.7 million.
We believe this capital markets activity further demonstrates our reputation as a prudent steward of capital and sets us up with a strong liquidity and balance sheet position that will last well into 2023. Regarding our dividend, on February 21st, the board declared a $0.20 regular quarterly cash dividend to be payable on March 30th to shareholders of record as of March 15th. Based on the dividend amount, our AFFO payout ratio for the fourth quarter was 69%.
Which is well within our previously stated guidelines of two-thirds to three-quarters of AFFO. Turning to guidance for 2023, we expect AFFO per share will be in the range of $1.17-$1.23 per share. This range assumes acquisition activity included completed development and net of dispositions to be at least $400 million in 2023. Prudence exhibited in 2022, we believe we are extremely well positioned entering 2023. At year-end, we had almost $500 million of available liquidity, a conservative level of debt, of which 77% was fixed rate, and an acquisition team that has consistently proven its ability to source and close high-quality assets at yields demonstratively better than our competition.
We are in position to continue to execute our growth strategy opportunistically and accretively as we drive shareholder value into the future. With that, we will now open the line for questions. Operator?
Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would 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 would 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. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from the line of Nick Joseph from Citi. Please go ahead.
Thanks. maybe just starting on the transaction marketing, your assumptions embedded in guidance. You'd mentioned, the lighter activity in the fourth quarter. As you, enter 2023, maybe you can talk on the pipeline that you have today, and then what guidance is assuming, in terms of timing and cap rates.
Yeah. you know, it's interesting. I mean, I'd say we're still in a world of pretty bifurcated sellers. you know, the larger group really doesn't have a need to sell, you know, at this point, which we kind of started to really see at the back half of last year. They're really kind of waiting to maybe see the Fed pivot or cap rates to come back down to 2021, which, you know, we don't really think is a likely scenario in the short term. The second bucket really being a smaller group of sellers, that have some pressure to transact. you know, we took a more opportunistic approach back in October, and I'd say that the, you know, the bid-ask spread is still there, but it has condensed a bit.
We've started to see some slow movement of, you know, some sellers moving from that first bucket into the second. It's allowed us to really assess the needs of the different types of property owners and use our team's creativity to source acquisitions. You know, pretty quickly after our earnings call back, you know, last October, we did start to see that shift, which is why I think we probably acquired a little bit more than what we thought we were going to at that point in time. We're really seeing that in 2023 as well, which gives us a lot of confidence that we're gonna be able to find some very attractive opportunities, you know, here in the first and second quarter.
Thanks. For guidance, is it kind of just across the board that at least $400 million, or is it more back half loaded?
Yeah, I mean, we're kind of thinking about it, you know, spread evenly, you know, throughout the year. We're feeling, you know, very strong about what we're seeing currently, that we should be able to close. It's hard to say what we'll close in March and what we'll close in April. The first and second quarter look pretty strong.
Thanks. You'd mentioned maybe stepping into some loans. You know, what's the opportunity set there? How are you thinking about maybe the different risk profile, and how do you underwrite that relative to acquisitions?
Yeah. It, you know, it's really interesting. I mean, when you think about, you know, the different, you know, types of capital that have exited, the marketplace, you know, whether they be lenders, or even, you know, some buyers, you know, out in the marketplace. We've been able to, you know, work with our network and find some opportunities where, you know, there could be like a developer that has the view that the 1031 market is going to come back, and they really wanna take advantage of that. We've taken the approach of we'll loan you less than 100% LTV.
Call it, you know, 60%, 70%, 80%, you know, loan to value, sweep all of the rent, so that we're coming in at a safer position because we're under 100% LTV, getting an outsized yield in the short term while they wait and see if the market comes back. If the market comes back, you know, we may have these loans outstanding a little bit shorter. If it doesn't come back as quickly as they think, we might have these loans outstanding for a little bit longer or potentially take those properties at, you know, much more attractive cap rates.
Great. Thank you very much.
Thanks, Nick.
Thank you. Our next question comes from the line of Josh Dennerlein from Bank of America. Please go ahead.
Hey, thanks for the time, guys. I just wanted to follow up on the opening remarks on the CFO search. I guess, how far along are you in the process, and is there any kind of color you can provide on maybe, the timing of announcement of permanent CFO?
Yeah. I mean, I'll probably stop short of giving you timing of when that announcement will occur 'cause we're not, you know, we haven't offered anybody yet. We, you know, pretty quickly hired a headhunter back in November. You know, spent a lot of time going through exactly what we needed and what we wanted in a candidate and then hit the ground running in January. I've talked to a very large number of potential candidates and have narrowed that field considerably and are making pretty good progress there. Are, you know, we're very optimistic about the candidates that we've got left. I'll... Lori, I don't know if you've got anything to add there.
I think, you know, the good news is it's a very desirable job and we have some great folks who are interested in the job and, you know, moving here and being in Dallas. We're excited about what the future holds for the new CFO.
Thanks for that. On the acquisition side, just kind of curious if you've seen any changes in the competition for assets that you're going after. Is it more or less, new players, less players? Just kind of curious on the backdrop.
Yeah. No, it's a, it's a, it's a great question. I mean, I think, you know, what we just covered with, you know, sellers kind of holding out, you know, that being the larger group, I think you've seen a pretty large drop in the number of transactions in the back half of last year. I expect that to continue into 2023. Now, what gives us comfort is exactly what you're hitting on, which is there's a pretty, you know, big drop off in the competition, whether that be kind of leveraged private equity buyers.
You know, the 1031, you know, market is significantly smaller than it was, which has allowed us to be a little bit more constructive, you know, working with, you know, various groups that we've tried to build relationships with over the past several years, and has resulted in actually a larger opportunity set for us.
Great. Thanks for the time.
Thank you. Our next question comes from the line of Ki Bin Kim from Truist Securities. Please go ahead.
Thanks. Just to follow up on that previous line of questioning, can you just comment further on the types of tenants and real estate that was acquired? Curious if the similar basket of assets that you've historically been acquiring at, if those cap rates are rising or if you're kind of slightly targeting a different basket of assets. I ask this because, even within IG or IG-like assets, I'm guessing there's a spectrum of quality and risk. Just trying to better understand where your sweet spot is and if there's been any kind of incremental shifts.
Nothing really to speak of as it relates to any real shift. I mean, we've got pretty clear criteria that we look for on the real estate side as well as the credit side. I know the credit side kind of gets a little bit more of the focus, but when you look at what we acquired, clearly the credit quality and lease term of what we bought during the quarter is near the top of what we've acquired in the past. Then, you know, I think at some point, you know, we're gonna drill down a little bit more on our investment grade profile bucket, just to kind of share a little bit more information because I think when you compare the metrics of that bucket, that actually compares quite favorably to our investment grade bucket.
I think that could, you know, give a little bit more clarity as to the types of credits within the portfolio. As it relates to what we acquired in the quarter, I mean, I'll give you a few examples. You know, we bought our first DICK'S Sporting Goods just outside of Pittsburgh, Pennsylvania. DICK'S agreed to extend that property out beyond 10 years. We added our first REI, another investment grade profile tenant in Tysons, Virginia. You know, another Ross Dress for Less, added another Kroger, and we did a sale leaseback with an investment grade profile grocer that was already in the portfolio, and they agreed to add that to a master lease that we have with that tenant.
As you can see, there's a, you know, a little bit of a pickup, with the Dollar Generals, which, you know, I think you'll probably see, in several other REITs as, you know, the merchant developers are really starting to look more to the REITs rather than the 1031 market, because the 1031 market, is much shallower than it's been in the past.
In terms of the, your comments about making loans possibly, can you just provide some more color around that? If you have make-whole provisions and what that kind of total scope or basket of the investable universe looks like for you?
Yeah. No, yeah, that's a good point. you know, we do have make-whole provisions, you know, in the loan so that we don't just get completely financed out. In the event that we are providing capital to a developer that thinks the 1031 market is gonna come back more quickly than we do, we do allow them to sell the properties without a penalty. If we get refinanced out, then there is, you know, kind of that make-whole yield maintenance, provision within the loans. That being said, I don't foresee that being a giant portion of what we're doing.
It is, you know, something that we think is pretty attractive right now, where we can come in at a lower than 100% LTV, which is essentially what, you know, what you're doing when you're buying a property, and getting an enhanced yield.
Okay, thank you.
Thanks, Kim.
Thank you. Our next question comes from the line of Greg McGinniss from Scotiabank. Please go ahead.
Hey, good morning.
Good morning.
Could you just talk a bit more about the relationships that you're building with these merch-merchant developers now that the 1031 market has cooled a bit? Does the pullback in net acquisitions versus 2022 reflect just fewer opportunities, more complicated fundraising these days? Or any details you can provide there would be appreciated.
Yeah, sure. I mean, I think back in October, you know, we just weren't really seeing a lot of great opportunities at pricing that made a lot of sense. you know, still acquiring kind of net $90 million or so, in the fourth quarter and getting above the $480 million, which was the guidance that we pulled, you know, during that call. you know, shows that it did come back, you know, enough for us to, you know, be able to deploy that capital. We're seeing, you know, a better backdrop now, and more sellers, that are willing to kind of, you know, adjust their pricing to current market conditions.
As it relates to, you know, merchant developers, you know, we've, you know, I think done a lot of the legwork over the past, you know, few years trying to build those relationships with all those different developers. They've just chosen to focus on the 1031 market where the pricing has been significantly more aggressive. Now that that's gone, I think all of that legwork has really paid off, where we've got a, you know, really good line of communication with all of the major developers and even a lot of the smaller regional developers that focus on the tenants that we're trying to grow with.
Okay, thanks. Appreciate that. Just the second one from me is kind of following up on the last question that was just asked in terms of, you know, the investment-grade exposure, which has been kind of lowering quarter-over-quarter as you go towards more investment grade-like acquisitions. You know, how much of that is diversifying the types of tenants that you can be acquiring versus yields that you couldn't achieve that made sense with purely investment-grade tenants?
Yeah, no, I think we've just, you know, we've, you know, had a concerted effort to go out and try to find more investment grade profile tenants. They're a little bit off of the radar of most of the other REITs and institutional buyers. We feel like we're actually taking in a lot of cases, less risk with those tenants, and in some cases being able to get a little bit more yield. Some of those have been more apt to look for sale leaseback financing, which could be, you know, I think you'll probably see more sale leasebacks done across the space from, you know, maybe some groups that haven't done as many sale leasebacks, you know, including us, over time.
It's really just, you know, it's not a, you know, a conscious effort to increase or decrease our investment grade, you know, concentrations. It's really just a byproduct of us trying to find the, you know, the best risk-adjusted returns that we can. That may go up, that may go down. I think you're likely to see that, you know, stay somewhere in kind of the 60% to 70% range like it has since we went public.
Thanks for the color.
Thank you. Our next question comes from the line of Wes Golladay from Baird. Please go ahead.
Hey. Good morning, everyone. Just a question on the merchant builder deal flow that you're seeing. Is this gonna be like a one-time thing where you clear out their inventory or are they gonna continue building and it's gonna be more programmatic with you? I'm just trying to get a sense of how sustainable this is.
You know, at least if we have the current dynamics of the 1031 market not being there, I would expect it to be programmatic with, you know, not only us, I would expect other REITs to have a similar answer to that, because they continue to build. You've seen the growth plans of various different retailers that you see in our top 20. They're continually looking for ways to continue growing. They're just, you know, they're just gonna have to have their developers focus on institutional buyers a little bit more than the 1031 market like they have in the past.
Okay. Do you have a watch list at this point? Do you embed any bad debt in your guidance? Can you also clarify what is the cash G&A assumption for this year?
We do assume some small net bad debt. I think the way to think about it is that we look at what our reimbursable are, you know, CAM reimbursables versus our reimbursable expenses, as well as non-recoverable expenses and bad debt. That is, you know, historically been and continues to be what we project to be less than 2%. For G&A, the way I would think about that is that, you know, we're pretty much fully staffed now, so our cash G&A is gonna rise more consistently with what you think about, you know, in terms of salary increases, benefits. You know, this year we have the difference of the full-year of a fully built-out team versus last year, where we were averaging into that full build-out. That's how I think about it.
You know, in a little bit higher than inflation.
Okay, thanks.
Thank you.
Thank you. Our next question comes from the line of Linda Tsai from Jefferies. Please go ahead.
Hi. Good morning. For the Dollar General stores purchased, were any purchased on the secondary market versus being purchased from the distressed merchant builders? How would you determine which offer the greater value?
Yeah. There were a few that we acquired, really in the third-party market. Those were some shorter-term leases that we got extended, you know, by working with the tenant. There were probably four or five of those, more on the Family Dollar side. The ones that we acquired from merchant developers, that was Dollar Generals, and so that was probably 75%, 80% of the dollar stores that we acquired in the quarter.
On the merchant developers, I think you said that there are like four or five that do a lot of the construction for Dollar General. Are they the same four or five that would do building across for other major retailers, too? I am just trying to get a sense of how fragmented the market is for this pipeline.
Yeah, I mean, there are a few kind of the smaller ones that are a little bit, you know, a little bit smaller than the bigger four or five that focus exclusively on Dollar General. There are most of the larger developers will develop Tractor Supplies and some of the other tenants that, you know, that we're trying to grow with. It's a little bit of a mixed bag.
Thanks. Then just one last one. Does the $400 million in acquisitions tie to the low end of earnings guidance?
You know, I think you can think about it more as being in the midpoint, Linda, is how I'd think about it.
Okay. Thank you.
Sure. Thank you.
Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. Now I would like to turn the conference over to Mark Manheimer, Chief Executive Officer, for closing comments.
Thank you, operator, and thanks everybody for joining us today. Look forward to seeing you all in the coming weeks at the upcoming conferences. Thanks a lot.
The conference of NETSTREIT Corp. has now concluded. Thank you for your participation. You may now disconnect your lines.