Netstreit (NTST) Q3 2026 earnings call transcript

Thank you. You may begin. 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 risk 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 for 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 Mannheimer 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 Quotoran generating $246.3 million of ABR, leads to 158 tenants across 28 industries in 46 states. With just one vacant asset at Quotoran, 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 EBITDA RE 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, and 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'll 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 GNA 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 a 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 insuring until 2029.

In addition, we also raised a new $400 million seven-year delay 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 annualize adjusted EBITDA RRE was 3.7 times at quarter end, which remains comfortably below our leverage comfort zone of 4.5 to 5.5 times.

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 to $17.5 million. As Marge stated earlier, we now expect 2026 net investment activity to be at least $800 million. In addition, our AFO per share guidance now includes approximately $0.05 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 24 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 2.5 to 3 cents per share. In short the positive impact of 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 $0.22.5 per share. The dividend will be paid on December 15th to share it as a record as of December 1st.

With that, Operator, we are now over the line for questions.

Yeah. Hey, Handel, I appreciate the question. So, you know, as we think about the next five quarters, we have roughly 550 million of net investment capacity before we got to five times, which is the midpoint of our leverage comfort zone. So that's kind of how we're thinking about, you know, next year. And so if you think about that 550, you know, we do see a path towards mid-single-digit AFFO growth next year without needing to raise any equity between now and 2027 year end. And I would note that, keep in mind, that does include headwinds from refining the $175 million swap. So that's how we see the base case shaping up for 2027, which is not dissimilar to how we've guided to the forward year and prior years.

But look, if our cost of equity improves, we could obviously accelerate our net investment activity, and the sooner the better, and that would push up our potential growth to the higher into that mid-single-digit range while still ending the year, you know, actually in the low to mid-four times range. So it really just depends on kind of where our cost of equity is and, you know, how quickly we deploy the capital. But I think we're going to be judicious with the capital that we have raised. I guess, Mark, do you want to? Yeah, sure. And so, I mean, you know, I think we're in a really good position. I mean, just turning to page 19 in our investor presentation, you kind of see, you know, there's really only three other REITs, or three REITs, including us, that are in a pretty good leverage position where we have a lot of dry powder.

We've seen from a competition standpoint, you know, the private buyer really dry up. You think about the 1031 small family office buyer that is, you know, kind of borrowing from their community banks that, you know, 50 to 65% LTV at 7 plus percent interest rates. They're just not really competitive right now. So the supply and demand is shifting. We're seeing it happen real time.

And so, you know, cap rates need to move up unless interest rates move down and everybody's equity price gets a lot better really fast. So I think something's got to give, and I think it's likely going to be cap rates here in the short term. We're certainly already seeing that. And then, you know, the good news for us is we're in a really good capital position where we have capital to deploy, which is why we maintain a low leverage balance sheet.

that's great guys appreciate the color there and maybe a follow-up on cap rates uh you brought up uh i'm curious uh how much price i guess thoughts on balancing pricing power and risk management uh here as you look to optimize yield versus risk how much do you think you could push cap rates are you willing to enter new verticals or maybe i wouldn't take push risk but just how do you envision sourcing uh higher cap rates does involve new verticals or and any change that perhaps your views on certain subsectors or risk profiles. Thanks.

Yeah, thanks, Andel. So I wouldn't anticipate really any change in terms of our investment criteria. We see plenty of opportunity deals that we're chasing look a lot like what we've bought in the past. If you look at the pipeline currently, maybe the credit profiles are a little bit better. There's certainly more investment grade, investment grade profile in what's in our pipeline currently. That's, you know, when we add more, that might not look like that, so I wouldn't necessarily count on that. But that's what we've got in the pipeline currently. I don't think we're going to have to move into any other verticals or anything that will surprise investors.

It's just a matter of how long is the bid-ask going to compress. When we went back at the very end of the third quarter, we already closed most of our transactions, but we went back and were able to reprice a bunch of deals. And fortunately, the sellers were a lot more receptive this time around to those conversations. if you compare to 2023, 2024, when deals were repricing, there was just a very large bid-ask spread for a long period of time. This time, I think sellers aren't really assuming that cap rates are just going to drop back down like they did the last go-around so that we were able to really get better terms, get better pricing.

We were looking at a couple of portfolios where there were a few assets we thought we were going to likely put in our TRS and turn around and sell those quickly after buying portfolios. We were able to just remove those from the portfolios so we didn't have to take on that risk, which was helpful. So sellers are much more responsive this time around. So it feels like it could move a little bit more quickly, but we'd still like to kind of get a little bit more pricing, which is, again, why I think we're going to see fourth quarter acquisitions likely be pretty back-end loaded, which is somewhat intentional because we want to give as much time as possible to allow sellers to reprice their expectations.

Super helpful. Thank you.

Yeah. Unfortunately, we just really aren't seeing very much at all in terms of credit issues. Maybe one or two assets here or there that we're paying attention to, but out of 913 assets, that's not very much. So we don't really think there's going to be anything material there. And you kind of hit the nail on the head. We're very focused on not only the credit of our assets and the real estate of our assets, but also the unit level coverage. And so seeing our under one times bucket get cut in half is certainly helpful.

Some of that is our focus on dispositions of really kind of trying to cull some of those assets. And so you've seen some pretty good movement both from the assets that we own improving as well as our focus on the disposition side of really trying to keep that very healthy. And I think if you compare our unit level migration to others, it's really been very strong.

Yeah, I think the opportunity set remains very strong. So the supply is there every bit as much as it's been so far this year, maybe even a little bit better. And then the demand side is weakened substantially. So we just really think it just needs to reprice a little bit more for us to get aggressive. You know, we've got dry powder. We think that's a great asset to have in this environment where most others do not have that. So we want to take advantage of it and not just chase every deal. So we really want to maximize the pricing on every opportunity that we get.

And so, yeah, I mean, you know, I think, you know, going into next year, the opportunity set certainly won't be holding us back. it's really going to come down to whether assets reprice enough or if cost of capital improves.

Got it. Okay. I'll hold it there. Thank you.

Yeah, no, I think it's a good question. But, you know, the $150 million, you know, we did say at least $800 million. So, you know, if things don't really change all that much, you know, then it'll be probably, you know, right around $800 million. If things get better, you know, we're, you know, ready and able to, you know, to ramp that up. And so the team's really shown a lot of ability to ramp up when opportunities are there, as well as show a lot of discipline when things maybe aren't there as much. And so right now the pricing isn't exactly where we want it to be, but if that improves, we certainly feel like the opportunities are there, and we'd certainly be able to do a lot more than $150, which is why we've kind of just left that as an open-ended, you know, above $800 million.

I mean, I'd say really on a little bit where I think people have, you've seen some announcements of some of the store openings being a little bit more conservative and operators being a little bit more selective in terms of what real estate they're willing to go in. But what's working continues to work, even if margins have compressed a little bit with a lot of retailers.

And so, fortunately, that's really where we have focused on investing in the necessity service and deep discount type sectors, where they just remain defensive and continue to do well, and they continue to expand, which is why we continue to see just a lot of opportunity for acquisitions, whether it be new developments or just buying existing assets.

Yeah, we hope they normalize as well, Nick. Look, as we sit here today, we think our spreads are about 60 to 70 basis points. And what we've historically said is that we really need to be north of 100. So, you know, we don't have any, you know, near-term need to raise equity. You don't have to raise equity at all next year if we so choose. So I think we need to be above kind of 100 basis points and feel comfortable, you know, we can stay at those levels. But right now, it's just not really a concern of ours given the capacity, you know, that we have.

Yeah, I think we're optimistic just because the conversations that we had about revisiting pricing on deals that we had in the third quarter were very constructive, where I don't really feel like they were that constructive back in 2023. And so I think people kind of get it a little bit more this time. and there's not a knee-jerk reaction that things are going to just kind of swing back to the way that they were. So it does feel like it's going to be quicker. How much quicker, you know, I don't think we really know. So that's why we're just kind of putting in some conservatism in terms of how we're thinking about deploying capital in the fourth quarter.

Yeah, I mean, it typically will depend on their level of sophistication and kind of understanding, you know, that there's probably not a buyer right around the corner that's just going to step into our place. And then the other big piece is going to be how much pressure is on that seller to transact. You know, if they, you know, have debt coming due and it's a portfolio and they say, okay, if I have to, you know, I have to do something and redoing the debt is just going to be really painful, I'd rather just sell and maybe, you know, sell at, you know, 30, 40 basis points higher.

Yeah, Greg, it's obviously the latter. So we definitely need to, we definitely factor in where we are today versus kind of where cap rates are today. So as we think about settlement of equity, you know, I think it'll be light over the next, you know, two quarters, could be, and then probably pick back up in the back half of 2027. But as far as new equity is concerned, you know, we're just, that's just not in the model at this point in time, given where we are. But, you know, we're optimistic that, you know, people will see the value in our shares as well as, frankly, the net lease space in general. So, you know, we're hopeful that we can be back to issuing equity at some point in time next year or this year.

Yeah, I appreciate the question, Michael. Look, it certainly puts us in a more favorable light with the rating agencies. you know, they really look at leverage without the impact of the Ford. And so you really want to be below six and a half times without the Ford. And so at five times, we're currently below that. So we're optimistic that we can continue to have constructive dialogue with those parties when and if we decide to get additional ratings probably sometime next year.

And I think the first part of your question, why is now the time? I mean, look, we don't really view beating earnings on having less TSM dilution than we expected as a clean beat or as a good way to guide higher. So, you know, in order to kind of blunt the positive impact that came from that, we decided to settle more shares, which, you know, obviously has the positive impact that you referenced in terms of the rate agencies. It obviously increases our float. it also allowed us to delay the pulldown of the seven-year term loan. And kind of given where swap rates have moved in the last week or two, hopefully they continue to move down and that will allow us to swap at better than expected rates versus what we have in the model today.

So it did afford us a lot of advantages while not impacting earnings at all relative to our prior guidance.

Yeah, thanks, Mike. We'll continue to do what we've been doing in those sectors. In fact, I think you can expect some more sales in both of those sectors in the fourth quarter. And then we've always been opportunistic. So in the event that there is somebody that wants to pay aggressive cap rates for some of our assets and we can redeploy that capital into, you know, better assets at better pricing, We're always interested in doing that. We've been asked a few times about the bonus appreciation buyer. We certainly have a lot of convenience stores and some interested parties, so there's always the possibility that we go down that route. But, yeah, we're going to be opportunistic, and I think historically we've probably been the most active on the disposition side, whether it be focused on concentrations or just improving the quality of the portfolio, which ultimately is why I think we've got the lowest credit loss in the space at three basis points per year.

Thanks.

Yeah, that's a good question. So I'd say most of the improvement came, quite frankly, from some sales. And then overall, I would say the coverages for the existing portfolio slightly improved, but was really just pretty stable. And then from new investments, that was kind of more in the kind of the three-and-a-half times coverage. So that actually brought it down a little bit, but certainly feel comfortable with where those came in.

Yes. I mean, that was kind of the big one is we look at a portfolio. There's a book of every portfolio that we look to buy. Even if we like all the assets, there's certainly some better than others. And so in the event that we able to cull down and really kind of chop off the tail of the weaker assets at acquisition you know that obviously you know a big plus to us I mean, I think in sale-eat specs, you might be able to get better escalators and some other, you know, maybe longer terms, things like that. But, yeah, everything's on the table. And, fortunately, we've had very constructive conversations with all sellers.

Yeah, it's a little bit difficult to know where things are going to land in the fourth quarter. you know, our expectations are certainly, you know, much higher, and we'll kind of see what we're able to extract. But in terms of the third quarter, most of that was really at the very end of the quarter, because you really think about when things moved. I mean, the 10-year at the beginning of the quarter was, you know, less than four and a half, and moved up to, you know, I think five, three at the end of the quarter, and most of that was really in the last three weeks, which you also kind of saw most of that move in our stock price and other stock prices in the space was really in that last three weeks.

So it was really, you know, we had closed on most of the transactions at that point in time where we're, you know, in the closing process. So, you know, we were able to revisit pricing on 10 different deals. And, you know, we're able to move pricing on average about 30 basis points on those transactions. But it just didn't really move the needle that much for the entire quarter. It did take it from a 7.3 to a 7.4 overall for the quarter. but it was, you know, you think about it, it was really very late stages of the quarter when things really started to move and we weren't willing to, you know, sacrifice, you know, relationships as well as have a ton of dead deal costs, which we didn't think was really needed.

No, we did not.

Yeah, I mean, it's not necessarily driven by sector. It's driven by seller. And, you know, again, how sophisticated is that seller? Do they kind of really understand where you're coming from and really what's going on in the market and then how much pressure is on them to transact? And so I think the people that maybe need to kind of see some comps at higher cap rates, that's going to take a little bit more time, but it's really pretty broad across all sectors. It's really driven by who the seller is and what position that they're in.

Thanks, Linda.

Yeah, it's an interesting question, Alec, because, you know, we kind of think that the longer this disruption lasts, you know, there's just going to be, you know, kind of some one-off opportunities. We haven't really seen much on the lending side currently that's that attractive to us beyond what's normal course for us. But we do think there's the possibility that that could pop up.

Thanks, Alec.

Yeah, I mean, I think we'd consider anything, especially as some of those have paid off or converted into fee ownership. You know, our loan book is certainly a lot smaller. So I think we have a little bit more capacity there. And last time, it really was, you know, some people that had some financing commitments that fell through. So I think that'll probably take some time, maybe a quarter or two, if that's going to happen again, or if lenders want to kind of reprice the interest rates on deals if they burn through some rate locks or things like that. I think that's certainly possible. It's just very difficult to predict whether that happens again or not.

Thanks, Yana.

Yeah, I mean, I think in most cases, the loans, as they repay, they're replaced with a new development and a new loan. And so, as those assets are sold. And so, I would think of it just kind of, you know, standing in place, you know, with most of those. There's a couple of chunkier deals that may pay off, but those are at much lower interest rates, and that would be a great source of capital.

Yeah, we never take into effect where we've raised equity in the past when we think about putting new capital to work. It's really where can we raise it today and what does that outlook look like and what is the spread on that cost of capital? it's where we raise equity passes is not relevant to us at all.

Well, I mean, there's a lot of different factors. So, equities is not one of them, but I think it would be, you know, where we refry the $177 million swap in January, what type of credit losses we recognize in the quarter, where our cash G&A shapes up relative to this year.

The timing of investments would also factor into that. And then where we're able to eventually pull down the seven-year term loan and swap that. Those are all different. Those are all the factors that would go into the growth range that we gave. But that growth range is based upon, again, $550 million of net investment capacity being deployed between now and the end of 2027.

I mean, you think about our average escalator growing at kind of, you know, a little bit around 1%, give or take, you know, 10 to 20 basis points depending upon, you know, how, you know, what, you know, least bumps we have.

Yeah, I mean, it's very opportunistic and really escalates massively at the very end of the year. So a little bit tough to predict how much we do, if any. I mean, I imagine we'll do some there. But yeah, I mean, we had a lot of people coming to us, you know, literally in, you know, early to mid-December last year, frantically wanting to figure out how to, you know, get their hands on some of our C-Star assets. And so I would expect this to continue to be the same this year, kind of running out of, you know, the last couple of years of this administration. I think there's a fear that maybe that goes away at some point in time.

But yeah, it's, you know, the tax planning seems to really, you know, really escalate quite a bit in the last few weeks of the year.

We understand which of our assets would qualify for that tax treatment. And so, if somebody approaches us, we're ready to go.

Yeah. Yeah. There are certain criteria beyond just what sector that they're in, but it's primarily just convenience store assets within our portfolio.

Thanks, Jamie.

Well, thanks, everybody, for your interest in the company today. We look forward to seeing many of you at the upcoming conference schedule. Take care.