Netstreit Corp (NTST) 2022 Q3 法說會逐字稿

Greetings, and welcome to the NETSTREIT Corp. Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.(Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Amy Eng, Investor Relations Manager. Ma'am, you may begin your presentation.

We thank you for joining us for NETSTREIT's Third Quarter 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 31, 2021, and our other SEC filings. All forward-looking statements are made as of the date hereof, and NETSTREIT assumes no obligation to update any forward-looking statements in the future.

In addition, certain financial information presented on this call includes non-GAAP financial measures. Please refer to our earnings release and mental 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 Chief Financial Officer, Andrew Blocher. They will make some prepared remarks, and then we will open the call for your questions. Now I'll turn the call over to Mark. Mark?

Good morning, everyone, and welcome to our third-quarter 2022 earnings conference call. We are pleased to share that NETSTREIT continued to perform very well in the third quarter despite high inflation, rising interest rates, and macroeconomic uncertainty. With the diligent planning and strong execution, we believe we can continue to create value throughout all stages of this economic cycle. During the quarter, we completed $130 million of net investment activity, closed on both our second forward equity offering of 10.35 million shares and our $600 million sustainability-linked credit facility, locking in attractively priced capital before the latest interest rate hikes and heightened market volatility. As stated in last night's earnings release, given the nature of today's environment and anticipated pricing adjustments in net lease assets, reflecting the disconnect between the current capital markets and property markets, we believe it is prudent to take a more opportunistic approach to capital deployment.

While we are pleased with our investment activity to date and are seeing no shortage of opportunities, rising marginal borrowing costs and increased equity costs across the sector make it prudent for us to eliminate our quantitative investment targets. At the same time, the positive investment decisions we have made, the limited operating risk associated with our current tenant lineup, and our ability to lock in significant portions of our capital structure in the third quarter allow us to narrow our AFFO per share guidance range to $1.15 to $1.17 per share, resulting in a small increase in our midpoint of expectations. Given the current economic uncertainty, our portfolio of high-quality assets is best positioned to weather the road ahead. with over 88% of our portfolio in defensive industries and partnering with retailers that have strong access to capital and experienced management teams, we believe our portfolio will continue to perform well during a potential downturn in the retail environment.

Due to our diligent underwriting process and continued credit monitoring, we are confident in our tenant's ability to meet their rental obligations. As a reminder, we have collected 100% of our rent since our IPO in 2020 and believe we have put the proper risk management guardrails in place to see this trend continue. Now moving on to our third quarter investment activity. We acquired 26 properties for $131.3 million at a weighted average initial cash capitalization rate of 6.6% and a weighted average lease term of 11.8 years. As part of an acquisition of a Winn-Dixie property, we assumed our first mortgage loan payable of $8.6 million with a fixed rate of 4.5% that matures in November 2027. This acquisition provides strong store sales and profitability, dense infill real estate, and attractive pricing.

Also, in the quarter, we disposed of a bank property for $1.7 million at a 5.5% cap rate, further reducing our banking exposure. Finally, we provided $4.7 million of funding to support 6 ongoing development projects. At quarter end, we have invested $17.5 million to date in these projects. As with the previous quarter, we remain comfortable with the performance of our existing development projects but remain cautious in committing to new developments during a time of increased costs for construction and labor and heightened economic uncertainty. At quarter end, our portfolio was comprised of 406 properties with 787 tenants contributing approximately $92.7 million of the annualized base rent.

The portfolio has a weighted average lease term remaining of 9.6 years, with approximately 79% of AVR represented by tenants with an investment-grade rating or investment-grade profile. The portfolio remains 100% occupied. We added 2 new high-quality grocer tenants, Festival Foods in Dollar Fresh and a discount retailer, T.J.Maxx, in the quarter. During the quarter, BigLot's credit changed due to their second quarter results, with reported margin pressures, therefore, no longer meeting our investment-grade profile definition. That being said, we believe the company has a strong balance sheet, and we remain confident in their performance. To conclude, despite the uncertain macro backdrop, we remain confident that our cycle-tested portfolio and experienced team will continue to maximize shareholder value. With that, I'll turn the call over to Andrew to go over our third-quarter financial results and 2022 guidance.

Thank you, Mark, and once again, thank you all for joining us on today's call. In our earnings release published yesterday after market close, we reported a net income of $0.03, core FFO of $0.28, and AFFO of $0.30 per diluted share for the third quarter. The portfolio's annualized base rent grew to over $92 million in the third quarter, up 55% from September 30, 2021. Interest expense increased to $3 million from $895,000 in the third quarter of 2021 due to higher borrowing costs and increased debt balances. G&A increased to $4.6 million in the third quarter compared to $3.8 million from third quarter 2021, primarily due to building out our team to 32 employees. As Mark stated in his opening comments, we had an active third quarter with regards to our financing activities, opportunistically completing over $800 million of capital raising and refinancing. We completed a forward equity offering for 10.35 million shares in August. Similar to our last 2 offerings, the deal was upsized, and underwriters exercised the shoe, demonstrating the continued support from investors on our strategy and execution.

Following our equity deal, we completed a new $600 million sustainability-linked credit facility. The new credit facility includes a $400 million revolver that matures in August 2026, subject to an extension option, and replaces our previous $250 million revolver. The credit facility also features a new $200 million 5.5-year term loan set to mature in February 2028, which is fully hedged at 3.88%. If we were to hedge the term loan today, the all-in rate would be above 5%. As part of the recast, we made some notable enhancements to our credit facility. Our cap rate utilized for valuing our asset base decreased from 7.25% to 6.5%. Covenants have been adjusted to offer greater flexibility for our various approaches to acquisitions. And we add an investment-grade pricing grid to reflect continued progress to becoming an investment-grade unsecured borrower. In addition, we would like to highlight that in a lending environment where banks are being significantly more selective, Net Street was able to secure 3 new banking relationships, giving further credence to our strategy and growth initiatives.

Finally, we included an innovative sustainability feature as part of our credit facility, which allows us to benefit if certain key performance indicators are met. If year-over-year improvements are made to the percentage of our annualized base rent from tenants with side-based target initiative commitments as determined by our sustainability agent, we can see up to a 2.5 basis point reduction in pricing. The structure of this KPI is an innovative approach for a retail net lease landlord to participate in the reduction of greenhouse gas emissions as determined by science-based target initiatives and hopefully empowers more of our tenants to make reduction commitments as well. On September 29, we settled all 4.5 million remaining shares from the January forward equity offering, receiving net proceeds of $93.5 million. We did not settle any of the 10.35 million shares from our August forward equity offering and did not make any sales under our ATM program during the quarter. As a result of our latest financing activities, we've raised over $1 billion of capital this year and increased our liquidity position, allowing us to remain opportunistic in the current environment.

At quarter end, we had total debt of $413.5 million outstanding, of which $375 million is from our fully hedged term loans with an additional $30 million on our revolving line of credit and $8.5 million from the fixed rate secured mortgage we assumed as part of the Winn-Dixie acquisition. At September 30, 2022, our net debt to annualized adjusted EBITDA ratio was 2.5x after giving consideration to the remaining shares outstanding under the forward sales agreement, well below our target range of 4.5 to 5.5x, and 93% of our debt is fixed. With regard to our dividend, earlier this week, the Board declared a $0.20 regular quarterly cash dividend to be payable on December 15 to shareholders of record as of December 1. Our AFFO payout ratio for the quarter was 67%. As stated in our earnings release, we're narrowing our AFFO per share guidance range to $1.15 to $1.17 per share. The new guidance range includes the following assumptions. Cash G&A is expected to remain in the range of $14.5 million to $15 million, which is inclusive of transaction costs.

Noncash compensation expense is expected to remain in the range of $5 million to $5.5 million. Our cash interest expense expectation has been narrowed from our previously stated $7 million to $9 million to $8 million to $9 million. Noncash deferred financing fee amortization, which is not included in our cash interest expense, remains unchanged at $800,000 to $900,000. And lastly, the full-year 2022 diluted weighted average shares outstanding, which includes the impact of OCI units, is updated from our previously stated 50 million to 52 million shares to now be in the range of 50 million to 51 million shares.

As we finish the last half of 2022 and enter into 2023, we believe we are in an extremely enviable position. Our capital structure has significant undrawn liquidity, especially considering our size, and 93% of our debt is fixed through maturity. In addition, on an apples-to-apples basis, our acquisition team has consistently proven their ability to source and close high-quality assets through a variety of sources and yields demonstrably better than our competition. With all the right pieces in place, we believe we are well-positioned to continue our track record of success and remain excellent stewards of shareholder capital. With that, we will now open the line for questions. Operator?

(Operator Instructions) Our first question comes from R.J. Milligan with Raymond James.

I'm curious, obviously, you highlighted the disconnect between the capital markets and private markets. I'm just curious how you view your current cost of capital. What is it today? And how do you calculate it?

Sure, R.J., and welcome aboard to the NETSTREIT team. I think the question that you're asking really is and should be the question of the day based on the changes that we're seeing in the capital markets. The way that we think about it is we start by assuming our target capital structure, which since the beginning of our existence, we said is the third debt and 2/3 equity. Our current capital structure is somewhat more conservative than that and under 30% on a (inaudible) basis. On the debt side, we think about our marginal cost of borrowing, which is somewhere between 4.1 and 4.2 on an all-in-spot basis. But the forward curve is really indicating an increase in that all-in rate to about 5, 6 a year out, maybe 5, 4, 2 years out. So we need to take that into consideration. And if we're going to access the private placement market with term, that fixed rate is likely north of 6%.

From our perspective, we really think utilizing a spot marginal borrowing rate, or even our weighted average cost of debt actually underestimates the true borrowing costs in the current market. And the risk there is it potentially produces false positive investment decisions for assets we intend to hold for the long term. So that's the debt side. On the equity side, we've historically utilized the implied cap rate as a proxy for our marginal cost of equity. Just as looking this morning at the current trading levels, our implied cap rate is somewhere in the 6.5% to 6.25% range. And even if you use an AFFO yield, probably produces a result that's very similar to that range. The marginal cost of the undrawn $200 million forward is probably about 50 basis points inside of that.

And similar to the way that we were thinking about the spot rating on the debt side, the benefit of the undrawn forward could produce positive investment decisions for assets that are spot equity cost, wouldn't, right? And really, our preference with respect to that is to utilize the benefit to provide additional accretion to our shareholders for less marginal investment decisions. So those are kind of the components. So if you're asking me to peg a specific range, I'd probably put a lack for investment decision-making purposes in the mix. If you want me to pinpoint something, probably the best number that we have in a volatile market is about 6.25%.

That's helpful, Andy. And so then, what is the spread, assuming that you maintain the sort of credit quality that you guys have been buying? What is the spread that you need to achieve to go out there and become more aggressive on the acquisition side?

Yes. Sure, RJ. So there's a couple of pieces to that. One, we do feel like the fundamentals in the market should indicate that cap rates should be a little bit higher than they are, and we are starting to see some cracks there. So while we've been buying at a blended 6.6% cap rate over the past couple of quarters. And like you said, we're not interested in dropping our investment criteria in any way. We really feel like we're not really getting paid enough currently, but there is a light at the end of the tunnel. So it's a little bit of a tough question as it will depend on credit quality, real estate quality, lease term, rental increases, and then the capital markets are going to be fluid. So like, if there's a good asset with an AAA-rated tenant and a 25-year lease, and good rental increases, would we move forward at Andy's number as a 6.25% to improve the portfolio potentially?

But then, on the flip side of that, if there's a weaker asset with some issues that's really on the edge of our investment criteria at 7.5%, we probably would not move forward with that. So certainly a lot of variables there, but the fact that we really do see that there's a number of opportunities that are really coming back to us on pricing, and seeing the signs of our -- the early signs are that our patients are paying off. So I feel like we're -- everything is accretive right now. It just -- when we kind of run the sensitivity on our model, volume usually really dictates how much more you're going to make in the next year. It really just doesn't have as much of an impact right now. So we feel like it's prudent to be very cautious and really try to make sure that we're maximizing the capital that we've raised.

And just a follow-up to that is, you said that you're starting to see signs that the market is cracking. And I'm curious, what do you think the catalyst is for the market to really open up and cap rates to move?

Yes. I think that's a great question. I think that's been what every net lease company is really trying to figure out over the past 6 months and probably for the next couple of quarters. But like we said, I mean, the fundamentals clearly show that cap rates should be moving up as we've seen everyone's cost of equity and cost of debt increase. But really, what we're seeing is sellers really got used to very aggressive cap rates that we were seeing in 2021 and before that. So if sellers can hold off on selling, they're going to hold off. Those that have pressures to sell. They're going to be very patient and try to find a 1031 buyer who's willing to pay 2021 prices. And that does exist. It's just getting much harder to find those types of buyers. And then those that can't be patient have to sell -- they've got to sell at prices that make more sense for us. And we've been able to pick off a few so far this quarter. We just don't know how many we're going to be able to tick off. The market is not completely there yet, but we feel like it's certainly going there.

Our next question is with Nick Joseph with Citi.

Completely understand being opportunistic and disciplined. I was hoping you can kind of quantify where the current pipeline is today and then just compare that to where it normally looks on the forward, I don't know, either kind of 3 months or whatever kind of metric you focused on.

Yes, sure. So I think the opportunity set that we have is drastically larger. Just as you've got the leverage buyers largely out of the market. I think a less competitive or less deep 1031 market. It's really just coming down to pricing and what we -- where we see potential cracks. And I think that -- so when we basically took away the quantitative piece of the fourth quarter acquisitions guidance, we could still hit it. It's just debatable how many of the sellers are going to come to our pricing. Starting to see a little bit more of that really in the last week or so. So difficult to say how much of that's going to come our way. But in terms of the opportunity set that we could move forward with right now, it's larger than it's ever been.

And then, just on that movement of cap rates, are there different categories or retailers or tenants adjusting more versus others this far?

It's funny. We get asked that question a lot over the last couple of quarters. Is it investment grade? Is it this tenant? Is it that tenant -- it really comes down to the situation that the seller's in and how much pressure they have on them to sell and whether they can be patient or not. And so that's -- it really has had very little to do with what type of asset. And I'm sure if you're down in the 4 cap rate range like some of the industrial was that's going to -- you're going to get to negative leverage a lot more quickly on the lower cap rate deals, but it's really come down to what type of seller are we working with?

Our next question comes from Ki Bin Kim with Truist.

So I was wondering if you can help paint the landscape as we look into next year. Obviously, the acquisition part of that is a little bit more ambiguous, which makes sense. But how about things like G&A, interest expense? I'm not sure if there was -- I remember a while back, there was a topic about the insurance cost as well for the company. I just want to make sure that we don't get surprised in any way or another.

Yes, Ki Bin. So interest expense with 93% of the debt costs locked, right? We've only got $30 million of floating rate balances except for what we would have used to fund incremental acquisitions. I think that we're able to provide some -- you can just get from your disclosure, some certainty around that. With respect to G&A, over the course of 2022, we've been building out our team. We are currently 32 boxes on our org chart. A couple of them had people in them or are empty currently that we're going to be looking to replace, but I don't see the staff really going beyond that. So I think that you're going to start seeing some stabilization of G&A on the income statement.

Just be aware there is some seasonality with respect to it, whether it's tax work, auditor fees that are a little bit more heavier weighted to the first and second quarter. But outside of that, I think that we're getting to stabilization with respect to things like salary and benefits. As it related to the D&O, we've been performing well there. We didn't get the D&O increase that we thought that we were going to get. So some of that is some of the pickups that you're seeing in G&A. It's not a lot. It's $100,000, a couple of hundred thousand bucks on an annual basis. But yes, we're getting to the point where we're just over 2 years into the public company journey, and we're really doing a good job of stabilizing that part of the income statement.

And I can't remember if I missed this, but did you guys give an update on the assets you closed in the fourth quarter to date?

We have not.

Are you able to provide some color around that?

Yes. I mean, it's pretty similar to the types of assets that we've acquired, but we're not providing a dollar figure on that.

Our next question comes from Wes Golladay with Baird.

Just to dive in a little bit more on the developer side of the business (inaudible).

I really could not understand -- maybe if you get a little closer to the mic or speak up again, I couldn't hear you well. Sorry.

For the developers that are not, I guess, the -- what I'm looking for is the developers -- you mentioned the 1031 market was not that robust right now. So I'm kind of curious what are the developers doing if they're not hitting the bid right now. Are they holding off on new developments? And is this a segment you typically get a higher yield from?

Yes, it's a great question. So especially the larger developers that are going out and developing 150 locations with various tenants that we try to acquire, Typically, we've reached out to a lot of those types of developers. They either don't call us back, or we don't really get anywhere near where we need to be on pricing because of the robust 1031 market. And so they're having a lot more difficulty historically selling 15, 20, 25 locations every month. Now they're only able to sell 2 or 3 locations every month. So either equity sources or their debt sources are getting stretched pretty thin as their inventory is growing. So we've been having a lot more conversations with those developers, but developers by their nature, are very optimistic for as long as they possibly can. So I'm not sure exactly when the levy is going to break there, but that does feel like an area where there could be some opportunity.

And just a follow-up on that is typically a higher yield when you look at the way you source deals throughout the year, you have multiple channels. Is this one of the higher cap rate channels and probably the titan, but is it at the upper end usually?

Yes. Yes, it's a good question. So developers, if they're able to finance themselves and develop properties all the way to certificate of occupancy and then they sell into the 1031 market, they're going to get more aggressive pricing than what we're willing to pay. But then the developers that would prefer for us to finance their developments. So whether we're buying the land and funding development or providing a guaranteed equity takeout, we do typically get better cap rates on those types of transactions.

And then one modeling question. Do you happen to have the end-of-period rent for the -- on a cash basis, excluding the active developments?

Yes. We'll follow up with you offline on that one.

Our next question comes from Josh Dennerlein with Bank of America.

Just curious, you mentioned in your press release appropriate pricing for assets. What do you think is appropriate pricing in today's environment? Last quarter, it was 6.6% on the acquisitions. Just kind of curious.

Yes. No, it's a good question. So I mean, I think it's really going to be asset dependent, depending on credit quality, real estate quality, lease term rental increases, et cetera. And so it feels like we're going to start to see some pretty good increases in cap rate as just that's kind of what we're expecting, and from the conversations that we're having with various sellers, how much higher that goes, I think, is -- it depends on what happens at capital markets as well as whether other buyers are able to kind of come back to the market. So it's got a lot of different factors there. Hard to say where it goes, but I think it should be meaningful to us.

And then you mentioned big loss. I think you said it's no longer an IG-like credit after the recent results. How do you think about that in the portfolio? Is that a temporary blip for them? Or is it something that maybe is that something you'd maybe look to like monetize?

Yes. I mean, obviously, we're always looking at what we can sell and what the best economic outcome is for very different strategies by assets. But yes, I mean, look, I mean, the Big Lots has got supply chain concerns, freight costs, both via truck and over the ocean, have really pressured margins. That being said, their total debt to EBITDA is 2.1x, which almost still meets our investment grade profile definition. But look, I mean I do think we're going to see margin pressures persist, but they've got over $400 million of liquidity. So I think they're going to be able to weather what's going on right now, and really doesn't provide any real concern as it relates to their ability to meet their financial obligations. And then we've got 10 locations that I think we feel really strongly in the real estate where the rent is replaceable. So I think we've got a long way to go before we start to really have major concerns there, but it's certainly the trend is not going in a positive direction with that tenant.

Our next question comes from Todd Thomas with KeyBanc.

I just wanted to follow up a little bit on the investment activity and the slowing pace of investments that you're talking about, which we think make sense just given the volatility in your cost of capital and then the market more broadly. But we're through October. And I'm curious if there's any way to size up what the fourth quarter might look like in terms of acquisitions? And just maybe help us also think about the old volume heading into '23. Again, I realize the world's changed quite a bit, but the pace of growth, external growth that I think investors have been thinking about was sort of in the $500 million range per year. I'm just curious about what you might be thinking about over the next few quarters if you could maybe provide some insight?

Honestly, I wish I could give you better guidance other than it's going to be effect in circumstances driven based on what the opportunity set is and whether we start to see enough volume move into the cap rates where we feel like we're maybe not making the same spread that we did over the past couple of years, but kind of trending more in that direction. So it's just a little bit difficult for us to give guidance on what we think we're going to do in 2023 when we're struggling to tell you what we're going to do in the fourth quarter of this year.

Yes. Todd, I mean, if I could just add a little bit to that. Go and take a look back. I mean, at the beginning of the year, SOFR was 0, right? It's 3% now. You've seen equity costs go up dramatically, right? And we've been able to kind of make by buying assets, as I said in my prepared remarks, better yields than the peer group. But I just think that the pace of change of the capital markets has just been so great in such a short period of time. It would almost be irresponsible for us to go and start throwing numbers out there without getting a better look as to some of the changes that Mark talked about earlier that we're starting to see on the beginnings.

And in terms of the fourth quarter, is this sort of off of sort of the $125 million, maybe $135 million pace that we've seen. Are you thinking something more in the $40 million, $50 million range or it might just sort of fall just a touch short of the $500 million for the full year as we kind of think about like the exit rate heading into '23?

Yes. I mean, it's going to be opportunity based. I mean, we're going to be opportunistic. I think all things are on the table. We've got some opportunity to take advantage of the fact that there is a 1031 market out there and potentially sell some assets and then redeploy. So there's a lot of different factors that we're considering and a lot of different options that I think are on the table. The thing that we don't want to do is take money in one pocket and just put it in the other, and then we're bigger without really any benefit to shareholders. So we think the best thing for shareholders is to consider all options on the acquisitions and dispositions side and try to maximize the transaction volume that we're going to do. And what that looks like is still in flux.

And then just last question also, just following up, I guess, on the underlying credit of the portfolio and in the context of the discussion around big lots being lower to sub-IG during the quarter. I'm just curious as you look out if there are other retailers, other tenants on your credit watch list over the course of the next few quarters as we head further into the cycle where you see potential risk. And not looking for names specifically, but just in the context of the overall portfolio and your exposure to IG and IG-like profiles.

Yes. I think it's a good question. And really, what we've seen with the tenants within our portfolio, as you know, it's a very defensive portfolio, very high credit quality portfolio, not a lot of debt coming due for these tenants, which I think is going to be interesting to see how some of the retailers are able or not able to refinance their debt. But I think it should be indicative of the quality of the portfolio when you consider Big Lots is a company with almost $1 billion tangible net worth with $400 million of liquidity and total debt to EBITDA is 2.1x, which by most definitions is not very leveraged. If that's the one that we're talking about on the call, I think that should be seen as a good sign. And in fact, we've had a couple of credit upgrades within the portfolio.

Our next question comes from Nick Yulico with Scotiabank.

First question is on drugstore investments. You did take your exposure up to the segment, also the CVS now, specifically 11% of ABR. I mean, how much higher are you willing to take the exposure for CVS and for the drugstore category?

Yes. No, great question. It was really -- we weren't really planning on increasing our pharmacy exposure as much as we did, but we saw a couple of opportunities, specific with CVS and Walgreens, that were very attractive, attractive pricing, really strong locations that we felt were the best risk-adjusted returns that we could provide investors. I would not expect us to be adding to those names. In fact, we just mentioned dispositions that could be something that we look to maybe offload a couple of those locations in the 1031 market that have pretty attractive cap rates and redeploy into other retailers that we like just to improve our diversification. But I mean, when we're at the size that we are, 1 or 2 transactions certainly can drive up the concentration, but we -- I wouldn't expect to see us move our concentration higher in the near future.

And the second question then, Andy, is on -- when we were talking about earlier how you thought about your weighted average cost of capital, it kind of sounded like to me that if -- the way you're looking at your cost of debt, if you look forward based on the curve, that it's not necessarily that debt is a cheaper cost than equity over the next year, if you kind of look at over full year on where interest rates could be. I guess how are you thinking about that equity versus debt mix? And going back to as well, I know your leverage target, I think, is 4.5 to 5.5x debt to EBITDA. So I mean, are these situations where you're going to overequitize perhaps because of some of these dynamics?

Yes. I mean, look, and we've over-equitized to date, right? I mean, we're below 30% on a market cap basis, debt to equity with a target of $33 million -- but yes, we're constantly thinking about the tools that we have in our toolbox. And the $200 million forward that we did in August is a great tool for us to use. If equity prices start trading in a more acceptable range, the ATM, either spot or forward, is another tool that we can use there. But the point that I was really trying to make is I think that just looking at spot rates in the current environment could really cause you to regret some of your decisions and can lead to false positive investment decisions -- and we -- and similarly, the idea that the balance sheet is overequitized, if debt capital, we saw great opportunities with respect to debt capital, utilizing that to get a little bit more in line as an option on the table, too. So I mean, Mark and I, Randy and Amy, we talk about this like literally every day, right? So we're constantly looking at the menu of opportunities that are out there.

And I think the greatest thing that we've been able to add is we've been able to be very, very nimble, right? We were able to pull off that August offering right after we announced second-quarter earnings. And similarly, we were very early in the queue for the term loan market, which is a market that's becoming significantly tougher. So yes, all of those options are on the table.

Our next question comes from Linda Tsai with Jefferies.

I appreciate the prudence with which you're allocating capital going forward. Is there an assumption that you stick with the 65% IG profile? Or would you expect to capitalize on more IG-like tenants?

Yes. I mean, I think we like the investment-grade profile tenants just as much as we like the investment-grade tenants in that the risk profile is, in most cases, even slightly better for the investment-grade profile as they carry no debt and generate strong cash flow, larger retailers. There are just fewer of them out there. So I think the opportunity set will likely dictate what we buy, but I would expect the ratios of the portfolio to remain fairly constant.

And then, could you comment on any general trends in the sale-leaseback environment and whether higher cost and inflation are catalysts for operators to do more sale-leasebacks?

Yes. And as you know, we've only done a handful of sale-leasebacks, but I do think that when CFOs start looking at refinancing their debt, and they may have a little bit of a sticker shock, I would assume that sale-leaseback could start to make a little bit more sense than it has in the past.

Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to Mr. Mark Manheimer for closing comments.

Thanks, everyone, for joining today, and for those of you attending the upcoming conferences, we look forward to seeing you then.

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