Q3 2021 National Retail Properties Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the National retail properties third quarter 2021 operating results.
At this time, all participants have been placed on a listen only mode and we will open the floor for your questions comments after the presentation.
It is now my pleasure to turn the floor over to your host Jay Whitehurst, Sir the floor is yours.
Thank you Matthew good morning, and welcome to the National retail properties third quarter 2021 earnings call. Joining me on this call as Chief Financial Officer, Kevin Habicht, and Chief operating Officer, Steve Horn.
And we're pleased to report another solid quarter for national retail properties with increasing acquisition volume high occupancy and rent collections and a rock solid balance sheet.
We increased our common stock dividend in August, making 2021 hour 32nd consecutive year of increased dividends.
Only 86 other U S public companies, including only two other Reits can offer their impressive track record of consistent dividend growth to investors.
And as our press release. This morning indicates we are again, raising our guidance for 2021 core <unk> per share to a range of $2 80 to $2 84 per share, which reflects an approximate 9% increase over 2020 performance.
We're also issuing guidance for 2022 core <unk> per share of $2 90 to $2 97.
Collecting approximately 4% growth over 2021 from midpoint to midpoint.
Kevin will provide more details on the individual factors behind our guidance for both 2021 and 2022, but the Reader's Digest version of the story is at National retail properties is humming on all cylinders.
Turning to the highlights of our third quarter financial results our portfolio of 3195, three standing single tenant retail properties continues to perform exceedingly well.
Occupancy ticked up slightly from the prior quarter to 98, 6% and remains above our long term average of 98%.
We also announced collection of 99% of rents due for the third quarter.
Collection of previously deferred rent remained at an equally high percentage and we forgave no rent during the quarter.
These impressive collection results compare very favorably to other retail real estate companies, including those with a significantly higher percentage of investment grade tenants.
Moreover, we believe these results validate our strategy of doing direct sale leaseback transactions with large regional and national operators for well located real estate parcels at low cost per property and reasonable rents.
Our acquisitions, which are sourced primarily from our portfolio of relationship tenants with which we do repeat programmatic long term sale leaseback transactions continued to ramp up.
During the third quarter, we invested $247 million and 49, new properties at an initial cash cap rate of six 4% and with an average lease duration of 19 years.
Year to date, we've invested $455 million and 107, new properties at an initial cash cap rate of six 5% and an average lease duration of 18 years.
Our relationship tenants with which we do the majority of our business have returned to growth mode and our transaction volume has ticked up accordingly.
We've increased our 2021 acquisition guidance to a range of $550 million to $600 million.
And we issued initial guidance for 2022 acquisitions in the range of $550 million to $650 million as we.
<unk> returning to our typical pre pandemic run rate of acquisition volume.
During the third quarter. We also sold 27 properties raising $30 million of proceeds to be reinvested in new acquisitions year to date, we've now raised over $70 million from the sale of 53 properties divided roughly equally between leased properties and vacant properties.
Our balance sheet remains one of the strongest in our sector highlights highlighted by our issuance of $450 million of 3% interest only 30 year notes in September.
With over $200 million of cash remaining after redemption of our five 2% preferred in October.
Zero balance on our $1 $1 billion line of credit.
No material debt maturities until 2024.
And a weighted average debt duration of almost 15 years, we have one of the strongest balance sheets in our sector and remain well positioned to fund future acquisitions and take advantage of opportunities that may present themselves.
On the personnel front I want to once again say, thank you to our talented and resilient associates for their hard work flexibility respect and professionalism.
We reopened our office fully in July and I'm, absolutely certain that we are all better together under one roof. I'm also proud of our company's recent recognition as the 2021 Cigna Wellbeing Award recipient.
Let me close by reiterating our long term approach to all aspects of our business.
Though we will continue to review and refine our strategy. We believe that the right long term approach for creating consistent per share growth on a multiyear basis is to own a broadly diversified portfolio of well located real estate acquired at reasonable prices and leased to strong regional and national tenants.
At reasonable rents.
All supported by a low leveraged balance sheet and long tenured staff of industry experts.
This strategy has once again proven to be resilient and durable during a period of upheaval in crisis and has put us in a great position to play offense as we look ahead to 2022 and beyond.
With that I'll turn the call over to Kevin for more details on our third quarter results and 2022 guidance.
Thanks, Jay as usual I'll start with the cautionary statement, we will make certain statements that may be considered to be forward looking statements under federal Securities law.
The company's actual future results may differ significantly from the matters discussed in these forward looking statements and we may not release revisions to these forward looking statements to reflect changes after the statements were made.
Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in this morning's press release.
With that as Dan mentioned headlines from this morning's press release report quarterly core <unk> results of <unk> 71 per share for the third quarter of 2021, that's up <unk> <unk> from the preceding second quarter of <unk> 70 per share and up nine from the prior years 62 per <unk>.
Sure.
Today, We also reported that <unk> was <unk> 75 per share for the third quarter, that's down too.
From the preceding second quarter 77.
And Thats largely a result of scheduled deferral repayments beginning to taper off from the peak levels in the first half of 2021.
We did footnote this ammo.
This <unk> amount included $4 3 million.
<unk> rent payment and our crude rental income adjustment for the third quarter.
Without which would have produced <unk> of <unk> 73 per share.
Excluding all deferral repayments, our <unk> dividend payout ratio for the first nine months was 73, 5% and thats fairly consistent with prior year levels.
They noted occupancy was 98, 6% at quarter end and Thats fairly consistent with recent quarters G&A expense was $11 1 million for the third quarter and that increase for the quarter and the nine months is really largely driven by incentive compensation.
We ended the quarter with $706 million of annual base rent in place for all leases as of September 32021.
As Jay mentioned rent collections continued to remain strong in the third quarter.
With rent collections of approximately 99% for the third quarter <unk>.
Collections from our cash basis tenants, which represent about $50 million or seven 1% of our total.
Annual base rent improved to approximately 94% for the third quarter and that's up from 92% in the second quarter and 80% previously reported in the first quarter of 2021.
Yes.
Today, we did increase our 2021 core <unk> per share guidance to a range of $2 75 to $2 80 per share.
And thats up from a range.
I am sorry, we increased it from a range of $2 75 to $2 80 to a new range of $2 80.
To $2 84 per share and similarly increase the <unk> guidance to a range of $3 to $3 four per share.
Notably this guidance exceeds our 2019.
Results by approximately two to two 5% despite the headwinds and reduced acquisition levels in 2020.
Today's 2021 guidance incorporates the continued strong collections and increased acquisition activity. Some of the assumptions for this guidance are noted on page seven in today's press release and Theyre largely entering unchanged from last quarter's guidance with the exception of the increased acquisition guidance of five.
$550 million to $600 million.
Acquisitions versus the previous guidance of $400 million to $500 million.
We expect to continue the high level of rent collection rates, but have assumed a total of one 5% one 5% of potential rent law.
In time, we are optimistic that will drift back towards our usual, 1.0% rent loss assumption in our guidance.
Today, we also initiated 2022 core <unk> per share guidance $2 90 to $2 97 per share that represents a four 1% increase over 2021 results using the guidance midpoint.
Both years.
22, <unk> guidance was set at.
$2 99 to $3 <unk> per share and that reflects the.
Scheduled slowdown in deferral repayments in 2022 as noted on page 13 of the press release.
The supporting assumptions for the 2022 guidance.
On page seven of today's press release that includes.
G&A expense of $45 million to $47 million real estate expenses net of tenant reimbursements of $10 million to $12 million acquisition volume of $550 to 650 million skewed 40, 60 between first half and second half of 2022 and disposition volume.
Of $80 million to $100 million.
We've assumed rent collections remain at high levels and have assumed potential loss of one 5% of annual base rent.
Switching over to the balance sheet largely as a result of the $450 million 30 year, 3% debt offering we completed in September we ended the third quarter with $543 $5 million of cash on hand.
However, $345 million of that cash was used shortly after quarter end on October 15th to redeem our five two <unk>.
<unk> preferred stock so that would have left us with approximately $200 million of cash on a pro forma basis and no amounts outstanding on our $1 $1 billion bank credit facility at quarter.
Quarter end, so our liquidity remains in excellent shape weighted average debt maturity is now approximately $14 nine years with a three 7% weighted average fixed interest rate.
Next debt maturity is $350 million of three 9% coupon debt that's due in mid 2024.
So with leverage and liquidity in very good shape, the balance sheet is well positioned for 2022.
Couple of leverage stat.
Gross book assets was 39, 8%.
Net debt to.
EBITDA was five four times and.
At September 30, and that's pro forma for the.
Preferred redemption.
That we completed soon after quarter quarter end.
Interest coverage was four eight times and fixed charge coverage was four two times for the third quarter of 2021.
That is not pro forma for the preferred redemption.
The dividend.
Preferred.
So 2021 looks to be another very solid year, we're well positioned to continue that performance into 2022.
As Jay noted our focus remains on the long term as we continue to endeavor to grow per share results on a consistent basis, so with that Matthew we will open it up for any questions.
Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we do ask that what posing your question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Your first question is coming from Katie Mcconnell from Citi. Your line is live.
Hey, Good morning, guys. This is parker for any on for Katy.
I was just wondering if you guys could help bridge the gap between where your fourth quarter implied acquisition volumes stand today.
It's obviously, a little light relative to what you are able to do at <unk> and I know Jay in your opening remarks, you talked a little bit about it sort of a comment about.
Returning to pre pandemic levels.
Just looking back at my model and I'm, saying that you know back in 2019, you guys were running.
Closer to about 170 $175 million a quarter.
You could just sort of touch on that and how to think about that for 'twenty two as well if there is any potential for that to ramp up.
<unk> continues to grow that's great.
Parker, Yes, I think if you look at 2022 guidance or the midpoint of that is $600 million right, Kevin as the midpoint, yes. So I think that's kind of the.
Thats relatively consistent with our pre pandemic run rate bearing in mind that here. It is November of 2021, and we we don't want to over promise at this point.
And so.
The slightly elevated acquisition numbers.
For this last third quarter relative to that kind of.
That kind of run rate is really just a matter of timing and it's a matter of our relationship tenants.
Back into their growth mode, and having deals that closed in the third quarter. So I wouldn't read too much into any one particular quarters level of acquisition volume.
As it relates to that and at the macro level, we feel good about that.
Relationship tenants that we have in their continued growth and expansion in 2022, and Steve and the acquisitions folks in our company.
Also building new relationships and.
In lines of trade that we do business with and in other lines of trade all still in the world of retail property single tenant retail properties, but we feel good about that.
Way, we are building that that pipeline of relationship tenants that ultimately results in acquisition volume, but I wouldn't read too much into any particular quarters kind of ebb and flow off of that that general kind of average run rate.
Okay, Yes that makes sense to me that was the only question I had so I'll yield the.
Thanks, guys.
Thank you. Your next question is coming from Brad Heffern from RBC capital markets. Your line is live.
Hey, good morning, everyone.
With the acquisition theme can you talk about the amount of the volume in the third quarter that came through the relationship channel.
Dave do you want to talk about that a little bit.
Yes.
Our historical being about two thirds relationship.
This third quarter was a little bit lower than that than historical norms now for the year to date, we will be back up at that two thirds, 70%.
Arena, but we.
We did one significant carwash portfolio that was out there that was.
Company, we've talked to you for a while but not good enough to call. It a relationship.
Fiduciary responsibility and took it to auction.
But I will tell you Brad.
Once we've done the first deal with someone who was not previously a relationship. Our goal then is to do repeat business with those folks and so while they.
It may not have been a relationship in the first transaction our goal is to turn it into one.
Okay got it.
And then on collections.
Effectively every.
Sectors recover the one area that is still lagging a little bit would be full service restaurants, I'm curious does that just one tenant and then what the.
Path to getting that back to close to 100%.
Yes.
It's largely focused on one particular full service restaurant tenants.
I think it will be drifting back to towards 100%.
In due course, but I think its next year before that happens.
That rent has been deferred right I haven't heard of it's scheduled for repayment just right farther down the road right. It is a more extended.
Deferral repayment schedule than most so.
So that will catch up in time.
Okay I appreciate it.
Thank you. Your next question is coming from David Toti from call. Your Securities. Your line is live.
Good morning. Thank you I just have two questions. The first one is if you can.
Could you just talk a little bit about what youre seeing in the transaction markets relative to valuations is there continued compression.
What's the pace of that compression and what's sort of the range of values.
Okay.
Assets that Youre looking at.
Sure David Good to talk to you that cap rate just to step back at the macro level, we would say that cap rates in the single tenant.
Retail sector.
Have not bumped upward at all that would say there is still continuing to trend, Steve you'd say downward a little or flat, Steve is giving me a flat side with the sand, so, let's say that cap rates flat.
But but at near historic lows and remaining flat and we're continuing to see that.
Our focus is on doing sale leaseback transactions with relationship tenants with repeat business with these customers where we are.
Build this relationship as their capital partner and in that instance.
The cap rate is not the only <unk>.
Driver of the value proposition and so youll see that our initial cash cap rates that we reported are generally a little bit higher than what you see a lot of other folks reporting who are acquiring properties in the one off market as opposed to doing sale leasebacks directly with retailers.
Also when we do business directly with the retailers they call out the properties, but they're worried about signing a long term lease on so we get slightly better property and we negotiate our own lease and we get that long term lease.
So I made note of that in my opening comments and I really want to emphasize how proud I am of our team for achieving a few year to date I think our average lease duration is 18 years and thats materially better than you will see from most real estate companies that are acquiring single tenant <unk>.
<unk> like like we are.
And to US all of that gets factored into the underwriting and the evaluation when it comes to.
Along with cap rate when it comes to doing our underwriting so I've given you a little bit of a long winded answer about how we look at all of this but.
I just wanted to kind of differentiate the way we approach things versus other companies, where they are really truly.
Truly just focused on cap rate only.
Okay. Thank you I appreciate that detail my last question is very big.
Big picture I'm, just wondering are there any sectors or.
The industry segments that Youre seeing that you believe could be at risk.
Sure.
The advancement of AI and through the replacement of people with machinery and does that impact any of your any of your tenants categories. Do you think is there something.
I think it impacts all of all kinds of areas in the economy. That's a very good big picture question.
We do business couple of points I want to make that we do business with large regional and national operators and they are figuring out a way.
They too.
To run their business and attract customers and.
And take market share regardless of their line of trade Thats one of the attributes that has helped get us through the pandemic and before that got us through the.
Recession of <unk> <unk> nine is doing business with big companies that have expertise in financial wherewithal and scale.
And those companies are all figuring out how to run their business.
But perhaps with better automation, perhaps with AI, perhaps with fewer people, but they're all trying to figure that out what what what they.
But from as it relates to the <unk>.
Two our portfolio our focus is on having owning good real estate locations along high traffic roads at reasonable rents leased to these large operators and when you have that kind of real estate location.
What we found is that it is in demand and our tenants are indicating to us that it will continue to be in demand as they refine their business model. There is other property types that I would not want to own looking into the future of what's going to be how real estate is going to be utilized by operators, but when I look.
Into the future.
See is continued demand for small parcels along high traffic roads that are convenient to where people live and work and shop.
Great. Thank you very much.
Thank you. Your next question is coming from Wes Golladay from Baird. Your line is live.
Hey, good morning, guys. Since the pandemic you guys have been averaging about $250 million of cash on the balance sheet and you have a strong cash balance and this quarter, even pro forma for the preferred redemption. So.
Yes. It is up the plan next year to carry a large cash balance throughout the year.
Yeah. Thanks, Kevin Yeah, typically over the last 30 years that has not been the case, but you are correct in saying over the last 18 months that has been correct and part of that was.
A matter of timing as we entered 2020 early in 2020, we did a.
A debt offering and so that really gave us a lot of liquidity just on the E literally on the eve of the pandemic and so we've kind of stuck with that without creating any net real usage of that liquidity.
As we've worked our way through the pandemic and so but I think youll see us revert back more to normal, which historically has involved some modest usage of our bank credit facility. So eliminating the cash balance and then call. It a couple of hundred million dollars down on the bank line before.
Before we start thinking about.
Longer term capital, so I think youll see us shifting back to a more normal.
Cash profile in the coming quarters.
I would say too that it's indicative of our long term philosophy of raising capital when it is well priced and available.
And deploying it with discipline and so it was the right thing to do to raise that capital when it was available.
But our relationship tenants were taken a pause in their acquisitions and so it made sense to us to just sit on it.
For the time being.
Yes, It makes sense and then when you look at this quarter's acquisition activity you did more than what you did in the first half of the year was this I guess driven by M&A transactions with your tenants towards M&A or is it more organic growth on their part.
Steve.
This quarter wasn't as much about M&A it was more sale leaseback funding.
And organic growth with the tenants.
But there is really.
Couple of larger transactions, one I mentioned, it's kind of in the.
Carwash industry and that was that was part of an M&A, but the rest of them are all.
Balance sheet reinforcement.
Yes.
Okay, and then when we look at the guidance for next year I guess, even this year as well the one 5% credit reserve and definitely higher than the typical triple then level is there anything that is standing out to you in your current tenant rosters that just general caution yes.
General Cautiousness, yes, there is.
Nothing that we're worried of note are communicating to investors that we.
We have concerns about this just a conservative assumption for now and hopefully in due course, we can like I say drift back to what we always have about a 1% assumption in our guidance.
Frequently that 1%.
Realized but we just think it's prudent to do that.
Great. Thanks, guys.
Thank you. Your next question is coming from Spencer alloy from Green Street. Your line is live.
Thank you in regards.
You guys have made year to date can you just remind us what industries. They were comprised of and then also in terms of pricing what the cap rate on the occupied dispositions have been.
Kevin do you have that in front of you.
Yes hypersound.
Right at 7%.
The $30 million of dispositions 10 of that was vacant properties and $20 million of that was.
16 different occupied properties, there wasn't any real sector per se related to that.
That was.
I'm just looking at the list here real quick.
A variety of.
Our portfolio.
Handful convenience stores.
A handful of restaurants.
Couple of miscellaneous if I if you will so nothing stands out of note, we really take it it's really not.
Line of trade driven decision generally its a very bottom up property specific approach and so.
In terms of deciding what to sell as well as kind of what market pricing might bring for those assets.
The equation, we're looking at for that but it was one third vacant two thirds occupied with a seven cap on the op side.
Great and then.
Then just in terms of your existing customers are there any.
As there are industries that are you.
And I think are more kind of in growth mode versus others.
I know youre still expecting probably about two thirds of your guidance next year to be driven by relationship tenants I'm, just curious where you're seeing.
More growth.
Steve I'll take a stab at this and if I Miss anything you can add on but Spenser I'd say it really if you just look across the top lines of trade in our portfolio.
It's in those areas generally I think we expect to be some convenience store business next year. Some some fast food casual fast food <unk> business Auto service business to the car wash industry has a lot of consolidation and growth going on at the moment.
Also collision repair and and then Steve and his team are working on building some new relationships in other lines of trade that we will try to keep as proprietary as possible for as long as possible.
But.
Trying to.
As always continuing to grow our pool of relationship tenants, Steve did I Miss anything just kind of really expand the auto service industry, we're seeing a lot of private equity money coming into China established platform. So we're seeing a lot of growth within that industry and <unk> the larger franchise.
E are buying the smaller ones because we got a lot of second third generation <unk> owners, they're just looking to get out of the business and cash out. So we're seeing a lot of activity in that sector.
Okay, great. Thank you guys.
Thank you. Your next question is coming from Lindsay Deutsche <unk> from Bank of America. Your line is live.
Hi, Good morning, guys I'm on for Josh to underline.
I was just wondering if you could comment more broadly on.
Very interesting challenges.
Inflation labor shortage.
<unk>.
Okay.
Industry at your tenants are in.
How are you thinking of combating that it'd be great to hear your thoughts around.
Okay impact.
Certain pressures.
Sure.
Sure.
Sure, let me I mean.
Kind of deal with the strategic way, we look at that and then Steve maybe turn it over to you to talk about what you've heard from some of the tenants that <unk> been talking to but Lindsay at the strategic level, what we want to focus on is a good real estate location. That's a long a high traffic road that we can acquire.
<unk> four as low a price as possible for what I, often referred to as a reasonable price and what we can.
Have leased at as low a rent as possible.
Often refer to that as a reasonable rents, but what we want our low cost properties with low rents along high traffic roads those that builds in a margin of safety that we think is more enduring than focusing on the tenant's balance sheet for your primary.
Security or focusing even on store level performance as your primary.
Comfort and security and so regardless of the line of trade. That's what we're trying to find our well located properties at reasonable rents and.
In the situation, where we have that what you've seen through the recession and now through the pandemic is that those properties remain highly occupied and tenants want to be there and want to keep those locations and.
And it helps to build that stable income stream that allows us to have our long history of dividend increases and per share growth, but thats. The macro level. Steve you want to talk about what your tenants are telling you about labor.
All of that.
Specifically, the <unk> or the restaurant full service <unk>.
And at convenience stores.
Early on kind of a wage inflation or labor shortage will start with convenient stores were shutting down certain hours of the day, they're low peak hours.
But now thats kind of coming back because they are becoming more efficient with fewer employees.
What we're finding in the restaurant industry is the late the wage inflation.
They have fewer employees. So their margins are actually up but they are starting to be able to pass through the top line to the consumer slowly to combat wage inflation.
That's very helpful.
Yes, yes, Lindsay I, just just to close on that I'd say, we deal with large regional and national tenants, we don't have mom and pop tenants and so they are.
To the point of one of the earlier questions Theyre, focusing on automation and labor management, and and there and I think they feel like across the different lines of trade that they can take some price that they can pass some of this on to the consumer.
That's very helpful. Thank you.
And then for my second question.
Can you just remind us again, what your mix.
Our complaint.
Portfolio had been like historically I know you commented on areas of growth.
Are there any plans to diversify away from certain industry either.
Maybe your largest tenant.
In.
Yes provided yes right.
Our portfolio has look pretty similar for the past five years. So there hasnt been a big change in the.
Relativity between the top lines of trade and I think you should.
I assume that we're going to generally going to continue to be consistent with that kind of mix.
One of the things that we feel like the pandemic validated our approach of focusing on all of those things I talked about a minute ago, good locations at reasonable rents and reasonable costs.
<unk>.
And so.
You will see us continue to be very thoughtful and prudent in underwriting bigger boxes that have more special that are more special purpose uses the movie theater industry is one where we are still remaining very cautious our tenants are paying us rent right now.
AMC is our primary tenant in them.
<unk> theater sector, and they've done a great job of raising money and.
And they're right on track with us, but but that's an area.
A trade that we still want to be cautious about going forward, so you're not likely to see us buy.
Any.
Many movie theaters going forward.
And other than that.
Regardless of the line of trade, we're going to continue to focus on keeping the costs down and keeping the rent down and in that instance, we feel like we've built a pretty durable rental income stream and just.
One side note related to that we don't from a macro standpoint, we don't sit back and say, let's buy $600 million worth of properties and these four lines of trade in the nine states.
We're very bottom up.
<unk> of our approach to this.
We think about how it fits in the portfolio.
And make sure we have adequate diversification, but we don't start there we start at the bottom and work our way up to decide.
Property is.
Reasonably priced in and a good location and then move from there to decide whether it fits in the portfolio rather than a top down approach.
I guess, maybe one last thing to add.
You mentioned 711 as our top tenant.
We have done.
Zero business directly with 711, all of our 711 exposure.
And the portfolio is what's.
What's originally transactions that we did with reach strong regional operators, who grew and ultimately were acquired by 711 in one fashion or another and to the extent we have other operators, who also get acquired by 711 in the future I don't know that that move will ever.
Happen, but if it did happen 711 would become an even bigger tenant of ours, but we would not worry about that.
We keep an eye on it but we would not lose sleep over that that our 711 real estate if some of our best real estate at some of our best prices and yields of anything in the portfolio.
That's very helpful. Thank you.
Thank you. Your next question is coming from John Masako from Ladenburg Thalmann. Your line is live.
Good morning.
Good morning, John.
Maybe just going back to the credit loss outlook, I guess compared to the one 5% you're baking into the remainder of 2021 and in 2020 guidance. What is the actual credit loss result in for kind of the first <unk>.
Nine months of the current year.
I need to think about that a little bit.
I think the way I think about that is it's.
Call it.
<unk>, 5% on the accrual basis tenants in.
About five about 6% on the cash basis. So.
That's probably sub 1% all in.
Probably.
80 basis points something like that.
All in at this point.
For the year.
Nine months.
Okay. That's helpful I'm sorry, Ed.
You've kind of guidance versus maybe kind of.
Oracle.
Outcomes. So that's helpful.
Fair question, I would point out kind of pre pandemic.
We think we're post pandemic, but maybe were late pandemic instead opposed but.
Currently, but pre pandemic that that number probably would have been less than 50 basis points.
Yes.
On a given year.
So.
It's a small number to the extent that you've probably never created pandemic have heard us talk about that number.
And we look forward to returning to those days, so which we think are in the not too distant future.
Okay understood and then maybe switching gears a little bit as we think about kind of particularly in the current inflationary environment rent escalators, I guess, where is with new transactions kind of your leverage if at all to maybe push additional escalators or tie them more to kind of free floating CPI.
CPI in your portfolio.
What kind of cap in Florida, et cetera, but kind of maybe any kind of leeway in terms of how you can kind of put those same store rent drivers in new leases yes.
Yes, John I think for the for the size and sophistication of the tenants that we deal with you should not expect us to do any better than our long term average of kind of one 5% per year rent increases that is market for these large regional and national.
Operators that we do business with.
And we don't we don't expect to do much better than that.
In our underwriting and our view of it to.
To the extent you can get a tenant that would give you uncapped CPI increases that may not be a tenant you want to do business with.
So thats just something that you get from smaller operators that we.
That are not the core of our relationship building in the core of our strategy. So I think you should just kind of assume that thats going to continue to be the case kind of one 5%.
Per year annual.
Increases.
Okay that makes sense and that's it for me. Thank you very much for taking the questions. Thanks John.
Thank you. Your next question is coming from Chris Lucas from capital One Securities. Your line is live.
Hey, good morning, everybody just a couple of quick follow ups on the guidance assumptions.
Any change to cap rate expectations for next year relative to this year.
Kevin I think the next year's guidance, we bumped it down a little bit to the kind of six to six three range at the low six range, we're expecting to see some compression.
The overall cap rate for 2022 compared to 2021.
Okay, and then I.
I think when you laid out 2021 guidance you had mentioned that you expected acquisitions just would it be 40%.
60% back in.
How is the cadence looking or how.
Are you thinking about it from 2002, yes, we've assumed a similar cadence in pacing for 2022 as well.
Okay.
Okay and then my last question is.
Lease expirations from 2002, a slightly elevated.
How should we be thinking about sort of your retention rate.
Volume, what's sort of embedded in your guidance.
I think our historical long term rate is in the 80% to 85% of the time the tenants renew the lease at the then current rent and.
And so I think you should assume something in that same ballpark going forward.
The tenants that make up next years.
Explorations are really convenience stores auto services.
A little bit of a <unk>, but primarily convenience stores auto service is the vast majority.
I think if you take that used to long term assumption, Chris you know, it's not going to be off by much.
That's all I had this morning. Thank you.
Thank you. Your next question is coming from Linda Tsai from Jefferies. Your line is live.
Hi.
You mentioned earlier in auto service Youre seeing consolidation.
Could you just talk a little bit about what's driving this.
We reclassified Carwash and Vanessa.
Yeah.
Classify car washes in the auto service and.
I really think it was a success of Mister car wash and then kind of institutionalized carwash sale leasebacks.
The success that Mister car wash has I think I've seen a lot of private equity money come into the sector. It's a highly fragmented sector, but thats the big driver as well.
Private equity money went into maintenance.
Services tire and like collision repair, there's been a lot of money flowing into that sector as well.
And then what's the best way to think about the timing of capital raising activity in 2022.
Do you anticipate seasonality given lumpiness between first half and second half this acquisition volumes.
Yes, it's Kevin So, yes, we don't give guidance on capital raising.
I will say you should expect us to behave in a leverage neutral manner.
And so.
Which has been the case for the last 20 or 30 years.
And.
I will say too that in our minds, we don't directly tie capital deployment with capital raising on a quarterly basis, and sometimes not even quite on an annual basis, we want to get that connected over the long run, but as we've talked about we want to raise capital when.
It's available and well priced somewhat irrespective of whether we have an immediate need and we want to deploy capital when theres good opportunities.
<unk>.
And reasonable pricing.
Somewhat irrespective of whether the capital markets at the time are particularly friendly and so.
So those.
Those two things arent always directly connected particularly on a short term basis.
But you should think of us behaving in a leverage neutral manner.
Over the course of next year would be a good assumption.
Thanks for the context.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone at this time.
Your next question is coming from Ronald Camden from Morgan Stanley. Your line is live.
Hey, two quick questions from me.
Thanks.
Providing the guidance early I think is really helpful for all of us.
Just on the one 5%.
Basically of rent loss, that's baked into it looks like 2021 and 2022.
Obviously, you talked about some conservatism versus the usual, 1% rent laws just curious whats what's driving that conservatism is it the conversations you're having with tenants is it just the Delta V. I am just trying to figure out.
Whats, causing that conservatism with data points are you looking at today.
Yeah, Hey, its Kevin.
Besides the fact that just a conservative guide alright, bye Kevin's wiring.
And part of it goes back to my comment earlier no are we postponed that makes our early late pandemic and so Jeff.
Just a holdover of conservatism.
Going forward.
Our transparent with people on.
Investors are more optimistic.
Then our guidance that they can make that adjustment, but there is no.
Notable concern or worry that we have about particular issue or tenants et cetera behind that it is a general <unk>.
Services to them rather than a particular one so.
Great. That's helpful. And then just maybe asking <unk> question, a different way as Youre thinking about next year's acquisitions in the funding of it.
I mean, the debt market is on fire is there is there a preference to maybe do more debt than equity.
Obviously, keeping in mind that you are trying to maintain sort of a leverage neutral but at this point is there a sort of a preference or how do we think about that.
I'm not exactly certain where we'll be next year, but I will say for this year.
You have seen us take that position I think we've we've done too.
Debt offerings this year and raised zero equity granted we used.
Large portion of that.
The debt raise to redeem some preferred so maybe that's a chunk of that is just a refinance is the way to think about it but.
You've not seen us issue any equity this year, because we do think that that market has been very attractive when we can issue, 3% 30 year debt that's of interest to us and so.
What we did and so but.
That's not necessarily a good read on well see what next year holds for us in terms of pricing of capital and that will that will drive a good portion of our decision making process going forward, but at the moment.
We don't have a strong preference one way or the other.
With debt versus equity.
Great helpful. Thanks, again for the transparency on guidance much appreciate it.
Thank you there are no further questions in the queue I will now hand, the conference back over to our host for closing remarks. Please go ahead.
Thank you Matthew and thank you all for joining US today, we look forward to talking with many of you virtually at NAREIT and other conferences over the next few weeks have a good day.
Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.