Q1 2022 Netstreit Corp Earnings Call
Greetings and welcome to the NetStreetCorp first 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Amy Ahn.
Greetings and welcome to the net Street Corp, first 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.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded is that my pleasure to introduce your host Amy Ellen.
We thank you for joining us for NetStreet's first 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.netstreet.com.
We thank you for joining us for our next Street's first 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 Dot net street dotcom on today.
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.
This call managements 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.
Forward-looking statements address matters that are subject to risk 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 FEC filings.
K for the year ended December 31st 2021, and our other SEC filings. All forward looking statements are made as of the date hereof and that Street 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.
All forward-looking statements are made as of the date hereof and NetStreet assumes no obligation to update any forward-looking statements in the future. In addition, certain financial information presented on this call includes non-GAAP financial measures. Please refer to our earnings release and supplemental package for definitions, GAAP reconciliations, and an explanation of why we believe such non-GAAP financial measures are useful to investors.
Mineral package for definitions and 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 NetStreet's Chief Executive Officer, Mark Manheimer, and Chief Financial Officer, Andy Blocker. 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.
Today's conference call is hosted by next streets, Chief Executive Officer, Mark Manheimer, and Chief Financial Officer, Andy Blocher, They will make some prepared remarks, and then we will open the call for your questions now.
Now I'll turn the call over to Mark Mark.
Good morning everyone and welcome to our first quarter 2022 Harnings Conference.
Good morning, everyone and welcome to our first quarter 2022 earnings Conference call.
pleased to share with everyone our strong start to the year, completing over $135 million in net investment activity during the quarter.
I'm pleased to share with everyone. Our strong start to the year completing over $135 million and net investment activity during the quarter.
Acquisitions developments, where rent has commenced in our first ever secured mortgage loan with an option to purchase.
Developments where rent has commenced and our first ever secured mortgage loan with an option
We acquired 34 properties for $90 million at an initial cash capitalization rate of 6.3%, and a weighted average lease term of 8.3%.
We acquired 34 properties for $90 million at an initial cash capitalization rate of six 3% and a weighted average lease term of eight two years.
In addition, RENT has commenced on two development projects that had a total cost of $7.6 million and had a weighted average investment yield of $7.6 million.
In addition to rent has commenced on two development projects that had total cost of $7.6 million and had a weighted average investment yield of seven 6%.
We also provided $5 million of funding to support ongoing development projects and one new development for an investment grade profile.
We also provided $5 million of funding to support ongoing development projects and one new development for an investment grade profile.
At quarter end we had nine projects under development representing $37 million of additional
At quarter end, we had nine projects under development, representing $37 million of additional investment.
Yeah.
During the quarter we entered into our first ever convertible mortgage loan agreement with a developer. A $40.4 million secured loan with an 18 month term and an interest rate of 6%.
During the quarter, we entered into our first ever convertible and mortgage loan agreement with a developer a $44 million secured loan with an 18 month term and an interest rate of 6%.
The loan is collateralized by three parcels of land that include a strong-performing Home Depot located in the Portland, Oregon, MSA. At funding, the loan to value was approximately 75 percent.
Alone is collateralized by three parcels of land that include a strong performing home depot located in the Portland, Oregon NSA funds.
Funding the loan to value was approximately 75%.
Upon the completion of the developer's plan to redevelop and reposition the assets and with certain conditions being met, NetStreet will have the right to purchase the Home Depot at an above market cap rate equal to the current 6% tax rate.
The completion of the developers plans to redevelop and reposition the assets and what certain conditions being met.
We'll have the right to purchase a home depot at an above market cap rates equal to the current 6% interest rate.
Additionally, we are comfortable with the real estate quality as security for our loan. We do not expect to purchase the other two assets that collateralize our loan.
Currently we are comfortable with the real estate quality as security for our loan we do not expect to purchase the other two assets that collateralize our law.
Stepping back, we view this transaction as a demonstration of how we can work with real estate owners to find creative transactions.
Stepping back we view this transaction as a demonstration of how we can work with real estate owners to find creative transaction solutions.
while providing a path to fee-simple ownership of high quality real estate for now.
Providing a path to fee simple ownership of high quality real estate furniture, that's great.
In this case, we are providing the seller time to achieve their optimal resolution through a short-term loan while we receive an option to purchase the asset we want at an accretive return and achieve a superior interim yield on a well-secured loan.
In this case, we are providing the seller time to achieve their optimal resolution through a short term loan while we receive an option to purchase the asset we want at an accretive return and achieve a superior interim yield on a well secured loan.
The investment grade and investment grade profile totals for our investment activities in the quarter, including acquisitions, developments where rent commenced,
The investment grade and investment grade profile totals for our investment activities in the quarter, including acquisitions developments where rent commenced.
the mortgage loan receivable were 56.5% and 21%.
And the mortgage loan receivable were 56, 5% and 21%.
Lastly, we disposed of a casual dining restaurant during the quarter for a sales price of $2.4 million, representing a 5.5% cash cap.
Lastly, we dispose of the casual dining restaurant during the quarter for a sales price of $2 $4 million, representing a five 5% cash cap rate.
We will continue to opportunistically reduce our exposure to select categories, including casual dining banking and health and fitness.
We will continue to opportunistically reduce our exposure to select categories including casual dining, banking and health.
At the end of the first quarter, our portfolio was comprised of 361 properties with 71 tenants contributing $77 million of annualized basis.
At the end of the first quarter. Our portfolio was comprised of 361 properties with 71 tenants contributing $77 million of annualized base rent.
The portfolio had a weighted average lease term remaining of 9.6 years with 80.6% of AVR represented by tenants with investment grade ratings or investment grade profiles. And the portfolio remained
Portfolio had a weighted average lease term remaining of 9.6 years with 86% of ABR represented by tenants with investment grade ratings or investment grade profiles and the port and the portfolio remains 100% occupied.
New tenants added in the quarter include a Publix grocery store, a Panera Bread, and a Family Fair grocery.
New tenants added in the quarter include a publix grocery store, a panera bread and a family fare grocery store and.
In addition, we added one new state, Nevada, to our portfolio.
In addition, we added one new state, Nevada to our portfolio during the quarter.
As we look ahead, our pipeline continues to grow as we source opportunities through various channels and work creatively with tenants to unlock value and provide capital while maintaining our portfolio quality and reliability.
As we look ahead, our pipeline continues to grow as we source opportunities through various channels and worked creatively with tenants to unlock value and provide capital while maintaining our portfolio quality and returns at this time, we believe we are well positioned to achieve our increased investment target for the for the year.
At this time, we believe we are well positioned to achieve our increased investment target for the.....
Before I hand the call off to Andy to go over the first quarter financial results, I want to take a moment to remind everyone of the unique characteristics of net...
Before I hand, the call off to Andy to go over the first quarter financial results I want to take a moment to remind everyone of the unique characteristics of necessary.
Since our formation in 2019, we have curated and built our portfolios.
Since our formation in 2019, we have curated and built our portfolio strategically are investment grade percentage remains one of the highest in the net lease space.
Our investment grade percentage remains one of the highest in the net lease space. Our portfolio is largely made up of tenants in defensive industries, and we have no legacy issues with our assets.
Portfolio is largely made up largely made up of tenants in defensive industries, and we have no legacy issues with our assets.
We have Oh, we have focused on tenants and industries that will perform very well in any economic environment with a largest capital cushion to respond and adapt to various evolutions in the retail space.
We have focused on tenants and industries that will perform very well in any economic environment, with a large capital cushion to respond and adapt to various evolutions in the retail sector.
With rising inflation and interest rates, as well as global uncertainty, we are confident that our portfolio is well-positioned to deliver the most stable cash flows in our space, even as we seek to meet our increased growth expectations for 2020.
With rising inflation and interest rates as we as well as global uncertainty. We are confident that our portfolio is well positioned to deliver the most stable cash flows in our space, even as we seek to meet our increased growth expectations for 2022.
With that, I'll turn the call over to Andy to go over our first quarter financial results in 2020.
With that I'll turn the call over to Andy to go over our first quarter financial results and 2022 guidance.
Thank you, Mark, and once again, thank you for joining us on today's call.
Thank you Mark and once again, thank you for joining us on today's call.
In our earnings release published yesterday after market close, we reported net income of 4 cents, core FFO of 28 cents, and AFFO of 29 cents per day.
In our earnings release published yesterday after market close we reported net income of four core F O 28 cents and.
And <unk> 29 per diluted share for the first quarter.
The portfolio's annualized base rent grew to $77 million in the first quarter, up 60% from the first quarter last year, driven by acquisitions and developments since the prior year.
The portfolio's annualized base rent grew to $77 million in the first quarter up 60% from the first quarter last year, driven by acquisitions and developments since the prior year's quarter.
Interest expense increased to $1.2 million from $0.9 million due to our higher average balance outstanding on the revolver compared to the first quarter 2020.
Interest expense increased to $1 $2 million from 0.9 billion due to a higher average balance outstanding on our revolver compared to the first quarter 2021.
G&A increased to $4.2 million in the first quarter compared to $3.1 million from first quarter 2021, primarily due to increased number of employees as we grew our staff from 20 at the start of 2021 to 26 today, and the opening of our new corporate office.
G&A increased to $4 $2 million in the first quarter compared to $3 1 million from first quarter 2021 <unk>.
Similarly, due to increased number of employees as we grew our staff from 20 at the start of 2020 one to 'twenty six today.
And the opening of our new corporate office.
Turning to our balance sheet, at quarter end, we had total debt of $295 million, outstanding of which $175 million is from our fully hedged term loan with the remaining balance from our revolving line of credit. We have no debt maturities until the maturity of our revolver in December 2023, which is subject to a one-year extension option to align with the December 2024 maturity of our $175 million term loan.
Turning to our balance sheet at quarter end, we had total debt of $295 million outstanding of which 175 million is from a fully hedged term loan with the remaining balance from our revolving line of credit.
We have no debt maturities until the maturity of our revolver in December 2023, which are subject to a one year extension option to align with the December 2020 for maturity of $175 million term loan.
Moving on to our capital markets activity during the quarter, in early January , we entered into forward sale agreements related to over 10.3 million shares of our common stock at an offering price of $22.25 per share.
Moving onto our capital markets activity during the quarter in early January we entered into forward sale agreements related to over $10 3 million shares of our common stock at an offering price of 22 and a quarter per share.
On March 30th, we settled over 3.4 million shares, receiving net proceeds of $72 million after deducting fees and expenses. We have until January 10th, 2023 to settle the remaining.
On March 30th we settled over three 4 million shares receiving net proceeds of $72 million after deducting fees and expenses, we have until January 10th 2023 to settle the remaining shares.
Also during the quarter, we issued shares in connection with our ATM program for net proceeds of approximately $3.5 million after deducting underwriting discounts and transaction costs of about $100,000.
Also during the quarter, we issued shares in connection with our ATM program for net proceeds of approximately three and a half million dollars after deducting underwriting discounts and transaction cost of about $100000.
With our successful capital market activities during the first quarter, we have significant dry powder in hand to fund most of our targeted investment activity for 2020.
With our successful capital market activities during the first quarter, we have significant dry powder in hand to fund most of our targeted investment activity for 2022.
At March 31, 2022, our net debt to annualized adjusted EFDI ratio was 4.6 times, which was at the low end of our targeted leverage range of 4.5 to 5.5%.
At March 31, 2022, our net debt to annualized adjusted EBITDA ratio was four six times, which was at the low end of our targeted leverage range of four and a half to five and a half times.
After giving consideration to the remaining shares in the forward sales agreement, our net debt to annualized adjusted EBITDA ratio would be 2.5.
After giving consideration to the remaining shares in the forward sales agreement, our net debt to annualized adjusted EBITDA ratio would be two three times.
With regard to our dividend earlier this week, the board declared a 20 cent regular quarterly cash dividend to be payable on June 15th to shareholders of record as of June 1st. Our payout ratio for the quarter was.
With regard to our dividend earlier this week the board declared a <unk> 20 regular quarterly cash dividend to be payable on June 15th to shareholders of record as of June 1st our payout ratio for the quarter was just under 69%.
We're increasing our 2022 AFFO per share guidance range to $1.14 to $1.17 per share, and net investment guidance to at least $500 million for the year. Our guidance
We're increasing our 2022 <unk> per share guidance range to $1 14 to $1 17 per share and net investment guidance to at least $500 million for the year.
Our guidance includes the following assumptions.
increased investment activity in the year, including developments where rent commenced, mortgage loan receivables, and net of dispositions to at least $500 million.
Increased investment activity in the year, including developments, where rent commenced mortgage loan receivables and net of dispositions to at least $500 million.
Cash G&A to remain in the range of $14.5 to $15 million, which is inclusive of transaction costs. Non-cash compensation expense is expected to be in the range of $5 to $5.5 million.
Cash G&A to remain in the range of 14 $5 million to $15 million, which is inclusive of transaction costs noncash compensation expense is expected to be in the range of five to $5 5 million.
Cash interest expense is being increased to the range of $5.5 to $6.5 million, reflecting the significant rise in short-term basis.
Cash interest expense is being increased to the range of five five to $6 5 million, reflecting the significant rise in short term base rates noncash deferred financing fee amortization, which is not included in our cash interest expense remains unchanged at approximately $600000.
Non-cash deferred financing fee amortization, which is not included in our cash interest expense, remains unchanged at approximately
And full year 2022 diluted weighted average shares outstanding, which includes the impact of OP units, to be in the range of 52 to 54 million.
And full year 2020 to delight diluted weighted average shares outstanding which includes the impact of O P units to be in the range of 52 to 54 million shares.
Yeah.
Echoing Mark's earlier comment, we're off to a great start this year. We're highly confident that our investment strategy positions us to continually deliver predictable cash flow in a time of global uncertainty.
Echoing Mark's earlier comments, we're off to a great start this year, we're highly confident that our investment strategy positions us to continually deliver predictable cash flow in a time of global uncertainty through our ability to regularly sourcing finance accretive deals to grow our best in class portfolio.
through our ability to regularly source and finance the creative deals to grow our best-in-class portfolio. With that, we will now open the line.
With that we will now open the line for questions.
Operator.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment it may be necessary to.
Pick up your handset before pressing the star keys.
Your first question comes from Nate Crossett with Barenburg. Please go ahead.
Your first question comes from Nate Crossett with Bahrenburg. Please go ahead.
Hey, good morning.
Was wondering maybe you could just comment on the deal flow so far in Q2, you know, your visibility into the pipeline and, you know, what you're seeing in terms of pricing.
I was wondering maybe you could just comment on the deal flow. So far in Q2, you know your visibility into the pipeline.
And you know what youre seeing in terms of pricing.
Yeah sure Oh, you know what the pipeline is probably a little bit more robust and what we typically see at this point in the quarter. So we're feeling pretty good about second quarter in a few transactions that I think will likely leak into into the third quarter.
You know, the pipeline is probably a little bit more robust than what we typically see at this point in the quarter. So we're feeling pretty good about.
second quarter and a few transactions that I think will likely leak into the third quarter.
And then as it relates to what we're seeing on pricing, you know, we certainly are seeing a number of buyers, you know, kind of falling out of contract on some of their deals and pushing back as they're...
And then as it relates to what we're seeing on pricing you know, we certainly are seeing a number of buyers you know kind of falling out of contract on the on some other deals in pushing back as there is there are financing costs have increased so I think a little bit more a little bit more opportunity on some deals that have come back to us.
Their financing costs have increased, so seeing a little bit more opportunity on some deals that have come back.
Yeah.
Okay, that's helpful. And then maybe just one on the mortgage loan. Are there more of those in the pipeline?
Okay. That's helpful. And then maybe just one on the mortgage alone are there more of those in the pipeline.
And maybe you can just talk to this specific transaction, you know, how did it come about? Was it off market, you know, are there other opportunities with this developer, things like that?
And maybe you can just talk to the specific transaction you know how did it come about was it.
Market you know are there other opportunities of this develop or things like that.
Yeah, sure. So, specific to that opportunity, you know, we just viewed that as a really good opportunity to come in, provide capital to that developer that needed to do some work, re-parcel off, you know, the Home Depot that we'd like to own long-term, and then sell off a couple of that parcels at much lower cap rates than what we would like to acquire assets at. So, at a 75% LTV, you know, type situation and some pretty
Yeah sure. So specific to that opportunity are you know, we just viewed that as a really good opportunity there to come in and provide capital to do that developed did that developer that needed to do some work re parcel off.
The home depot that we'd like to own long term and then sell off a couple of out parcels at much lower cap rates than what we would like to acquire assets that so at a 75% LTV type situation and some pretty.
pretty clear goals that they needed to accomplish that we think are pretty achievable in the short term. It was a good way for us to get our hands on an asset sometime in the next 18 months at a very aggressive cap rate. It's a Home Depot that has
Pretty clear goals that they needed to accomplish that we think are pretty achievable in the short term. It was a good way for us to get our hands on an asset a you know sometime in the next 18 months at a very aggressive cap rate. It's a home depot that has you know some of the best foot traffic in the country. So you know typically a location that we'd have a lot of trouble getting our hands on.
some of the best foot traffic in the country, so typically a location that we'd have a lot of trouble getting our hands on. Now, I think we'll likely do more business with this particular developer, likely won't look quite like this, not to say that we wouldn't do a similar type of transaction, but I think the circumstances here were pretty unique where we could come in with a very low risk option to come in and take down a property at very attractive pricing.
Ah now I think we'll likely do more business with with this particular developer likely won't look quite like this are not to say that we wouldn't do a similar type of transaction, but I think the circumstances here, we're pretty unique where we could come in with a very low risk.
You know option to come in and take down a property it at very attractive pricing.
Yes.
Okay. That's helpful I'll leave it there thank you.
Thank you. Next question comes from Todd Thomas with KeyBank Capital Markets. Please go ahead.
Thank you. Your next question comes from Todd Thomas with Keybanc Capital markets. Please go ahead.
Hi. Thanks. Good morning. Just following up first on the investment environment, Mark, what's driving the increase in the investment pipeline that you cited? And then can you comment on whether you anticipate any change in pricing or cap rates as we move further throughout the back half of the year?
Hi, Thanks. Good morning, just following up first on the investment environment, Mark what's what's driving the increase in the investment pipeline that you cited and then can you comment on whether you anticipate any change in pricing or cap rates as we move further throughout the <unk>.
Half of the year.
Yeah, sure. I mean, always always difficult to predict exactly where where cap rates are going to go. But, you know, we do anticipate cap rates moving up a little bit on the margin.
Yeah sure I mean, it's always difficult to predict exactly where where cap rates are going to go but you know, we do anticipate cap rates moving up a little bit on the margin.
And I think what's really driving our pipeline is we've seen a number of different types of buyers that have really had trouble getting their financing. And so, you know, as you're aware, kind of our approach is
And I think what's really driving our pipeline as we've seen a number of different types of buyers are that have really had trouble getting their financing and so you know as you're aware kind of our approaches yeah, we'd look for the investments that really fit our criteria and then we tried to get the pricing that works for us the second part.
We look for the investments that really fit our criteria, and then we try to get the pricing that works for us. The second part being the more challenging of the two. And so with a lot of buyers kind of blowing out of contracts and not being able to perform, that's allowed us to get back involved with a lot of these transactions. And I think, you know, always tough to predict exactly how this plays out, but we've seen more portfolio opportunities.
The more challenging of the two and so with a lot of buyers kind of blowing out of contracts and not being able to perform that's allowed us to get back involved without with a lot of these transactions. So I and I think you know always tough to predict exactly how this plays out but we've seen more portfolio opportunities, which you know historically, we've done very few we've done a couple of deals.
Historically, we've done very few, we've done a couple of deals over $50 million, but typically that's not what we're focused on. But when you think about the buyers that were really driving the cap rate compression overall in the net lease retail space, those are going to be your higher LTV portfolio buyers.
Over $50 million, but typically that's not not what we're focused on but when you think about are the buyers that were really driving a you know the cap rate compression our overall and the net lease retail space are you know those are going to be your higher L. T. V portfolio buyers are that can no longer get the financing to drive their their cash.
that can no longer get the financing to drive their cash-on-cash.
Yields that they were really trying to solve for so seeing them kind of pull back out of the market
On cash yields that they were really trying to solve for so seeing them kind of pulled back out of the market. There's a number of wholesale to retail type portfolio of buyers that would go in and try to take advantage of the 10 31 pricing they have become very uncomfortable that theyre going to be able to flip those properties accretively.
There's a number of wholesale to retail type portfolio buyers that would go in and
try to take advantage of the 1031 pricing, they've become very uncomfortable that they're going to be able to flip those properties accretively.
And so we're seeing some of those deals potentially come back to us. There are other public buyers that are still aggressive in the market. So we're cautiously optimistic that we may be able to do, you know, some more, you know, chunkier transactions, but I think, you know, we're going to continue to stick to our bread and butter, which are kind of the smaller portfolios and one-off transactions.
And so we're seeing some of those deals potentially come back to US there are other public buyers that are still still aggressive in the market. So we're cautiously optimistic that we may be able to do.
You know some more chunkier transactions, but I think you know we're going to continue to stick to our to our bread and butter or what's your kind of the smaller portfolios and one off transactions.
Okay and then.
And then thinking about dispositions, you mentioned that you would continue to look to reduce exposure to casual dining, banking, and I think health and fitness. Where do you want those exposures to be? And what's the timeline to get to those target exposures? And if you are seeing some smaller or medium-sized portfolio deals, is there an opportunity to
And then thinking about dispositions you mentioned that you would continue to look to reduce exposure to casual dining banking and I think health and fitness.
Where where do you want those exposures to be and what's the timeline to get to those those target exposures and and if you are seeing some some you know smaller or medium sized portfolio deals is there an opportunity to yeah you know.
you know, rotate capital, recycle capital a little bit sooner.
Rotate cash or capital recycle capital a little bit sooner.
Yeah, absolutely. So, you know, we're always opportunistic when we're thinking about dispositions, you know, we added a portfolio within this within the portfolio within this quarter.
Yeah, absolutely. So I you know, we're always opportunistic when we're thinking about dispositions you know we added a portfolio within this within the portfolio within this quarter, which included a bank. So we're looking to sell that pretty quickly where we think we can do that pretty accretively.
which included a bank, so we're looking to sell that pretty quickly. We think we can do that pretty accretively. And then casual dining, you know, we've gotten it down under 1%. I think that's probably a healthy area to stick around.
And then in casual dining yeah, we've we've gotten it down under 1% I think that's probably a healthy area to stick around.
For us, we did add one location at Chili's that does over $4 million in sales, so we're a little bit less.
For US you know, we did add one location that chili's that does over $4 million in sales. So we're a little bit less concerned about that particular location with a really low rents. So each situation's kind of yeah, we underwrite them into its individual characteristics are but I think.
concerned about that particular location with really low rents, so each situation is kind of, you know, we underrate to its individual characteristics.
But I think, you know, I would think about casual dining likely to hang around that 1% of our portfolio, but really be very selective of what we're willing to keep in the portfolio. And then banks, I think you'll likely see that eventually get down to zero.
I would think about casual dining likely to hang around that 1% of our portfolio, but really be very selective of what we're willing to keep in the portfolio and then banks I think you'll likely see that eventually get down to zero.
Okay alright, thank you.
Next question comes from Greg McGinnis with Scotiabank. Please go ahead.
Next question comes from Greg Mcginniss with Scotiabank. Please go ahead.
Hi, this is Jason Wayne. I'm with Greg. Good morning. So you mentioned last quarter about potentially raising debt in the back half of this year. I was just wondering if that's still the expectation and what kind of rates you would anticipate achieving on that?
Hi. This is this is Jason weigh in on with Greg Good morning.
Mentioned last quarter about potentially raising debt in the back half of this year I was just wondering if that's still the expectation and what kind of rates you would anticipate achieving on that.
Yeah, Jason, yeah, from our perspective, we do continue to anticipate, you know, raising additional debt in the back half of the year. It's really to kind of term out what's going to be a more permanent line balance on our revolver. You know, the, we have been talking about doing a 10 year private placement, you know, in the 4% range that, you know, that market is in pretty significant disarray increased base rates, widening outspread.
Yes, Jason Yes from our perspective, we do continue to anticipate raising additional debt in the back half of the year.
It's really to kind of term out what's going to be a more permanent line balance on our revolver.
We had been talking about doing a 10 year private placement you know in the 4% range that you know that market is in pretty significant disarray increase base rates widening out spreads you know the indicative levels on that now are somewhere probably between five and five in the quarter.
you know, the indicative levels on that now are somewhere probably between 5 and 5 1?4. We do have other attractive options that allow us to get term, 5 and 7-year term through the bank market. I would anticipate that, you know, once we are able to put, you know, this quarter's earnings in the rearview mirror, you know, Randy and myself will go out to the market and, you know, start evaluating alternatives for a recast of the line of credit while maintaining as much optionality as we possibly can, you know, to lock in term.
We do have other attractive options that allow us to get term five and seven year term through the bank market I would anticipate that once we were able to put this quarter's earnings in the rearview Mirror you know Randy and myself will go out to the market and start evaluating alternatives for a recast of the line of credit while maintaining as much optionality as we thought.
We can you know to lock in term into the future. So.
So the increase in interest expense expectations that you saw in our guidance is really reflective of the opportunity set that we see as of today.
The increase in interest expense ex expectations that you saw in our guidance is really reflective of the opportunity set that we see as of today.
Okay.
Right.
Yes, that's all from me thank you.
Next question comes from Josh Dennerlein with Bank of America.
Next question comes from Josh <unk> with Bank of America.
I just wanted to follow up again on what you're seeing in the transactions market. Is there any sign of seeing, you know, leveraged buyers or just given the current volatility in the debt market impacting, you know...
Good morning, this is a living wage.
Josh I just wanted to follow up I can earn E right, you're seeing in the transactions market.
And is there any sign of you know leverage buyers or just given the current volatility in the market.
Tacking on certain opportunities for you all to take on.
opportunities for you all to take on. If you could comment on seeing that or potentially seeing that as an issue as you consider transactions.
If you could comment on.
Being that we're essentially saying that I think that's right.
I consider transaction.
Yeah sure. So yeah, we are seeing some of the higher leveraged type buyers higher LTV buyers never are relying on call. It 75% type LTV transactions are more or less pull out of the market, especially in some of the portfolio deals to give you an idea of how we typically operate when we see larger poor.
Yeah, sure. So yeah, we are seeing some of the higher leveraged type buyers, higher LTV buyers that we're relying on call it, you know, 75% type LTV transactions.
more or less pull out of the market, especially in some of the portfolio deals.
To give you an idea of how we typically operate when we see larger portfolio transactions that are marketed, we'll typically bet on those and then just never hear back from the broker on those types of deals because we just aren't really that competitive on pricing because we can find better risk-adjusted returns.
Folio transactions that are marketed will typically typically bid on those and then just never hear back from [laughter] from the broker on those types of deals because we just arent really that competitive on pricing because we can find better a better risk adjusted returns with smaller types of deals that get a little bit less attention are we are.
with smaller types of deals that get a little bit less attention. We are getting calls back, which is certainly a pretty big change. I still don't think – I think now we're – rather than being seventh or eighth in line for pricing, I think we're probably third or fourth in most cases. So I still wouldn't anticipate us to be doing a lot of larger portfolios, but I think it is indicative of the fact that there aren't as many private buyers that are relying on more leverage when they're transacting.
Getting calls back which is you know certainly a pretty big change I still don't think I think when I wear rather than being seventh or eighth in line for for pricing I think we're probably third or fourth in most cases, so I still wouldn't anticipate us to be doing a lot of a lot of larger portfolios, but I think it is indicative of the fact that there arent as many private buyers that are relying on.
Yeah, more more leverage when they're when they're transacting.
Okay.
Okay great.
Yeah.
And I just wanted to dig into your process of being more selective on certain industries as you look to expand.
And I just wanted to dig into our Pos system being more selective on certain industry that you look to expand them.
Could you talk about your strategy if that kind of remains the same with respect to screening new tenants or opportunities? Is there anything in particular with Publix that was new to kind of your approach in considering opportunities?
Thank you.
Uh huh.
You know your strategy if that kind of remain the same with respect to screening.
Tenants are opportunity.
Is there anything in particular with public that with Neil here, you know kind of your approach and you know.
Considering the opportunity.
Yes, sure. I mean, I think as it relates to Publix, I think we would, you know, we've always wanted to add them to our portfolio. And we, it's just difficult to make the pricing work in most situations. And so this is what this is a transaction that we have worked on for quite some time, had a few out parcels, which included
Yeah sure I mean, I think as it relates to Publix I think we would you know we've always wanted to add them to our portfolio and we it's just difficult to make the pricing work in most situations and so this.
This is what this is a transaction that we have worked on for quite some time I had a few out parcels, which included a wells Fargo Bank, which we're taking on we put into the Trs and then we're going to sell so it had a couple of moving pieces that that allowed us to get in front of it and close on it. So you know we'd love to do more of those types of transactions, but I don't think that.
uh... welfare go back which were taking on we put in the terrace and then we're going to tell so at a couple moving pieces that uh... that you know allowed us to get part of it and close on itself
You know, we'd love to do more of those types of transactions, but I don't think that our
Our you know investment criteria has changed really in any way when we formed the company back in 2019, we really wanted to focus on Tennessee, that's going to do very well in any economic cycle and certainly what we're seeing and what we're predicting a here for the next several quarters that is theres going to be some pressure on the consumer.
Um, you know, investment criteria has changed really in any way when we formed the company back in 2019.
We really wanted to focus on tenancy that's going to do very well in any economic cycle and certainly what we're seeing and what we're predicting.
I think anything discretionary is gonna be a little bit more difficult are you know we went through our entire portfolio.
we went through our entire portfolio and really tried to think through, you know, what's the most discretionary within our portfolio. Fortunately, we don't, you know, most of it's, you know, going to be necessity-based and, you know, really defensive types of categories. So I think the thesis at the time that we really started adding to the portfolio back in 2019, 2020 has really held. And you know, I think, you know, Netflix, you're seeing their subscriber base decrease, which to us is an indication that, you know...
And really tried to think through whats the most discretionary within our portfolio. Unfortunately, we don't you know most of it's gonna be a necessity based and you know really defensive types of categories, though I think the thesis at the time that we are really started adding to the portfolio back in back in 2019, 'twenty 'twenty has really held.
And, you know, I think, you know, Netflix, you're seeing their subscriber base decrease, which to us is an indication that, you know, people's budgets are getting squeezed and they're looking at their monthly budget and saying, what do I really need and what don't I need? So we feel like we're really well positioned, you know, to be able to collect all of our rent and we think that'll be a different story.
You know I think you know Netflix you're saying their subscriber base decrease which to US is an indication that you know people's budgets are getting squeezed and they're looking at their monthly budgets and saying what do I really need and what don't I need so.
So we feel like we're really well positioned are you know to be able to collect all of our rent and we think that'll be a differentiator for us.
Okay.
Great. Thank you. That's helpful. And just to follow up, so would you say, you know, your focus is, there's kind of a higher focus on the defensive category?
Great. Thank you that's helpful and just a follow up how would you say you know your focus is.
There's kind of a higher focus on the defensive category.
Yeah, I mean, I think that's been our DNA from day one. But I think it's, you know, even though that's our DNA, we wanted to take a hard look at the portfolio and really assess
Yeah, I mean, I think that's been our DNA from day, one, but I think it's you know even though that's our DNA. We wanted to take a hard look at the portfolio and really assess not only the underwriting that we did at the time of the acquisitions, but kind of what things look like today and really feel very comfortable with the portfolio there will be some things on the edge.
not only the underwriting that we did at the time of the acquisitions, but kind of what things look like today, and really feel very comfortable with the portfolio. There will be some things on the edges that, you know, we may look to sell. Casual dining, certainly an area that we spoke about a little bit earlier. You know, if you've got a consumer that's under pressure, that's an area that we've seen get squeezed in the past. So we're going to be extraordinarily selective with some of the categories that we're in.
It just that you know we may look to sell a casual dining certainly an area that we spoke about a little bit earlier, you know if you've got a consumer that's under pressure are that's an area that we've seen get squeezed in the past. So we're gonna be extraordinarily selective with the with some of the categories that we're in.
Okay, great. Thank you.
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Next question comes from Nicholas Joseph, Citi. Please go ahead.
Next question comes from Nicholas Joseph of Citi. Please go ahead.
Thanks. For the development spend, what's the exposure to rising construction costs and how does that impact the targeted yield?
Thanks for the development spend what's the exposure to a rising construction costs and how does that impact the targeted yield.
Yeah, no, it's a great question. So there's a lot of different ways to attack development. We've chosen to take
Yeah, no. It's a great question. So there's a lot of different ways to attack development, we've chosen to take a very conservative approach, where we're underwriting the developer and all cost overruns are borne by the developer so we need to lease in hand, and not be responsible for any cost overruns and so we haven't had.
a very conservative approach where we're underwriting the developer and all cost overruns are borne by the developer, so we need a lease in hand and not be responsible for any cost overruns.
And so we haven't had any issues there, but I do think it's going to have a negative impact on future developments in terms of being able to make the numbers work, where the retailers are either going to have to pay more rent, or the developers are going to have to take less profit, which is already pretty thin. So I would anticipate that part of our pipeline coming under some pressure and maybe not growing.
Any issues there, but I do think it's going to have a negative impact on future developments in terms of being able to make the make the numbers work, where the retailers are either going to have to pay more rent or the developers gonna have to you know take less profit, so which is already pretty thin. So I wouldn't I would anticipate that a part of our pipeline coming.
Under some pressure in and maybe not growing quite as quickly as it would have absent the increase in construction costs and labor costs.
quite as quickly as it would have absent the increase in construction costs and labor costs.
Thanks, but the existing development pipeline is pretty locked in from your standpoint in terms of the yield, right? And that's that's right.
But the existing development pipeline is pretty locked in from your standpoint in terms of the yield right.
That's right.
Awesome. Thank you.
Thank you.
Next question comes from Linda Sy with Jeffries. Please go ahead.
Next question comes from Linda Tsai with Jefferies. Please go ahead.
Yes, hi the mortgage loan receivable that was a creative way
Yes, hi, good mortgage loan receivable that was accretive way to achieve your capital deployment target are there. Other examples that you could point us to in terms of creative solutions to achieve capital deployment.
capital deployment target. Are there other examples that you could point us to in terms of creative solutions to achieve capital deployment?
Yeah sure I mean, I think really from our inception, we've looked to figure out the most.
Yeah, sure. I mean, I think really from our inception, we've looked to figure out the most, you know,
creative ways to get better cap rates and better yields for higher quality assets.
Creative ways to get a better cap rates and better yields for higher quality assets and so and some of those work do they some of them don't I you know I think a good example was you know where we had you know a Walmart and Sam's club and Tupelo, Mississippi last year.
uh... and some of those work today some of them don't uh... you know if you know i think a good example was
you know, where we had, you know, a Walmart and a Sam's Club in Tupelo, Mississippi last year, where, you know, there's a shopping center, you know, REIT that was selling an entire shopping center. We put a bid in for that Walmart and that Sam's Club, and they came back and said, hey, look, you know, we're really looking to sell the entire shopping center, not really just trying to sell the two things that are easy to sell. And so we brought in a partner that was able to kind of take on the junior boxes and shop space.
Where you know there was a shopping center.
REIT that was selling an entire shopping center, a we put a bid in for that Walmart and Sam's club and they came back and said Hey look you know we're really looking to.
Sell the entire shopping center are not really just trying to sell the two things that are easy to sell and so we brought in a partner that was able to kind of take on the junior boxes and shop space and you know they they are.
you know, the more difficult part of the transaction for us and manage the center and, you know, allowed us to come in and buy the Walmart and Sam's Club 12 years of lease term at a 6.6% cap rate. So I think we're always looking for creative ways to get in front of transactions in a very low-risk way. And that's, you know, essentially a big piece of, you know, our underwriting and acquisitions process, which I think is a little bit different than what you see with some of the other ones.
The more difficult part of the transaction for us and manage the center.
And you know it allowed us to come in and buy the Walmart and Sam's club 12 years of lease term are.
At a 6.6% cap rate. So I think we're always looking for creative ways to get in front of transactions in a very low risk way and that's you know essentially a big piece of our underwriting and acquisitions process, which I think is a little bit different than what you see with somebody other Reits.
Thank you.
Thank you I will now turn the floor over to Mark for closing remarks.
Thank you. I will now turn the floor over to Mark for closing remarks.
Well, thanks, everybody for joining us today, and we look forward to keeping them keeping the dialogue going have a good day.
Well, thanks everybody for for joining us today and we look forward to keeping the dialogue going.
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This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.
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