Q2 2022 Spirit Realty Capital Inc Earnings Call
[music].
Thank you for standing by this is the conference operator, welcome to the Spirit Realty Capital's second quarter 2022 earnings Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded after the dip.
Presentation, there will be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star and zero.
I would now like to turn the conference over to pair of Wall Senior Vice President Corporate Finance and Investor Relations. Please go ahead.
Yeah.
Thank you operator, and thank you everyone for joining us for spirits second quarter 2022 earnings call.
Presenting on today's call will be president and Chief Executive Officer, Jackson Shay and.
And Chief Financial Officer, Michael Hughes, and Heimlich, Chief investment officer will be available for Q&A.
Before we get started I would like to remind everyone that this presentation contains forward looking statements.
Although we believe these forward looking statements are based upon reasonable assumptions.
Our subject to known and unknown risks and uncertainties that could cause actual results to differ materially.
That's currently anticipated due to a number of factors.
I refer you to the Safe Harbor statement in our most recent filings with the SEC for a detailed discussion of the risk factors relating to these forward looking statements.
This presentation also contains certain non-GAAP measures reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are included in the exhibits furnished to the SEC under form 8-K, which includes our earnings release supplemental information and Investor presentation.
These materials are also available on the Investor Relations page of our website.
For our prepared remarks, I'm now pleased to introduce Mr. Jackson check Jackson.
Thanks, Pierre and good morning, everyone.
We had another productive quarter with the team performing well across multiple fronts.
In the aggregate between acquisitions and dispositions, we completed over 50 transactions.
Our operational metrics continued to demonstrate strong performance.
Starting with capital deployment, we invested $417 million, including 38 acquisition transactions.
Of which 31 were with existing spirit relationships.
Such as lifetime Zips and off lease only to name a few.
Since our last earnings call in May we.
We have seen cap rates start to move higher.
Especially for attractive distribution and light manufacturing transactions that meet our underwriting standards.
And these higher acquisition yields will be reflected in our third and fourth quarter results.
Of the $4 8 billion of assets, we have added to the portfolio since I joined as CEO .
One third had been industrial.
Made up of 52% distribution facilities.
79% light manufacturing.
6% industrial outdoor services and 3% flex.
To give you better insight into our industrial exposure. We have included additional detail on our industrial mix on page nine of our investor presentation.
As I mentioned on our Q1 earnings call.
Asset recycling and dispositions will be a key part of our strategy going forward.
Providing an alternative source of accretive equity capital and.
And critical market intelligence.
Well alone for portfolio shaping strengthening relationships with them the brokerage community and demonstrating the quality of our portfolio.
During the quarter we.
We sold 10 occupied properties for gross proceeds of $93 million at an average cap rate of 4.38%.
Approximately 43% of the gross proceeds.
I'm from assets that are team acquired in 2020 or later.
These recent investments were acquired at an average six 9% cap rate.
Were all non investment grade tenants.
We were able to sell these investments and an average four 7% cap rate.
Cashing in on their value appreciation in just a short few short years after enjoying the rent we shouldn't we received.
The other assets were sold from our retained portfolio.
These properties included in an office building leased to a financial services tenant a.
The home improvement retailer with no escalations for the remainder of its 11 year term and several other smaller transactions.
Two of these smaller transactions where products of our proactive investment management.
We successfully negotiated ground leases with Chick Fil a and all these.
After our former tenant Ryan's buffet vacated in 2016.
After receiving ground lease payments for several years.
We sold those properties.
Averaged three 8% cap rate.
Finally.
Our portfolio continues to perform exceptionally well.
We only have four vacant properties at quarter end and our unreimbursed property costs were only one 3%.
Our lost rent, which represents tenants who are not paying rent.
Stands at a historic low.
0.0% to 3%.
Our expected lease escalations over the next 12 months are 2%.
We believe our rigorous underwriting focused on industry fundamentals credit and real estate strength use.
Use of our heat map and utilization of our technology tools is paying off.
We have built a solid foundational portfolio.
That continues to perform and as we look forward, we see market pricing beginning to rationalize.
And more opportunities for spirit to deploy capital at meaningful spreads.
With that I'll turn the call over to Mike.
Thanks Jackson.
During the quarter, our ABR increased $24 million $647 million with 90% of the increase attributable net acquisitions and the remainder driven by contractual rent escalators.
Six of the seven theatres released during Covid are now fully open to.
Seven theater is still undergoing extensive improvements slated to hold the largest screen in Illinois with an anticipated opening next spring.
With the strong summer blockbuster season, the ramp up of these theaters are going very well.
During the second quarter, we received 915000 rats from seven theaters, representing 65% of the scheduled rent stabilization also as Jackson mentioned all of our portfolio metrics, including occupancy unreimbursed property cost and lost rent deliberate pristine results, resulting in our adjusted cash NOI, increasing by $23 million.
The $647 million.
Turning to expenses, our cash G&A margin, excluding prior year COVID-19 costs improved.
60 basis points to five 2% compared to the second quarter of 2021, driven.
Driven by the scalability of our platform as our revenues grew six 3% compared to the same period.
For the second half of the year, we expect cash G&A to be between 19 to 21 million, which compares to $19 million in the back half of 2021.
Our cash interest expense increased $1 3 million since last quarter, driven by higher revolver balance and a 44 basis point increase in our revolver borrowing rate.
Subsequent to quarter end, we received commitments for an 800 million term loan facility structure is a 300 million three year term loan and a 500 million five year term loan.
In anticipation of closing the new facility, we entered into interest rate swap agreements that would effectively fix the three year term loan coupon at 359% in the five year coupon at 345%.
Dissipate the new term loan facility closing a couple of weeks.
During the quarter, we issued 2 million shares of common stock to settle certain forward contracts generating net proceeds of $90 million.
As of quarter end, you have unsettled forward contracts for $1 1 million shares and maintain leverage of five two times and our fixed charge coverage ratio of five eight times.
Our expanded credit facility outstanding forward equity and cash on hand, we had $594 million in total corporate liquidity as of quarter end, which will increase upon closing with anticipated term loan facility.
Turning to guidance, we are maintaining our ASP per share range of $3 50 to $3.58.
Our acquisition target of approximately $1 5 billion.
And our disposition range of $200 million to $300 million.
From a capital recycling perspective, we believe dispositions will continue to be a good source of funds as we see robust demand for many of our properties.
We had.
Re buyers that were 10 31 buyers.
But some of the industrial and some of the retail.
And then we had three buyers that were just.
All cash either high net worth or just people that didn't really need financing to close on those purchases.
Hum.
In those industrial opportunities that we were selling on a couple of those cases.
Anil beds, we'd like more.
Five days on one on one case.
Close to that on another situation.
So those are kind of very interesting pieces of information for us.
We were not successful in selling some of the other things that we're looking at from a pricing standpoint that would that required more see MBS.
So.
Overall like I said that sort of gives us some visibility as to how bidders are handling things I'd.
I'd say the other thing that we're seeing handle as it gives me a lot of encouragement because we're seeing deals come back around that we're sort of failed deals that we looked at earlier in the year went away to a higher bidder at a higher price.
And things have come back around and saying Oh, we're going to look to three to four.
We believe.
Credible buyers and see if we can get a deal done and I'd say some of those opportunities are probably 50 basis points wider.
The other thing that we're seeing is in.
In some cases, especially where there's a broker involved.
In the industrial area, we're seeing like as opposed to best and final bids.
Theyre, taking rolling offers so that that kind of tells you.
I should inform you that.
<unk>.
Maybe the bidding is not as robust.
I'd say that overall, what gives me the most encouragement today is that a lot of the larger private equity firms that were dedicated in this space, particularly industrial side last year and they were driving down cap rates based on access to.
Cheap low rate floating rates MBS that like those guys are basically taking the summer off at this point.
So the people that are showing up at these <unk>.
Situations, we're showing up.
Characterized probably five to seven people that can kind of write a check.
Necessarily need mortgage debt, because obviously, if youre borrowing mortgage debt today youre doing a floater youre looking at 5% to 6% probably on a <unk>.
Short term floating rate debt instrument.
They lock in see MBS fixed rate loan, it's it's definitely north of five.
I think that kind of gives us a bit of advantage relative to how we borrow and fund ourselves.
And I also believe fundamentally that long term rates are going to come down so kind of put that altogether.
It looks pretty interesting for US right now that's why we made that point.
Great that's great color. So another one perhaps on on transactions, but from a different angle you had a bit of a slowdown in <unk>.
<unk> in the second quarter versus the first quarter your guidance seems to imply a deceleration in the back half, but you've also alluded a few times, it's a really interesting opportunities. So I guess I'm curious, how you're feeling about your liquidity and your cost of capital today and your ability to pursue these.
Opportunities. Thanks.
Sure I mean, I kind of mentioned like one of the things that we look at it really carefully look as well we do a sale leaseback to me that competition is obviously other people that can provide a sale leaseback.
But it's also the high yield market and the leveraged loan market, because we particularly focus on double B and C will be credits.
If you look at the high yield index today, it's widening overall by about 375 basis points.
Leveraged loan default levels are at record lows.
You look at that.
If you look at year to date high yield issuance of standing at around 70 billion to compare that to last year year to date those volumes for 300 billion.
Last year in total there was 461 billion of high yield issuance. So this year is going to be dramatically.
Low.
Overall comparison basis.
As you know in this high yield market the way. It works is when things reopen the most liquid pay issuers come first.
Then there is kind of price discovery.
Actually what trickles down is small single B double b credits get access to the market.
And basically they don't get access today, that's just the way it's working.
If you look at single B spreads, we look at that single B index of the Triple C Index high yield index, that's very directionally informative about the kinds of yields that we can get especially in the industrial area right for the things that we're targeting.
Today, the single B spread index is 573 basis points. The Triple C Index is 1122 basis points.
Now that may seem high but that's in line with the 20 year average for.
Issuance levels across those credit tranches.
The all time tight spreads.
We're back in late 2021.
Single B spreads were $3 54, Triple CS with 585. So if you look at sort of what we've been buying it's no mystery that.
We were really heavy in industrial as a percentage in the first two quarters of 2021, starting to lighten up in 'twenty one back half.
I suspect youll start to see us get much heavier as a percentage of industrial versus retail in the fourth quarter and at this it is yield differential continues spread differential continue to stay wide.
Fay.
A higher percentage of industrial that's the phosphate I guess, let's say.
It was really just the cost of capital Michael We will talk about yeah look I think we're not we don't feel constrained by capital and we think that.
For the right opportunities, we think there's capital available for them. So I think we just want to stay right now disciplined on what we're seeing I think Jack has talked about we are seeing in real time.
And if opportunities present themselves then we'll lean into itself.
The next question is from harsh <unk> with Green Street. Please go ahead.
Hey, Oh, I noticed about 30% of this quarter's dispositions. This quarter's occupied dispositions came from office assets.
Oh, and and that's in order to be just given the low cap rate for these dispositions.
I wanted to check how the market how what's the where does the buyer pool look like for these office assets and how were you able to get a little.
A low cap rate.
Despite a property type.
Oh, it seems like that is not in favor.
Okay. Thanks, Josh.
You know I kind of make that statement earlier. This concept of fomo has gone well. The reason I say that is like if you were.
Trying to sell anything.
In the third and fourth quarter of last year pretty much anything or finance anything you.
Pretty much get it done at some kind of basis.
If you look at our success and dispose.
I kind of wanted to mentioned like it was funds. It was 10 31, it was like which people.
The office building that we sold.
It was leased to a financial institution.
Several years left on the lease.
The buyer was was a billionaire.
Yeah, Yeah he had some.
Local we knew the market well.
I think he has bigger designs.
For that asset maybe when that lease renews.
So I wouldn't say that all assets would trade like that but you know one of the things that we do when we look at our disposition strategy.
Really think through.
Especially because theres no more formal you've got to figure out who your targeted buyers.
Trying to and try to get the best execution.
You see us selling assets going forward, we're going to be extremely disciplined.
Yep, Yep, very well have a <unk>.
Selling strategy as to who will buy and why they will buy.
You know when you when you have a super competitive market like we saw late last year, you know, you're just kind of throw stuff out there and sell 100 books out and see what kind of comes in and all kinds of different people show up that that's not the kind of environment. We're in right now so we have that.
That particular asset was a very targeted.
Selling process.
I'm not suggesting we would be able to replicate that cap rate with other office buildings, but I would say it's at the end of the day the underlying real estate quality at that particular location was just a phenomenal location in spite of a lease that was in place.
What that is.
What helped us get that.
It's all about.
Great.
That's helpful and then one more I mean harsh.
The other thing I would say, it's like another example of a similar sale that we did.
Was when we sold that Sunny delight deal in New Jersey last year.
Remember we call that that was a deal that we had bought all of them. When I first got here, it's like a seven seven cap rate. So we have 27 loan what we paid for it.
We ended up selling it for three nine cap rate at a price of $59 million.
Sunny delight is seven roughly seven years of.
Remaining lease term.
But the buyer there are sort of had different ideas about possibly the developer they get maybe expanding yet, but he had a tenant that could still exercised a lease option.
So we look at we look for opportunities within our portfolio well, maybe we're not going to redevelop it or do something like that but we can still extract a really high.
Price for it and return so that was kind of a long way to say.
Total office assets will trade like that but obviously, we have things in our portfolio that are pretty unique.
That's interesting.
I guess.
So at these low usage. This is of course, a very attractive exactly the source of the aperture for U O.
And given the guidance that you've put out dead for dispositions. It seems like there's about 115 million more maybe a little above that coming through in the back half of the year.
Do you think given that cap rates are and keeping you can still get these kinds of yields or disposition.
What are you expecting in the back I would say like.
Yeah, I mean look I think it's gonna really it's highly dependent on what we obviously decided to sell.
<unk>.
It's not necessarily just trying to get the lowest possible cap rate I mean, if you.
Look in this quarter.
Empty pillow put out a neat little note is that our net acquisition yield this quarter was a seven cap based on what we bought what we sold in an interesting way to think about it.
When we look out as to what we think we're going to be putting out in the market its probably going to be a little bit higher just could be some risk mitigation.
Let's go in it also depends on the mix of things that we're selling.
I mean look I think you've heard us say one of the things that we tried to create is a very liquid portfolio.
And in.
Our portfolio is extremely liquid.
Yes.
Paper deal that we sold to Mac paper properties right.
When we acquired that portfolio, which was 14 properties remember that we acquired that in late March 2020. So we already saw COVID-19 sort of starting to creep in that spreads are widening still closed and renegotiate anything.
That sponsor because they were they were buying a business that was part of an acquisition financials of the company.
Selling those two properties at $27 5 million at that four five cap rate increases.
Increases the effective cap rate on the remaining 12 properties in that portfolio.
So 692% so it's a 67 basis point increase on our investment yield on our original investment.
So the way I would sort of describe what's happening is we're not just looking at accretive recycling obviously, yeah, we we acquired.
All of these properties on a net yield basis at a seven cap but.
But remember what this is doing two things that we buy it's boosting those going in yields as well.
So kind of get a twofold.
Okay. Thank you.
The next question is from Wes Golladay with Baird. Please go ahead.
Hey, good morning, guys. Jack. Thank you you mentioned that certainty of close is getting valued a lot more of these days are you starting to see a lot of re trading and then when you look into your pipeline.
You mentioned, the new volume was high or you're going to see a lot of new relationships coming into the pipeline in the next few quarters.
I would say, it's going to be a combination of existing and new relationships.
Well I'll give you a good example, like our golf, Yes, we had a meeting.
With club Corp, recently, the senior management team.
And you know look we.
Got a lot of questions about that golf acquisition that we did.
What I can tell you about that portfolio the portfolio that we acquired.
If you compare fiscal year 2019 results to second quarter.
2022, TTM, so it's kind of like over like periods.
The revenue in that portfolio is up almost 20%.
EBITDA was up 7%.
Coverage is up 7% and went to sales is down 200 basis points.
So pretty good right after meeting with that management team, there's way more upside still in this portfolio as a upcharge different management membership categories.
Within that private.
Club portfolio.
And look I would tell you right now we're going to do more golf acquisitions with club Corp, going forward expect to see that in the pipeline.
And it's gonna have a range of acquisition as well as some redevelopment opportunity with them.
We've been talking to other operators as well but.
Look we're going to leverage the relationships we have in the lines of trade that we think make the most sense today.
Well, we can get the best risk adjusted return so yeah.
I think it's clearly going to be a focused on repeat business, which was a high percentage.
This past quarter.
And we're being shipped we're being very selective in what we're buying right now and like I said, the most encouraging thing I say it is the things that make the most sense to buy or starting to.
Turn up now.
Maybe there's some price capitulation people just need to close they need to go forward look forward.
Got it and then we can go to in the passenger you lots of examples of where you.
<unk> been in your portfolio as it gets the value a lot higher than the private market and I guess, what the where the equity is today, it's recovered, but let's say if it were not as favorable would you just dial up more of these opportunistic dispositions and any way to quantify how big this bucket could be for your assets, where if you find.
The right buyer would you have done many times in the past you can just get a.
And abnormally low cap rate.
Yeah, I mean, we have.
If you looked at like I'll use an example, three of what I would consider some of the best transactions.
But just really <unk>.
Interesting ones that we could monetize Mac paper would be about right. We've already proved that Shiloh, which.
We acquired in 2021.
One of the sales this quarter was the Worthington steel building that was one of the acquisitions within the Shiloh opportunity.
When we bought that whole portfolio, and an 8% cap rate and we ended up selling Worthington at.
At a five cap I mean, just gives you some idea of the latitude service King I mean, I got a bunch of questions about that last quarter.
It's one of the best transactions, we've done I'll tell you right now.
That was a 21 store portfolio.
Very attractive going in yield.
Very very good lease.
Since we bought back.
Sale leaseback that we did that directly with the company clearly capital is invested $200 million.
And we moved $500 million of debt and merge it with another company they own.
Crashed champions.
That's totally different completely upgraded now it's 550 units.
And like Mac papers, and Shiloh, we've already got a reverse inquiry for units in a high four cap without even selling yet just reverse inquiry. So we're just going to kind of keep doing that.
Have an ability to identify the stuff.
And whether we sell these things one off or do a joint venture or whatever our lop off bigger pieces.
We're just going to keep making good real estate investments that's what we do.
And we're going to find the best source of capital to attack it.
And for that service King every Jackson, you bought that when it was a little bit more I guess I am clear story on the capital structure is there any way you can disclose that cap rate that you bought it that or is it something that there may be sensitive about.
Yes, there is some confidentiality things around it but what I would tell you about that.
That acquisition.
Light Shiloh had a lot of complexity.
Really good real estate really good unit coverage really good lease.
Well, we spent time with.
The company.
We believe that there was a path for them to get on the other end of success.
What gave us a lot of conviction to move aggressively on it.
So look we look at a lot of things like that and don't do them, but when we find them we launch them pretty hard.
Shiloh.
I was in the middle.
Okay, sorry about that Jack and Greg.
Yeah remember Shiloh, if you'll recall was a was a company that was also in bankruptcy coming out and the restructuring and we did the sale leaseback in combination with that.
That kind of restructuring process.
Look just because companies filing it doesn't necessarily mean your real estate assets are going down in value.
Do you think about bankruptcy senior debt converts to equity if you've got really good real estate and the company Restructures. Your property has just got a whole lot better and your business got better.
So remember how we underwrite we looked for critic.
Critically long term.
Robust industries look for really good real estate and we'll look for management and operators that we believe are sophisticated and.
And our large that can kind of manage through complexity.
Just kept keep the pedal over and over again and that's what.
It was $4 8 billion of properties that we bought so it's Paul.
Out here, we'll continue to apply the same.
Underwriting credit strategy to all the stuff we bought.
Yeah, Hi, Thanks, a lot.
The next question is from Mitch Germain with JMP Securities. Please go ahead.
Thank you Jackson, you seem to be pretty positive about.
The deal by the way you are out you mentioned could you speak a little louder I can't we can't really hear you maybe of pets that Paul.
But I would come back in the queue or something.
Right.
Okay.
The next question is from Rob Stevenson with James. Please go ahead.
Good morning, guys.
How are you feeling about Jim's. These days are you positive there or you're just positive on lifetime, given the expansion there in the quarter.
Look we.
I'll say, it's a very.
Specific answer.
Lifetime, given what they do I mean, they are the category killer in their space High end country club experience.
Look they're a public company.
To say a secrets they have not.
Back to pre COVID-19 levels, yet, but.
For instance, if you look at our Jim that we just acquired up in Frisco, We bought two assets this quarter one in Frisco, one in Plano and Frisco opened.
They already had a waiting list. So just think about that those are two of them probably best suburban locations in the country definitely the top.
Probably 10% or quartile gyms.
Gyms are awesome and they will do well I believe that they will do well and it will continue to improve and our membership you go to the other end.
<unk> fitness, which we love that's what that's all about the high volume low price.
Operator in the gym space they are already exceeding.
Pre COVID-19 levels, so they've recovered.
From a unit coverage and profitability and revenue.
Yes.
Actually exceeded pre COVID-19 levels.
So I think that.
I guess, what I'd say is.
Just just my own impression, but like lifetimes going in price is a little higher obviously with <unk>, it's more of a financial commitment.
The offering and product and services an opportunity that they provide membership it's just a much more phenomenal experience. So.
Look we like the subscription business like the car wash business the golf business.
The health club business.
I think for the higher end.
Jim operators people have kind of started to do different things, but I do believe they'll come back to lifetime lifetime offers tennis pick a ball.
Water great pools, great programming.
It's just a great facility. So so we're very comfortable at CN.
I'd say, we're very selective about the operator and the price points that we're getting into not all jets.
They focused on.
What I'll call that lifetime space.
And then the high volume low price provider like a boss side that we think is best in class.
Okay, and then are you guys seeing any price discovery on decent performing movie theaters, yet seems like Bacon and adaptive reuse theaters are the ones that are trading out there. So just curious if youre seeing anything.
This point on.
At least theaters at this point.
And I believe we heard of a couple of them, but yeah, we're obviously not selling movie theaters.
Yes.
I would suggest that the answer is no there has not been enough.
Transactions to say where pricing is shaking out.
It's interesting we've seen.
Some large.
Well known concept theaters on the market.
Nearly double digit cap rate.
<unk> also seen some regional players and pretty good real estate locations on the market.
Five and six cap not that theyre going to get that but.
I'd say the answers are just not enough transaction volume.
Figure out where pricing is for theaters right now.
Okay, and then last one for me Jackson.
Did you and the board.
Think about the potential to buy back stock when you were trading in the mid thirties in mid June .
Or did you.
No we didn't really look at it.
Sure.
If you remember since I've been here, we've bought back a lot of stock.
One point.
And number the percentage of the float, but north of $300 million.
While we're going through that whole FHA spinoff.
I'm glad we didn't buy back stock because.
I guess I look at.
I'd put it this way.
If we were in a prolonged period.
And we didn't see opportunities to deploy capital of what I'd call really attractive levels in attractive real estate investments.
Then yeah buy back stock makes total sense.
But what I can buy service king or a shiloh in that paper and I'm not competing with 20 people and people want certainty of close and I can get and I've got high yield.
I have the single B index and Triple C index trading at the 20 year average spread averaged an underlying base rates are going up.
Oh Man I got bought.
I'm going to make good investments because you are buying back stock in just a moment in time.
Right.
Mac papers will be the gift that keeps giving if we want to start with Shiloh and seamless service kit.
It's going to continue to improve.
I continue to get rent bumps.
To continue to get cash flow.
So, yes, but we do look at buybacks, but we never really seriously consider that.
Even at the depth.
Because we didn't want to lose opportunity to kind of continue to deploy and we're saying Oh I'm sorry last few weeks the happiest of that.
Alright, Thanks, guys I appreciate the time.
The next question is from Michael Goldsmith with UBS. Please go ahead.
Good morning, Thanks, a lot for taking the questions.
Cash capitalization rate for acquisitions in the second quarter was slightly lower than the first quarter and previously you've talked about the cap rates moving higher so when should we think about that as being reflected in the numbers and then given cap rates moving higher. This is thank you.
Are you less likely to move up the risk curve for higher yields.
Good question, Michael I mean, the first two quarters were largely done at a very early part of what I call the lifecycle of a quarter.
I think in the third quarter, you'll start to see an increase in the cap rate, but not the same kind of volume as you saw in the first two quarters because as I said the volume of opportunities just wasn't there people were still hoping for hey, I want the low six cap I don't want the seven cap.
I'm offering of seven or 6% quarter.
I think what you've seen today is real price capitulation.
Particularly in that industrial light manufacturing area in retail now so I think what youre going to see from us is higher cap higher yields lower.
Lower volume in the third quarter.
I suggest that youll see higher yields and much more industrial and hopefully much more volume in the fourth quarter and going forward.
And then to follow up on that you talked about industrial cap rates are.
50 to 100 basis points, how does that compare for distribution versus menu factoring.
I think distributions, obviously tighter it's really that's a hard question because it really depends on the nature of the distribution in the market and the particular manufacturers sub sector that had said I think that has a lot to do it I don't care. If you want to try to keep it there is a difference but yeah. There is a difference.
Jackson mentioned distribution tends to be a tighter cap rate but.
When we say light manufacturing that just means the majority of the space is dedicated and light manufacturing I would say typically those buildings do have distribution capabilities and whatnot, but.
Relatively speaking those cap rate increases at Jackson referred to would I'd suggest apply equally to both of those asset classes.
Got it and then as a follow up.
Cap rates starting to move higher.
So.
Maybe.
The spreads kind of compressing events, so you've been focused on dispositions as funding, but I guess, what would you need to see from here, where you can kind of switch to move away from distressed positions to other sources for funding.
Well I mean, I think first no matter, what our stock prices our cost of capital, we're always going to be disposal.
Maybe it's a smaller amount, but I think that we get strategic information out of that.
It's real time, obviously, but.
But we're trying to sell something we see who is bidding how they're bidding the number of bidders.
<unk> informative for somebody much a company that's buying so much be able to figure out when the Luna.
I would say that.
Yeah, well look at the equity markets. If things continue to go like I said last three weeks ago great.
So kind of to be honest it has been pretty crappy since.
Since the invasion and spreads widened as he hasn't been.
Product people, not really price capitulating on cap rate.
But I believe it's happening now.
And I, just don't know how long it's going to continue.
If you remember.
After COVID-19.
In the middle of 2020, like we got all in the third quarter and the fourth quarter of 2020, we picked up off lease that was a sale transaction with another buyer.
That's got a great deal with those guys will want to do we're doing more follow on business with them.
Then 2021, well two many people came in debt markets got crazy on across the business.
Got it really hard to do stuff.
Today.
Portfolios in my opinion, they're trading at a discount it's harder to finance them.
So that could be found it really interesting large portfolio would do it totally at this point I'm not quite sure yet and we thought we were getting paid properly.
Thank you very much.
The next question is from Joshua <unk> with Bank of America. Please go ahead.
Yeah, Hey, guys.
Just kind of curious on the term loan you did post quarter.
Kind of thinking through just.
The potential accretion that might offer you guys and kind of how you think about that age going forward.
Yeah, I mean, yeah, Josh it was good execution for us I mean, it's not closed yet so in closing a couple of weeks, but obviously the rates are swaps. So that's locked in.
Yes, we felt was a better cost of capital and where the bond market was today I think we'll get back to doing bonds in future I think.
We looked at the bond market today, it's just it was very disrupted and we don't think it made sense to go into a disrupted markets out.
We have a balance sheet, our size and our credit rating like ours that you can pivot to different pockets of capital.
Debt or other types of capital and so.
Youll continue to see us.
Take advantage of the right types of capital to fund our business, but that was definitely good execution for us at this particular time.
Okay.
Catch for all Hey, Josh I'd make a pitch to all of our companies companies that.
Pete in this space the other public net lease rates, you've seen a number of us access the term loan market.
If you had a acquisition strategy that was reliant on CBS or secured mortgages have you basically taken the selloff honestly. If you were a buyer that was really.
Well, Ian on high yield debt or high yield single B term loans.
Probably taken the summer off.
There's just no OBO is going on right now.
For us being able to pivot into.
Investment grade term loans, I mean, I'm not suggesting that's going to be there forever, but is there right now and that's why people are taking it.
Yeah, there's a lot of volatility in the swap market and so you can sort of hedge rates at this moment in time, it's not like it's not great Green Dot, 5%, which was better maybe I wish we would have hedged earlier in the year.
Still pretty good works for our model and we'll just keep punching out terminals, but that's what takes because I do believe long term rates are coming down.
Fundamental.
Point of view right now today based on what I believe is happening could be wrong, but I believe that then the strategy makes sense.
Are there any kind of limits on how much term loans you can have for.
It's just not as familiar with the market.
Yes, I mean, theres not really a limit there's plenty of capacity out there and we have a lot of banking relationships.
I think that it's just.
This piece of capital you want to constantly do I mean look what we can do as long as they need to.
So I think it is a place you can go back to all of our peers a giant there are some companies out there that you really exclusively term loan so and there's a term loan a markers, but we access with a small bankruptcies term loan b market, which is a whole nother universe of investors. So there are different markets out there and.
We will evaluate those in future we have future debt needs, but I think that's the good thing about as Jack was saying being at a large investment grade company, we have different pockets of capital. We can go to on the debt side for example.
A lot of competitors out there don't have and.
I would argue right now that us and a lot of the other public companies, we have the best cost cap around right now because we can access these different pools of capital.
And also also access it at large scale.
But I would tell you like you know where our equity multiple is in.
Great.
Our cost of capital is look we just have a longer vis vis our peers as it relates to cost of capital. So we're just going to try to be as nimble as we can.
We got some more assets at low cap rates to execute go do that do more term loans, we're going to do that bond market opens up we'll do that.
But right now.
I keep saying what we saw in the last three weeks and it continues we'll figure it out.
Yes, the best the best solution.
Maybe just one quick follow up on that like you mentioned equity just kind of where do you have to kind of see to start.
Tapping the equity markets again.
It's really just this continued what I saw the last three weeks high volume of quality things that we would like to buy it that meet our criteria.
We have not seen that.
I'd say in the past several months.
I don't know if thats going to continue like this is three weeks.
One of the reasons why we didn't increase guidance because it just kind of.
This was just a three week.
Blip.
We're kind of get we're okay with our guidance at this if this trend continues that's what we'll do more than our guidance on the acquisition front.
Tell you that.
But again, it's hard for us to <unk>.
Just to make a change because totally right now like we'd like to do more industrial.
Because we're getting paid for it.
Based on our credit facility.
Nature of the real estate, we're seeing right now in the industry.
If it continues like I said into the fall.
We expect to do a lot more.
I just can't tell you right now if that's if that's going to just three week trend that's going to continue.
No that's great color I appreciate it.
Yes, I mean I would tell you I gave you those high yield indexes like if things stay at that 20 year average from a spread basis.
I would tell you will do more you can spell.
Glad to say that if you see that index compressed back.
Back to.
Lower levels like we saw in 2021.
To be more challenging for us to do the volume.
Suspect we'd be able to do.
The next question is from Ronald Camden with Morgan Stanley . Please go ahead.
First one is on calls obviously they've been in the news about.
Potentially looking to do sale lease back in and so forth just.
Maybe can you comment just your relationship there and add more appetite to do more there. Thanks.
Yes, yes.
Well, we bought some calls this past quarter, we like calls for one okay.
We bid on some other ones too.
What wasn't successful.
But yeah, we like kohls.
There.
One of the things that we like about them is that they're not in mall locations that freestanding generally if some mall locations, but majority of our freestanding or in shopping centers.
You know, what they're doing with sephora seems to be getting traction.
They have all the department stores in my opinion, they're doing they're doing really good work right now.
So yeah I think.
If they were gonna go sell some properties I'm sure we would.
Who would show up in a bit off.
Somebody come out on the price alone.
Rent structure and price per foot, all that kind of stuff the locations, obviously, but we like that.
Great and then just the second question is just a.
Piggybacking on sort of the the.
The question is on sort of the debt.
You know obviously, the 800 million that that's presumably supposed to fund and so far it's just in terms of leverage levels, just how high would you be willing to go before.
Considering coming back to the equity markets and so forth like how do you think about that trade off.
Okay.
We want to stay within our leverage magnified by that time you ended the quarter at five two I think if you look out the rest of the year.
With our current guidance in place we could you could not fund any additional equity other than we have on the forward.
And still stable at five five times range, but that's the Jackson earlier mentioned, if we see opportunities.
Happy to lean into and issue equity if needed so.
I figured that out yet.
I would say like if you look at just kind of look at our I think we have that one schedule and are disclosed in the investor presentation that talks about quarterly.
Capital deployment performance.
And if.
If you look back in Q3, 2020, Q4, 2020 Q1 2021.
Q2 2021.
A good majority of the acquisitions were in the industrial space.
And then you look at what happened in Q3 Q4.
Q1 of 2022, we were just getting priced out getting outbid by other people.
If we start to get some success on some of the things I just talked about that we're seeing in the.
Past three weeks, but what was your equity for sure.
And if we see more of a issue more equity.
But what kind of things that that's been sort of a three week phenomenon in terms of volume of.
Volume credit and opportunities at a cap rate that we think makes sense.
The risk adjusted return.
Excellent and then my last one was just on just the comments on the experiential sectors, obviously looking to do more golf.
Are there any others either in the pipeline or when they're short list, whether it's you know a theme parks marinas. It could be whatever was there anything else that was sort of really interesting really attractive that we're sort of in the pipeline or that you were looking at.
No not really I mean, we look at a lot of different things, but.
Pulling the trigger on something like.
Like main event, David Busters, obviously that was a great.
Our thesis for us.
How that ended up the combined companies.
Ralph we have we have a lot of.
We have a lot of interest in golf and will pick us pick our spots pick our operators picked by real estate.
Look at theme parks, we like with gaming look at marinas.
<unk> gotten there yet for either price or credit or whatever.
Say, we'd never do it but we do look at a lot of different things, but it's got to have that real staying power and upward trajectory from a demand end user standpoint for us to really get.
Get there I guess, that's why I put it.
We're looking at things like trying to find opportunities, where we think there might be some cap rate compression in the future.
Thank you.
The next question is from John Masako with Ladenburg Thalmann. Please go ahead.
Good morning.
Just a quick one for me.
The guidance that was maintained is that including the impact of the.
New term loans in the swap just thinking I know that.
<unk> locked in the transaction, so a little bit ongoing there and so I don't know if that was kind of contemplated in your per share guidance.
Yes. It does it has the new term loan built into it which obviously has rates going up in the third and fourth quarter.
Okay.
Isn't really it for me thank you very much.
Great.
The next question is from Greg Mcginniss Scotiabank. Please go ahead.
Hey, good morning, So just to clarify on that last point, our midpoint of guidance implies it just to touch it.
Pull back from the 90 a share.
In Q2 is that primarily driven by higher interest expense.
Yes, Andrew expenses, the lion's share of that if you think about it we're using the revolver, primarily in Q1 and Q2 and the average revolver rate I think in Q1 was about one 1% when it's about one 6% in second quarter, and we're swapping $800 million of debt to three 5% and then it will be used in revolver in the fourth quarter and of course, you know those rates are.
You're going to three and a half 4% by the end of the year. So definitely some higher interest expense in the back half of the year is affecting the midpoint of our guidance range.
Any other items to consider really just that.
Well now the other thing of course is our loss rate and leakage reserves, you've seen obviously a year to date, we've had no loss rent and our property cost leakage or unreimbursed property cost has been a historic low.
You can assume that in our forecast, we're a little more conservative and we do forecast some reserve for that and so that also is built into our guidance.
Okay. Thanks.
And then just final question for me is how are you thinking about exposure to some of your top tenants such as lifetime.
In terms of where you're comfortable bringing that exposure similar similarly on retail versus industrial isn't there any diversity level or exposure that you're targeting there.
I guess it's.
So overall I mean Boeing asked but.
The way the way, we think about it we think that obviously this as well.
We're going to be in a fed induced possible recession.
We think it's going to be shallow not deep.
We think that the <unk>.
Housing industry is kind of right in the crosshairs of what.
That's focused on.
We think this interest rate cycle will be short lived and.
Good morning to start trading down and.
Yes.
I'll hop back in the office to be honest you again.
So I think that what that sort of moves as earnings are going to slow down for a lot of the businesses that we invest in.
So we're spending a lot of time looking at industries that we think will continue to perform at the high rate of growth.
There are some industries that will continue but will slow.
We think theres some industries in our portfolio that might deteriorate a bit.
And then we think there are some industries that will be counter cyclical on the way up because of a trade down with consumers.
So rather than answer it like in our top 10, we have a kind of point of view on each of these industries.
And we're going to probably be thoughtful on rebalancing some of that as we move forward based on.
What I described to you is our view of the economy.
Over the next several months or quarters.
And that's probably the dispositions that we do will follow suit with how we feel about some of those.
Where things go I mean.
I think it's we.
So we use that <unk> spent a lot of time talking about it was we evaluated we adjusted it.
<unk>.
So yeah.
But I would rather not get so tactical about individual loans, when we look at sort of industries industry exposure for instances.
It's a big one.
Okay. Thank you.
This concludes the question and answer session I would like to turn the conference back over to Jack <unk> for any closing remarks.
Thank you operator, but hopefully from this call you'll conclude that portfolio is performing great.
Our operating platform doing a great job doing 50 plus transactions.
There's a lot of underlying value in our real estate, that's not reflective necessarily in our <unk> that are out there and.
And we think that with these debt spreads.
It widen 20 year levels on the averages.
There's going to be more opportunity for us to deploy.
Capital at.
Better spreads.
Being cautious about where we think the economy's glum.
And from a funding standpoint, having basically no debt on our revolver. After this.
Term loan closes.
<unk>.
Get some interesting stuff done and the balance of the year. So I appreciate your support and interest.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.
Yeah.
Yes.
Yeah.
Yes.
Yeah.