Q2 2022 National Retail Properties Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the National retail properties second quarter 2022 earnings call.
At this time, all participants have been placed on a listen only mode.
So it will be opened for questions and comments after the presentation. It.
It is now my pleasure to turn the floor over to your host Steve Horn CEO , Sir the floor is yours. Thank you Allie and good morning, and welcome to the National retail properties second quarter 2022 earnings call. Joining me on the call as Chief Financial Officer, Kevin Habicht.
As this morning's press release reflects national retail properties performance in 2022 continues to produce strong results, including continued high occupancy impressive rent collections and solid acquisitions, driven by our proprietary tenant relationships.
We are in position to continue enhancing shareholder value as we move into.
Into the second half of 2022 and beyond.
In July we announced roughly a 4% increase in our common stock dividend to be paid August 15th.
Just making 2022, our 30 <unk> consecutive annual dividend increase.
Actual retail properties is one of the select companies of under 90 U S public companies, including only two other Reits, which have achieved this impressive track record.
Based on our continued consistent performance, we announced today a further increase in our 2022 guidance of core <unk> per share to a range of 307 to $3 12 per share.
Our long standing strategy is designed to deliver consistent per share growth on a multiyear basis. This disciplined long term approach is reflected in our second guidance increase this year.
Turning to the highlights of national retail properties second quarter financial results.
<unk> 3305, freestanding single tenant retail properties continued to perform exceedingly well.
Maintained high occupancy level of 99, 1%, which remains above our long term average of 98% plus or minus a fraction.
We also collected 99, 7% of the rents due for the second quarter.
Staying on a little bit more on rent collections.
The deferrals that we provided to our select tenants during the early days of the pandemic continue to track as we expect.
At the end of 2022, 87%.
Or <unk> $49 5 million of the original $56 $7 million deferred rent will have been paid back which is 100% that is due at the time.
While we continue on the topic of the portfolio, Dave and Busters moved in our top 10 tenants with the acquisition of one of our top 15 tenants main event in June .
With regard to acquisitions during the quarter, we invested just north of 150 million 43, new properties.
The initial cap rate of 6.2 with an average lease duration of over 19 years.
Which 14 of the 16 deals were firm relationship tenants with which we do repeat programmatic business.
The first half of the year, we invested over $350 million and 102, new properties, what the initial cap rate of six point too with the average lease duration of $16 seven.
In an environment, where cap rates are still near historic lows, but showing signs of adjusting we continue our thoughtful and disciplined underwriting approach.
And then we will continue to emphasize acquisition volume through sale leaseback transactions with our stable of relationship tenants.
Based on our pipeline and dialogue with our partners, we remain comfortable with our ability to meet and hopefully exceed our 'twenty to increase acquisition guidance of $600 million to $700 million.
Primarily via direct sale leaseback deals with our company's long duration triple net lease form which is more landlord friendly than a 10 31 market deal.
During the second quarter. We also sold eight properties raised almost $8 million of proceeds to be reinvested in the new acquisitions.
Year to date, we've now raised $28 million of proceeds from the sale of 18 properties, including 11 Bacon.
Although job one is always a release vacancies and our leasing team does an outstanding job of it.
We'll continue to sell nonperforming assets, if we do not see a clear path to generating rental income within a reasonable timeframe.
Our balance sheet remains one of the strongest in the sector. Our credit facility had plenty of capacity with only a balance outstanding of approximately $40 million and we have no material debt maturities until mid 2024.
And then that is well positioned to fund our 2020 to acquisition guidance.
In closing I'd like to thank our associates for their dedication and hard work, putting in and then back to pre pandemic momentum as we look to finish 2022 strong and position <unk> for success over multiple years in the future.
With that let me turn the call over to Kevin for more color and detail on our quarterly numbers and updated guidance.
Thanks, Steve.
Usual I'll start with the cautionary note that we will make certain statements that may be considered to be forward looking statements under federal Securities law.
The company's actual future results may differ significantly from the matters discussed in these forward looking statements that we may not release revisions to these forward looking statements to reflect changes after the statements were made.
Actors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in this morning's press release.
With that <unk>.
Headlines from this morning's press release report quarterly core <unk> results of <unk> 79 per share for the second quarter of 2022.
Nine or 12, 9% over second quarter of 2021, and that's up <unk> <unk> or two 6% from the immediately preceding first quarter of 2022.
And first half year to date core <unk> results were up 11, 4% to $1 56 per share.
Today, we also reported that <unk> per share was <unk> 81 per share for the second quarter.
<unk> <unk> from the immediately preceding first quarters 79.
We did footnote second quarter <unk> included $1 7 million of deferred rent repayment.
Our accrued rental income adjustment for the second quarter without which that would have produced.
<unk> 80 per share for the quarter and likewise, the first half of 2022 <unk> included $3 5 million of deferred rent repayments in our accrued rental income adjustment for the first half without which would have produced <unk> of $1 58 per share for the first half of <unk>.
<unk> thousand 22.
Which are on the same basis compares to $1 43 per share for the first half of 2021 and that represents a 10, 5% increase year over year.
As the scheduled deferred rent repayments continue to taper off from peak levels in the first half of 2021, we are seeing <unk>.
Improved results kicking in from 2021, and 2022 property acquisitions.
I will also note that we took a $2.7 million charge in the second quarter in connection with the retirement of our CEO in April .
And that was excluded from our core <unk> and <unk> calculations.
Excluding deferred rent repayments, our <unk> dividend payout ratio for the first half of 2022 was about 67% and with the recent dividend increase.
Should run approximately 68% for the full year 2022.
All of that suggests that we will create approximately $180 million of free cash flow. After the payment of all expenses and dividends for 2022 and as we've discussed with investors. We burden. This quote unquote free cash flow at a cost of 8% for purposes of making capital allocation decisions in new properties.
So theres nothing free about it in our minds, but it is as we have significant part of the equity need for say $600 million acquisitions, especially if you're a couple of with $100 million of.
Proceeds from dispositions.
Occupancy was 99, 1% at quarter end that's been.
He'd mentioned consistent with recent quarters G&A expense was $9 7 million for the quarter that is down from second quarter a year ago levels.
Moving on today, we did increase our 2022 core <unk> per share guidance to a range from a range of $3 one.
<unk> to $3 eight per share to a new range of three.
$3 seven to $3 12 per share and similarly increased our <unk> guidance to a range of $3 14 to $3 19 per share.
Which reflects the scheduled slowdown in deferral repayments in 2022 as noted on page 13 of the press release.
<unk> mid point for both core <unk> and <unk> were increased by five.
Compared to previous guidance.
Important assumptions for our new 22 <unk>.
2022 guidance are on page seven of today's press release, and our modestly fine tuned from last quarters guidance. We were as I mentioned, excluding any executive retirement charges from our guidance and 2022 acquisition volume was bumped up by $50 million.
As usual, we don't give any guidance on our assumptions for capital markets activity, except for the general assumption.
Tend to behave in a fairly leverage neutral manner over the long term.
Most important takeaway from all of this is that we expect to grow core <unk> per share results in 2022 by about 8%.
New guidance midpoint.
Switching over to the balance sheet. The second quarter was quiet in terms of capital markets activity. We were very active in the debt markets in 2021 and are not unhappy to be on the sidelines at the moment, we did issue a modest amount of equity $32 million during the second quarter.
Ended the quarter with only $48 million outstanding on our $1 $1 billion Bank credit facility, despite investing $365 million in the first half of the year.
Our liquidity remains in excellent shape, our weighted average debt maturity is now $14 two years, which seems to be among the longest in the industry. Our next debt maturity is $350 million with a three 9% coupon due in mid 2024.
And all of our outstanding.
Debt is fixed rate with the exception of that $40 million on our bank line.
Debt net debt.
Gross book assets was 49% at quarter end net debt to EBITDA was five four times at June 30 interest coverage and fixed charge coverage was four seven times for the second quarter.
So we're in very good shape to produce strong core <unk> per share growth with our 2022 guidance, suggesting about 8% growth to the midpoint at midpoint importantly, without any heroic assumptions our focus remains on growing per share results over the long term we think.
Asset growth focused acquisitions volume contests in recent.
Any factors in recent quarters may be slowing a bit or at least getting a little more disciplined on price. If so we think renewed investor focus on per share results and managing balance sheets will accrue to our benefit but time will tell.
While there is currently an increase level of increased level of economic and capital market uncertainty, we are well positioned for such well I'll close with there and with that we'll open it up to any questions.
Ladies.
And gentlemen disorders.
<unk>, if you have any questions or comments. Please press star one on your phone at this time.
We ask that while posing your question you pick up your handset assisting on speaker phone to provide optimum sound quality.
Please hold while we pull for questions.
Thank you your first question.
Is coming from Brad Heffern. Please announce your affiliation then pose your question.
Hey, good morning, everyone, Brad Heffern from RBC.
Can you talk about how much cap rates have moved and has there been much of a difference across industry are across credit quality.
Hey, How're you doing Brett.
The cap rates that were starting to see cracks you kind of second half of the quarter, we kind of started seeing movement in cap rates.
More.
This conversation we had before when interest rates started moving up a lot of the private equity money moved out of the market.
Now with the interest rates moving up we're seeing some institutions in the net lease business are drawn a line in the sand.
Call it seven cap or high sixes. So we've lost a little competition there within our market, but yes, we're starting to see about a 20 basis 25 basis move for the asset quality that we target, meaning the sale leaseback transaction, but more importantly, given the long term triple net lease by way of we did 19 year average for the <unk>.
<unk>.
Okay. Thanks for that.
And then any thoughts on the amount of exposure that you have in the tenant roster to variable rate debt and whether that represents a potential credit risk as that flows through.
Yes, no we don't feel like we have any notable exposure is really only the $40 million out of our three $8 billion of debt is only $40 million related to our bank credit facility. So we don't feel like we have any real exposure at all to variable interest rate risks.
Sorry, sorry, Kevin I meant at the at the tenant level so like.
Tenant tenant to have.
Variable rate debt in their capital structure, and so perhaps at the store level things look fine, but they might face issues with with rising interest costs.
Thanks for clarifying that yes, that's clearly some of our tenants definitely do I'd say about a third of our tenant roster as private equity back and they tend to operate under kind of that.
<unk> terms that are variable rate.
To date, we have not seen a lot of stress if you will at the property level.
Not too much really at the corporate level at this point in time.
I think some where it gets a little it can get a little more challenging is if you've got some near term debt maturities that you have to refinance its just a tough market for refinancing.
Sub investment grade debt in today's world, but but we.
We've found.
It appears that our tenants are not having any.
Challenges on the on the credit side at the moment.
Okay. Thank you.
Please state your affiliation and pose your question.
Thank you it's Green Street.
I know you guys have had success on the deal front as evidenced by our Q2 results and obviously guidance, but can you just talk a little bit about existing customer sentiment in regards to growth just given the broader economic backdrop. Just curious how recent conversations have gone and if there are any kind of industries that are perhaps a little bit more cautious at this point and others.
Hey, Spencer.
The conversation is obviously, we entered in conversations on a daily weekly basis, with our tenant base and the relationships.
What would they have seen we've seen a lot of kind of organic growth increasing over the first six months of the year with our tenants, where theyre doing new store development and then thats participating.
On that deal front, and there has been a little bit less M&A in the second quarter that we found and that was more than 10, it's been a little bit cautious more of the debt market than the consumer the consumer has been pretty resilient and our tenant base. So they're not worried about the top line growth and obviously with inflation their margins are getting squeezed.
Just a little bit more on the profitability, but it's not stopping them from growing but they are just kind of being a little hesitant and finding the low price discovery.
Okay that makes a lot of sense and then just as you are executing severely agreements and whether that's with new tenants are with existing tenants have there been any shifts or changes just in terms of what tenants are looking for in regards to term or.
The leaders being CPI linked or whatnot.
And my entire 19 year career here at <unk>, and then the tenant always want shorter term and less rent escalators.
But so that's a constant dialogue we have.
Negotiations yes.
We're pushing as hard as we can for.
Higher rent escalators, but the reality is we deal with large regional sophisticated tenants.
So the commercial product right now in our market is that 2% annual 10% every five years.
So we're not seeing any increased currently if the market shifts and enough institutions keep pushing at it might shift but in the foreseeable future it's been pretty steady over the course of 20 years.
Okay. Thank you.
Thank you. Our next question is coming from Nicholas Joseph Please.
Please announce your affiliation and pose your question.
Thank you yes.
<unk> from Citi.
Maybe back to the transaction market you touched on the cap rate movement in the broader market, but how does that play into the back half of the year guidance, obviously, you've raised acquisition guidance, but.
Second half does assume a T cell from what you've accomplished year to date.
The back half of the year, we're anticipating a little bit higher of the cap rate.
A lot of the deals that closed in the second quarter.
Reflecting a six two cap rate, we had a fair amount of April closings. So those cap rates were negotiated in February call. It 60 to 90 day window to get a deal closed.
We locked in the price and that was the deal we cut.
Now the second half of Q2 pricing for the third quarter, we're seeing that 2025 basis point increase.
Thanks, and I guess just on the on the volume is that also kind of.
Either active decision by you or is it more just kind of the market is pausing a bit or is it just being a bit conservative in what you are assuming for volume in the back half of the year.
Our main focus is growing the <unk> per share not looking for the headline of acquisition volume.
And we're comfortable the third quarter the numbers were going to hit obviously, we don't have visibility quite yet to the fourth quarter, but we're creeping towards that.
But yes, we're not looking to.
Blow out acquisitions at the expense of 2023.
Thanks, and then you touched a bit on how you think about cost of equity or at least internally.
You should have little equity in the quarter and it came.
43, a share which was a little below where street NAV. So how do you think about equity issuance relative to NAV and relative to that cost of capital I think you mentioned around 8%.
That's at least internally, how you think about it.
Yes.
Kevin Yeah, we put a modest amount and so I wouldn't read too much into that.
I think gross price a little over 44, and a little under 44.
But yes.
To that.
Not.
Exclusively driven by NAV and our shop as you and investors know, we're very trying to focus on growing per share results, which we think over the long time creates total returns.
That are attractive and its not at cross purposes within with that approach either so so that's the good news. So time will tell but you will know we've not issued.
Very much equity in the last call it six quarters.
And in large part because for the very reason Youre mentioning is we just didn't feel like it was appropriately priced.
So.
To the extent that changes in <unk>.
May have more interest as the share price rises.
And like I mentioned before it.
It was a piece of the equation.
Executed last year, where we didn't really do much equity at all but we did a lot of that because that was very attractive and so we try to pivot to the piece of capital. That's the most attractive at the time, while keeping our eye on managing the balance sheet and our leverage metrics and liquidity in all of those things and so.
It's a bit of an art.
A little bit of science, but.
We'll see where it goes from here in terms of our.
Interest in issuing any equity.
Thank you.
Thank you. Our next question is coming from Wes Golladay.
Please state your affiliation then pose your question.
Hi, everyone, a west Cody and good morning, everyone. Just maybe sticking with that last question on the cost of equity maybe a bit broader can you talk about how you want to fund the near term pipeline. When you look at it is you called out free cash flow, maybe a little bit of equity it doesn't sound like maybe should we that would be high on the list, but maybe can you talk about your appetite.
For running a little bit higher wide balance you called out earlier your weighted average occurred in 2014 years typically I don't think you carrier wine, but in the context that where capital markets are and how you position the balance sheet. How high would you want to take that line, where could you take that one can be comfortable with.
I never want to take a very high but but to your point, which is.
Articulated a little bit with investors in recent months.
In line with what I think what you're asking.
Is that given that we have a 14 year weighted average debt maturity and <unk>.
Little near term debt maturities, we now have the luxury and it's all fixed rate, we have the luxury of being able to use our line.
More than what we've had in the recent past I think on the average over the last six years I think the weighted weighted average outstanding Bank line usage over last six years or something like $55 million.
And so because people say well why was that the that the long term debt and the equity markets were so attractive. We just found ourselves raising copious amounts of that kind of capital and didn't really use your lines now.
Capital markets are rock here.
We can now pivot and use our bank line more.
And still have a balance sheet that's in.
Very good shape and still have lots of liquidity. So thats. The good news how high does it need to go before we get nervous.
We're going to use.
Well less than half of our bank line, let's put it that way so.
If it gets to three or $400 million, maybe we'll.
We will have to get more serious about thinking about terming out that that capital with either debt or equity, but as I alluded to in my prepared remarks $180 million of annual cash flow plus a $100 million a year dispositions just on average that's $280 million.
And that goes a long way to funding <unk> $700 million a year of acquisition. So the need is not that great for either equity <unk> debt and as I. Just said, we've got plenty of availability on our bank line and still stay within very conservative.
Metrics.
Got it and then that's how the April and made it into the top 20 tenant list.
Doing more business with them or is this just a function of combining the two tenants that you mentioned at the top of the call. It was largely a function of yes, we had two tenants combine up above them and so that pull them from number 21 to number 20 on the list.
And so we are aware.
That's a tenant that we are comfortable with our property level metrics are very comfortable with them.
The world is moving their way.
I think in terms of just infrastructure so they will.
Being good shape, they are staring at a a debt refinance issue.
I think Wayne on them a bit at the corporate level, but we think that will get worked out satisfactorily.
In the.
The coming quarters.
And then one last one if I could.
So thats of these half capital structure issues like you just mentioned with her and we're the retina or the coverage that was pretty good for you would you happen to have or a ballpark estimate of your typical recovery scenarios, where there are.
Call It a capital structure issue, where strong rent coverage. It seems that I think are in the past was pretty high I don't know the exact stats, but yeah. We don't have an exact one but yeah. Our experiences if you have well located properties that have good unit level metrics.
Even in the event of a corporate.
Our balance sheet issue, we come out just fine.
Obviously the pandemic.
A piece of that flavor to it 2008, and nine had that in occupancy and held up very very well through all both of those stress tests. If you will and so that's been our experience.
Got it thanks, a lot guys.
Thank you. Our next question is coming from Ronald Camden. Please.
Announce your affiliation and pose your question.
Hey, This is Ron from Morgan Stanley a couple quick ones just one on the guidance can you remind us what you're assuming for.
Bad debt reserves for for this year.
Yes.
As has been consistent with last many years in our shop.
And our.
Our projections internally, we've always assumed about 100 basis point.
<unk>.
<unk>.
Loss per rent. Despite the fact that our our experience has been better than that meaning 50 basis points or less and so we keep that general assumption out there just.
That would be somewhat conservative.
It makes sense and then just staying on tenant health and so forth.
Just what are you hearing from the tenant side I know others have already asked questions on that but just more broadly when your is there anything or when youre looking at different industries and so forth is there anything that youre thinking or doing differently as we potentially go into a downturn sectors.
Sectors that you're either doing more in or sectors that you may be pausing or trying to do bless it.
Going forward the strategy is still be mining our relationships of our current portfolio.
Yes.
Tenant knows they are consumer even better than we know so when they are comfortable that drove us through M&A or new store growth will participate remember when you do sale lease back the underwriting is a little bit different because you do have the benefit of the tenant selling you the asset and they are selling.
New assets that are pretty good because they are willing to sign a 15 20 year leased. So there is a self selection aspect to our underwriting which goes overlooked hence why we have a.
Hi, 85% renewal rate typically over the year.
So yes, we're not we never target what sectors, we want to go into more because we can only buy stuff for sale.
First and foremost, but remember Ron we do the bottoms up approach.
We want to grow the FX that mid single digit.
Area, and then we grow and say Hey, what acquisition. So we have to do to achieve that so thats really the first thing we target now our thought process on movie theaters is still the same we got out of those couple of years before the pandemic.
So we're not looking to add in that industry, but the other industries. If you focus on real estate first.
The credit isn't as important.
At the heart, we underwrite the real estate.
Find the small good locations.
Great and then just my last one if I may.
So if I think about the.
The <unk> number which is basically 80 once you back out.
All the sort of all the back deferred rent collections and so forth. So as youre going forward and thinking about sort of that run rate it sounds like potentially the interest costs could be.
It could be higher obviously than youre going to a higher rate environment, but is there is there anything else because I mean, because you know.
The acquisitions, obviously coming through and so forth, but was there anything else. That's in that 80% number that's maybe nonrecurring or one time or that we should be mindful of.
Yeah.
Second quarter. It was relatively clean we didn't have much hardly any lease termination kinds of income, which we did have some in the first quarter.
As usual.
The big variable that we don't give guidance on that has the potential to be a material impact.
It is just capital markets activity and so.
We obviously made some assumptions around that we don't we don't publish those.
Heart, because we wanted to retain maximum flexibility to do what we think is best at the moment for raising capital.
Since the last years in the past in the history.
Can talk a little bit about what we assumed last year and what we actually did last year and our initial.
Began before the beginning of 2021, we assume we've issued 5 million shares of equity and we would issue no debt well. It turns out we issued no equity and $900 million with 30 year debt.
We just felt like the relative value.
That at that point was a better place for it.
Raise capital and with the benefit of.
Six months or 12 months of hindsight, we liked that decision, but but that's the rationale for not really.
Part of the rationale for not.
Kind of laying out our thought processes is it's always evolving and tries to take advantage of what's available in the marketplace at the time.
Super helpful. Thank you.
Thank you. Our next question is coming from.
Are you focused on here.
Please announce your affiliation and pose your question.
Hi, Yes, good morning from credit Suisse.
Gentlemen, just a quick question around the acquisition outlook and just again the.
The level of acquisitions currently happening.
I would've ventured when we're all talking at the end of the first quarter earnings.
Concerns about rising rates, you know everyones stock price was down year to date, one would have been so that everyone was kind of slowed down on the acquisition front, but.
You guys a lot of your peers kind of have a strong acquisition quarter or raising acquisition guidance.
Yes.
Im curious the backdrop doesn't seem to have changed that much.
Why there is still such.
Is there an appetite or so much positivity on the acquisition front, just kind of still given some of these headwinds in the capital market side, some concern about credit.
Cap rates not moving on.
Things of that ilk.
Yes, I can take.
Part of it and then Kevin can kind of.
Chairman here on the capital market side of it as far as the appetite at the beginning of the year.
We guided Lewis.
<unk> was the midpoint of our 600 was the midpoint.
And that was based on the first quarter pipeline and then we've been in the business a long time and talking to the relationships of kind of the outlook for the year.
Cap rates now kind of what I touched based on they are starting to move.
We came into the year.
We're fortunate in that we had $173 million of cash at year end.
So we do we had our acquisitions are well funded going into the year and now talking to our current tenants that theyre looking to grow cap rates will adjust accordingly.
We're bullish on the second half of the year.
We're comfortable with our acquisition number.
It's Kevin.
Fully understanding the sentiment of your question.
But we might not be the best one to ask on that in some respects.
It was a surprise to us over the last call. It 18 months coming in prior to 2022.
So many decide.
<unk> decided to double down on acquisition volume at record low cap rates.
And to us that did on its face make a lot of sense.
And at the cap rates, where the market was it just to US it was not driving a sufficient amount of accretion per share growth, which.
We've talked about it in our minds is job one and so.
Yeah.
I think your observations generally right that there hasnt been a real pause there as I mentioned I think in my prepared comments.
We think the asset growth focus acquisition volume contest of recent quarters.
May be slowing a bit, but we've not seen much yet.
But we are we're optimistic about that and I hope it gets a little more disciplined on price and so but fully understand the sentiment of your question.
Thank you.
Thank you. Our next question is coming from John muscle worker. Please.
Please announce your affiliation and pose your question.
I'm with Ladenburg Thalmann.
Yeah.
Hey, good morning, Jeff.
So maybe going back to the balance sheet for a little bit has the outlook on long term debt changed at all.
Recently, I am just thinking you've given some of them.
It will be volatile but.
Given where the yield curve kind of is today from a kind of.
Inversion to kind of flatten it.
Aspect I mean does that change the outlook.
First maybe we were talking last quarter or even.
At NAREIT.
Yes, I mean, clearly the pricing has.
It.
The shape of that curve might alter ones view of what kind of that they want to be using.
The moment for us like I had mentioned on a previous question for us.
Because of the.
Very long duration debt, we issued in recent years.
Three of the last four debt offerings, we did were 30 year variety and.
We could've gotten cheaper debt with shorter term debt, but we just wanted to lock in those low rates for longer period of time because of that kind of that work and activity we did.
Last couple of years, it affords us the opportunity to lean a little bit more on our bank line, which has largely been unused here year to date.
But no.
The pricing clearly is a factor and Thats why do you think you got to see some movement firm firming up of cap rates.
Because of the pricing clearly has moved materially on the on the debt side for sure.
<unk>.
Whether people.
The curve is so flat.
<unk>.
<unk>.
I'll be interested to see where any debt not much thats getting issued in REIT world, but if it gets extended out further or it comes in shorter.
And that might go to one's belief about how.
Long term lease.
Interest rates will be or are they going to be at these levels for the next five years or the next.
Five quarters and so.
I'm not I don't have a good answer to your question, but that's just some of our thoughts around that.
Okay.
And then.
Maybe switching to kind of the disposition outlook.
Yeah, I know, it's not markedly lower than 50% of the low end of guidance, but maybe kind of what gives you confidence in kind of getting too.
The guidance target on dispositions right.
As we enter the back half of the year here.
Okay.
Yeah as far as dispositions.
What gives us a comfort level.
Below the 50% I know what's happening on the disposition front.
Our team is working on a lot of it was kind of the lower number was more of a timing issue.
With the interest rates moving up 10, 31 market is still very robust, but a couple of deals we're working on just got delayed.
So thats it so thats why we Didnt budge guidance and we remain the same to the $80 million to $100 million for the year.
Okay.
That's it for me thanks.
Thanks, Jeff.
Thank you. Our next question is coming from Spenser Alloway. Please announce your affiliation and pose your question.
I think Green Street again, I just had two follow ups. So my.
My first question. So just in regards to the inflationary pressure.
Patients with tenants regarding their ability to pass through cost to customers and then kind of.
In line with that and can you comment on how rent coverage is trending given this dynamic.
The conversations that we've been having with our tenants it's kind of the same at the.
Throughout the quarter, they were able to pass through the sales not quite at the rate of inflation still early in the cycle, but the conversations they're not concerned with it they're still very profitable.
And then the interesting thing is an inflationary market where rent is held constant the coverages are holding up even though there.
The profitability has come down slightly but in the long run our coverages are very healthy at the property level.
And the tenants kind of wood.
I'll reiterate.
Having the ability to pass through some of it but not all of them.
Okay. That's great color and then maybe just one more going back to cap rates. It seems as though commentary from peers that they've been seeing cap rates rise slightly more thus far in the back half of 'twenty two than maybe what you've cited I know you obviously can't comment on where peers are executing deals are what their store thing, but any insight as to.
Why perhaps cap rates have seemingly moved less on deals you've executed.
I think it's a function of the market we plan the sale leaseback with the large regional operators.
Historically, when you had the investment grade tenants and the cap rates were trading at 555 in a quarter.
Our ground leases that were in the fours those ones have moved up the $25 50 basis points and I would expect that.
Going forward and then the cap rates that were north of seven they haven't moved 50 basis points in 'twenty, but that area that we play in the low six market.
Trended up a little bit, but not to the degree of the investment grade market, we're finding and the other thing you got to think of as our deals are long term leases triple net so it's really tough to compare our peers to what we market.
Because if we were buying 10 year leases those have moved up as well the 25 to 50 basis points, but again, it's a function of our market Spenser.
Steve said this is Kevin.
I think youre getting more movement up where cap rates had compressed the most over the last year or two and so.
To the extent that we were buying five five cap rate deals we might be talking about a.
A larger increase in cap rates.
Where we've operated as Steve mentioned in the low sixes.
Excellent. Thank you guys. Thank you Bob.
Thank you. Our next question is coming from Linda Tsai.
Please announce your affiliation then pose your question.
Hi from Jefferies.
In your Investor deck on page 14, you show the history of acquisition volume and how the relationship based deals offered 20 basis improvement over market auction deals with interest rates higher now does that delta shift for any reason.
Well, we haven't done much of the market auction.
Deals, but I would expect right now there's a lot of dislocation in the market.
Where we've negotiated a lot of our relationship deals prior to the interest rates moving but I would expect going forward they would normalize to historical levels more.
And then at NAREIT, you discussed the opportunity to increase the tenant renewal rate of 85% could you just remind us again the factors driving that initiative.
So what we're putting in place now we're a very seasoned and then re.
<unk> operate in the space a lot longer than a lot of our peers. So we have a lot of leases that are starting to come at the initial term.
So we're putting in place an extremely active portfolio management team.
To start getting ahead of the curve in the future and hopefully in a few years you will start seeing increased benefit of that.
Thanks, just one last one with real estate expense guidance down $1 million at the midpoint what was driving that.
We really just have fewer vacancies and so but.
I think the way we think about it here is we think of our property expense exposure as the tenant reimbursements minus on our property expenses. It was about $1.8 million I believe for the second quarter and that's detailed on page six near the bottom of page six.
The press release.
Normal is kind of a low $2 million number for net property expenses, that's probably kind of a more typical.
And but it's influenced notably by vacant properties or the lack thereof.
And so that's what we'll move that number around a bit it's never too volatile typically operates kind of in that $10 million to $12 million.
Annual range and we're at nine to 11 for this year.
Thank you.
Thank you. Our next question is coming from Chris Lucas. Please announce your affiliation and pose your question.
Capital One securities Hey, Good morning, everybody, Kevin just a quick follow up on a comment made earlier related to the bad debt typically.
Assumed in your guidance of 100 basis points, what's the what's the first half number on that.
We collected 99, 7%.
In the first half.
So it's call it 30 basis points.
We're not.
Prepare to necessarily call that point, the 30 basis points bad debt in that in some respect at this point, we will pursue collection of that but.
But that's what got collected and whatnot.
<unk> got reported just so you know for our revenues.
Okay.
Steve just taking a step back on the competitive.
For the competition.
All the tiers you guys had talked about the fact that private.
Equity pulled back when rates move higher just curious as to whether or not youre hearing anything about their reentry into the market given a little bit of a pullback in rates, although again, the market's pretty unstable just curious as to what what youre hearing from that competitive set.
In the second quarter, we did 16 transactions.
<unk> worked through the relationships. So we didnt participate in a lot of the.
The Super large deals that might have been out there.
Put it bluntly I have not heard the private equity groups that came in the market second half of 2021 first quarter of 2022 back in the market at all.
Okay, great. Thank you that's all I had this morning.
If there would be any final questions or comments. Please indicate so now by pressing star one.
Sir there appear to be no further questions in the queue do you have any closing comments you wish to finish with yes. Thank you for joining US. This morning, and we look forward to seeing many of you guys in person kind of as the fall conference season.
It kicks off here and we'll see that thank you.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.