Q3 2022 Netstreit Corp Earnings Call
Greetings and welcome to the net straight Corp, third quarter 2022 earnings call. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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Star Zero on your telephone keypad.
A reminder, this conference being recorded it is now.
My pleasure to introduce your host Amy.
After relations manager Ma'am you may begin your presentation.
We thank you for joining us for net Street's third quarter 2022 earnings conference call.
In addition to the press release distributed.
Yesterday after market close we posted a supplemental package and an updated investor presentation. Both can be found in the Investor Relations section of the company's website at Www Dot net street Dot com on today's call management's remarks and answers to your questions may contain forward looking statements as defined in the private Securities Litigation Reform Act of 1994.
Five.
Forward looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today for more information about these risk factors. We encourage you to review our Form 10-K for the year ended December 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 supplemental 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 net 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 I'll turn the call over to Mark Mark.
Good morning, everyone and welcome to our third quarter 2022 earnings Conference call.
We're pleased to share that that street continues to perform very well in the third quarter, Despite high inflation rising interest rates and macroeconomic uncertainty.
With a diligent planning and strong execution. We believe we can continue to create value throughout all stages of this economic cycle.
During the quarter, we completed $130 million of net investment activity.
Closed on both our second forward equity offering of 10.35 million shares and our $600 million sustainability linked credit facility.
Talking in attractively priced capital before the latest interest rate hikes and site and heightened market volatility volatility.
As stated in last Night's earnings release, given the nature of today's environment and anticipated pricing adjustments in net leased assets, reflecting the disconnect between the current capital markets and property markets. We believe it is prudent to take a more opportunistic approach to capital deployment.
While we are pleased with our investment activity to date and are seeing no shortage of opportunities rising marginal borrowing costs and increased equity cost across the across the sector make it prudent for us to eliminate our quantitative investment targets.
At the same time the positive investment decisions, we have made the limited operating risk associated with our current tenant lineup and our ability to lock in significant portions of our capital structure in the third quarter allow us to narrow our <unk> per share guidance range to $1 15 to $1 17 per share, resulting in a small increase in our midpoint of XP.
Patients.
Given the current economic uncertainty our portfolio of high quality assets is best positioned to weather. The road ahead with over 88% of our portfolio in defensive industries and partnering with retailers that have strong access to capital and experienced management teams. We believe our portfolio will continue to perform well during a potential downturn in the retail environment.
Due to our diligent underwriting process and continued credit monitoring we are confident in our and our tenants' ability to meet their rental obligations.
As a reminder, we have collected 100% of our rent since our IPO in 2020 and believe we can put the property and believe we have put the proper risk management guardrails in place to see this trend continue.
Now moving onto our third quarter investment activity, we acquired 26 properties for $131 $3 million at a weighted average initial cash capitalization rate of six 6% and a weighted average lease term of 11 eight years.
As part of an acquisition of a Winn Dixie property, we assumed our first mortgage loan payable of $8 $6 million with a fixed rate of four 5% that matures in November 2027.
This acquisition provides strong store sales and profitability dense infill real estate and attractive pricing also in the quarter, we disposed of a bank property for $1 $7 million at a five 5% cap rate further reducing our banking exposure.
Finally, we provided $4 $7 million of funding to support six ongoing development projects at quarter end, we have invested $17 $5 million to date in these projects.
As with the previous quarter, we remain comfortable with the performance of our existing existing development projects, but remain cautious in committing to new developments during a time of increased cost for construction and labor and heightened economic uncertainty.
At quarter end, our portfolio was comprised of 406 properties with 787 tenants contributing approximately $92 $7 million of annualized base rent the.
The portfolio has a weighted average lease term remaining of nine six years with approximately 79% of ABR represented by tenants with an investment grade rating or investment grade profile.
The portfolio remains 100% occupied.
We added two new high quality grocer tenants Festival foods in dollar fresh and a discount retailer T J maxx in the quarter.
During the quarter, a big lots credit changed due to their second quarter results with reported margin pressures. Therefore, no longer meeting our investment grade profile definition that being said, we believe the company has a strong balance sheet and we remain confident in their performance.
To conclude despite the uncertain macro backdrop, we remain confident that our cycle tested portfolio and experienced team will continue to maximize shareholder value with that I'll turn the call over to Andy to go over our third quarter financial results and 2022 guidance.
Yeah.
Thank you Mark and once again, thank you all for joining us on today's call.
In our earnings release published yesterday after market close we reported net income of three cents.
Of course, that's all 28 cents and <unk> 30 per diluted share for the third quarter.
The portfolio's annualized base rent grew to over $92 million in the third quarter up 55% from September 32021.
Interest expense increased to $3 million from 895000 in third quarter 2021, due to higher borrowing costs and increased debt balances.
<unk> increased to $4 $6 million in the third quarter compared to $3 $8 million from third quarter 2021, primarily due to building out our team to 32 employees.
As Mark stated in his opening comments, we had an active third quarter with regards to our financing activities opportunistically completing over $800 billion of capital raising and refinancing.
We completed a forward equity offering for 10.35 million shares on August similar to our last two offerings. The deal was upsized and underwriters exercise the shoe demonstrating the continued support from investors on our strategy and execution.
Following our equity deal, we completed a new $600 million sustainability linked credit facility. The new credit facility includes a $400 million revolver that matures in August 2026, subject to an extension option and replaces our previous $250 million revolver.
The credit facility also features a new $200 million five and a half year term loan set to mature in February 2028, which is fully hedged at $3 88 per cent.
If we were to hedge the term loan today, the all in rate would be about 5%.
As part of the recast we made some notable enhancements to our credit facility.
Our cap rate utilized for valuing our asset base decrease from 7.25% to six 5%.
Covenants have been adjusted to offer greater flexibility for various approaches to acquisitions.
And we added an investment grade pricing grid to reflect continued progress to becoming an investment grade unsecured borrower.
In addition, we would like to highlight that in our lending environment, where banks are being significantly more selective that street was able to secure three new banking relationships, giving further credence to our strategy and growth initiatives.
Finally, we included an innovative sustainability feature as part of our credit facility, which allows us to benefit if certain key performance indicators are met if year over year improvements are made to the percentage of our annualized base rent from tenants with science based target initiative kind of commitments as determined by your sustainability agent.
We can see up to a two and a half basis point reduction in pricing.
The structure of this K P is an innovative approach for a retail net lease landlord to participate in the reduction of greenhouse gas emissions as determined by science based target initiatives and hopefully empowers more of our tenants to make reduction commitments as well.
On September 29th we settled all four and a half a million remaining shares from the January forward equity offering receiving net proceeds of 93 and a half a million dollars.
We did not settle any of the 10.35 million shares from August forward equity offering and did not make any sales under our ATM program during the quarter.
As a result of our latest financing activities, we've raised over $1 billion of capital this year and increased our liquidity position, allowing us to remain opportunistic in the current environment.
Yeah.
At quarter end, we had total debt of 413, and a half million dollars outstanding of which $375 million. Just from are fully hedged term loans with an additional $30 million on our revolving line of credit and eight and a half million dollars from the fixed rate secured mortgage we assumed as part of the Winn Dixie acquisition.
At September 30 of 2022, our net debt to annualized adjusted EBITDA ratio was two and a half times after giving consideration to the remaining shares outstanding under the forward sales agreement well below our target range of four and a half to five and a half times and 93% of our debt is fixed.
With regard to our dividend earlier this week the board declared a 20 rigs or a quarter quarterly cash dividend to be payable on December 15th to shareholders of record as of December 1st our F O payout ratio for the quarter was 67%.
As stated in our earnings release, we're narrowing our E F F O per share guidance range to $1 15 to $1 17 per share.
The new guidance range includes the following assumptions.
Cash G&A is expected to remain in the range of 14 $5 million to $15 million, which is inclusive of transaction costs.
Noncash compensation expense is expected to remain in the range of five to five and a half a million dollars.
Our cash interest expense expectation has been narrowed from our previously stated $7 million to $9 million to $8 million to $9 million noncash deferred financing fee amortization, which is not included in our cash interest expense remains unchanged at 800 to $900000.
And lastly, full year 2022 diluted weighted average shares outstanding which includes the impact of O. P units is updated from our previously stated $50 to 52 million shares to now be in the range of 50 to 51 million shares.
As we finished the last half of 2022 and enter into 2023. We believe we are in an extremely enviable position our capital structure has significant undrawn liquidity, especially considering our size and 93% of our debt is fixed through maturity.
In addition on an apples to apples basis, our acquisition team has consistently proven their ability to source and close high quality assets through a variety of sources and yields demonstrably better than our competition.
With all the right pieces in place. We believe we are well positioned to continue our track record record of success remain excellent stewards of shareholder capital with that we'll now open the line for questions operator.
Yeah.
Thank you we will now be conducting a question and answer session.
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Please hold while we assemble our roster.
Our first question comes from RJ Milligan with Raymond James.
Hey, good morning, guys.
Good morning.
Okay.
I'm curious obviously you highlighted the disconnect between the capital markets and private markets I'm. Just curious how you view your current cost of capital what is it today and how do you calculate it.
Sure RJ.
And welcome aboard and that Street team.
You know what I think the question that you're asking really is and should be the question of the day base.
Based on the changes that we're seeing in the capital markets. The way that we think about it is we start by assuming our targeted capital structure, which you know since the beginning of our existence. We said is the third debt and two thirds equity.
Our current capital capital structure is somewhat more conservative than that at under 30% under market.
As you.
On the debt side, we think about our marginal cost of borrowing which is somewhere between four 1% and four two on an all in spot basis.
But the forward curve is really indicating an increase in their own right to about five six year out maybe $5 for two years out.
We need to take that into consideration and if we're going to access the private placement market with term that.
That fixed rate slightly north of six.
From our perspective, we really think utilizing a spot marginal borrowing rate or even our weighted average cost of debt actually underestimates the true borrowing costs in the current market.
The risk there is it potentially produces false positive investment decisions for assets, we intend to her hold for the long term.
So that's the debt side.
On the equity side, you know, we've historically utilized implied cap rate as a proxy for our marginal cost of equity.
Just look at this morning.
At the current trading levels of our implied cap rate is somewhere in the six five to six and three quarter percent range. Even if you use an <unk> yield probably produces a result is very similar to that range.
The marginal cost of the Undrawn $200 million forward, it's probably about 50 basis points inside of that.
And you know <unk>.
Similar to the way that we're thinking about the spot rate on the debt side.
Benefits of the Undrawn forward could produce positive investment decision for assets that are spot equity costs wouldn't right and you really our preference with respect to that is to utilize the benefit to provide additional accretion to our shareholders for less marginal investment decisions. So that's.
Those are kind of the components. So if you're asking me to peg a specific range.
Put or WAC for investment decision, making purposes in the low to mid <unk>.
As you know if you wanted me to pinpoint something probably the best number that we have in a volatile market is about six and a quarter.
That's helpful. Andy and so then what is the spread assuming that you maintain the sort of credit quality that you guys have been buying what is what is the spread that you need to achieve.
So you go out there and become more aggressive on the acquisition side.
Yeah sure. So yeah, there's a couple of pieces to that one.
We do feel like the fundamentals and the market should indicate that cap rate should be a little bit higher than they are and we are starting to see some cracks there. So while we've been buying at a blended six 6% cap rate over the past couple of quarters and like I said, you know, we're not interested in and dropping our investment criteria in any way.
You know you know, we really feel like we're not really getting paid enough. Yeah currently, but where there is a light at the end of the tunnel. So yeah, it's a little bit of a tough question as well depending on credit quality real estate quality at lease term rental increases are and then you know the capital markets are gonna be fluid. So you know like if there's a good asset with a triple.
A rated tenant and a 25 year lease and good rental increases you know when we move forward it Andy as number six in the quarter to improve the portfolio potentially.
But then on the flip side of that you know if there's a weaker asset with some issues that's really on the edge of our investment criteria at a seven and a half we probably would not move forward with that so you know certainly a lot of a lot of variables there, but the fact that we really do see that there's a number of opportunities that are really coming back to us on pricing.
And seeing the signs of our you know the early signs are that our patience is paying off so I feel like were you know everything is accretive right now.
You know when you when you kind of run that sensitivity I you know on our model you know volume usually really dictates how much more you're going to make in the next year. It really just doesn't have as much of an impact right. Now. So we feel like it's prudent to be very cautious and really try to make sure that we're maximizing the capital that we have that we've raised.
Thanks, Mark and just a follow up to that as you said that you're starting to see signs that the market is cracking and I'm curious what do you think the catalyst is.
For the.
The market to really open up and cap rates, yeah right yeah.
Yeah, I think that's a great question and I think that's been a what every net lease company.
It's really trying to figure out over the past six months in and probably for the you know for the next couple of quarters, but yeah. Yeah. Like we said I mean, you know the fundamentals clearly show that cap rates should be moving up as we've seen everyones cost of equity and cost of debt increased but really what we're seeing you know sellers really I got used to very aggressive cap rates that we're seeing.
You know in 'twenty, 'twenty, one and hand before that so you know if sellers can hold off on selling they're going to hold off are those that have pressures to sell you know theyre going to be very patient and try to find a you know a 10 31 buyer who's willing to pay you know 2021 prices and that does exist. It's just getting them much harder to find that those types of buyers.
Then those that can't be patient have to sell you know they've got to sell at prices that make more sense for us and you know we've been able to pick off a few you know so far this quarter are we just don't know how many we're going to be able to pick off you know the market is not completely there yet.
But we feel like it's certainly gone there.
I appreciate the comments thank you.
Thank you our next question switch Nick Joseph with Citi.
Thank you completely understand being opportunistic and disciplined I was hoping you can kind of quantify where the current pipeline is today and then just compare that to where it normally looks calendar on a forward I don't know either kind of three months or whatever kind of metric.
Yeah.
Yeah sure. So I think the opportunity set that we have is drastically larger Ah just as you know you've got the leveraged buyers you know a large.
Out of the market I think are less competitive or less deep a 10 31 market. It's really just coming down to a tough pricing and you know what we you know where are we where we see potential cracks are and you know I think that you know so when we you know basically took away the quantitative piece of the of the fourth quarter acquisitions guidance we.
Could still hit it I, it's just debatable how many of the sellers are going to are going to come to our pricing are starting to see a little bit more of that really in the last week or so so difficult to say how much of that is going to come our way, but in terms of the opportunity set that we could move forward with right now it's larger than it's ever been.
That's helpful. And then just on that movement of cap rates are there different categories or retailers or tenants or just even more versus out there thus far.
You know it's funny I you know, we we get asked that question a lot now you know over the last couple of quarters.
It's my Great is that the standard is that isn't that tenants. It really comes down to the situation that the sellers and how much pressure they have on on them to sell and whether they can be patient or not and so that's it really has had very little to do.
With you know what what type of asset on them I'm sure. If you're down on you know the four cap rate range like some of the industrial load that's going to you're going to get some negative leverage a lot more quickly on the lower cap rate deals, but it's really come down to a you know what type of seller or we are working with.
Thank you very much.
Thank you. Our next question comes from cubic Kim with Trust.
Okay.
Good morning.
So I was wondering if he can help paint the landscape as we look into next year. Obviously the acquisition part of that is a little bit more ambiguous, which makes sense.
But how about things like G&A our interest.
Interest expense.
And I'm not even sure if there was I remember a while back.
There was a topic about the insurance cost as well for the company I just want make sure that we don't get surprised in any one way or another.
Yes, you bet.
So yeah, you know interest expense you know with a 90.
93% of the debt costs, you know walked right now we've only got $30 million of floating rate balances, except for what we would be used to fund incremental acquisitions. You know we think that we are.
We're able to provide some you can just you'd get from your disclosure some certainty around that yeah with respect to G&A.
You know over the course of 2022, we've been building out our team.
Currently 32 boxes on our Org chart.
A couple of them.
<unk> had people in or empty currently that we're gonna be looking to replace but I don't see the stock really going beyond that so I think that youre going to start seeing some stabilization.
As you know G&A on a you know on the income statement.
Just be aware of there is some seasonality with respect to with whether it's tax work auditor fees that are a little bit more heavy heavier weighted to the first and second quarter.
But outside of that I think that we're getting to you know stabilization with respect to things like salaries and benefits as it related to the D&O.
<unk> been performing well there we didn't get the increase that we felt that we were going to get so some of that is some of the pickup that youre seeing you know in G&A you know, it's not a lot.
100000, a couple hundred thousand Bucks, you know on an annual basis, but we're getting to the point, where you know where were just over two years and to the public company journey, and where we're really doing a good job of stabilizing that part of the income statement.
And.
I can't remember if I missed this but did you guys give an update on the assets you closed in the fourth quarter to date.
But we have not.
Are you able to provide some color around that.
Yeah, I mean, it's.
Pretty similar to the types of assets that we've acquired but we are you know we're not providing a.
A dollar figure on that.
Okay. Thank you guys.
Thanks.
Thank you our.
Our next question comes from Wes Golladay with Baird.
Hey, Yeah, good morning, everyone.
Okay.
Right now we're looking to do.
They have to somehow.
Okay cool.
So at this point.
Yeah.
I really could not understand.
Right.
Maybe if you get a little closer to the mic or pickup the handset I couldn't I couldn't hear your west coast.
Oh, sorry.
My phone got a plug for.
For the the developers that are not I guess the.
What I'm looking for is the the developers they missed the 10 31 market was not that robust right now so I'm kind of curious what are the developers doing and if they're not hitting the bid right now are they holding off on new developments and is this a segment you typically get a higher yield from.
Yeah. That's a great question. So you know, especially the larger developers that are going out and developing a 150 locations. You know various tenants that you know that we try to acquire a you know typically we've reached out to a lot of those types of developers. They are either don't call us back or we don't really get.
Anywhere near what we need to be on pricing because of the robust 10, 31 market and so they're having a lot more difficult to you know historically selling you know 15 2025 locations every month are now.
Now there are only able to sell two or three locations every month. So there yeah, yeah their equity sources and their debt sources are getting stretched pretty thin as their inventory is growing.
We've been having a lot more conversations with the with those developers, but you know developers by their nature are very optimistic for as long as they possibly can so I'm not sure exactly exactly when they'll love He's gonna break there, but that does feel like an area, where there could be some opportunity.
And just to follow up on that or is it typically a higher yield when you look at the way you source deals throughout the year you have multiple channels is one of the higher cap rate channels and it would probably be in a tight band, but just is it that the upper end usually.
Yeah, Yeah. It's a good question. So developers are if they're able to finance themselves and develop properties you know all the way to certificate of occupancy and then they found at the end of the 10 31 market, they're going to get more aggressive pricing than what we're willing to pay but then the developers that would prefer for us to finance there.
Their development, so whether we're buying the land and funding development or providing a guaranteed equity take out we do typically get better cap rates are on those types of transactions.
Got it and then one modeling question do you happen to have the in the period of rent for the on a cash basis, excluding the active developments.
Yeah, well what will finally, I will follow up with you offline on that one.
Okay sounds good thanks, everyone.
Thanks, a lot.
Thank you. Our next question comes from Joshua Your line with Bank of America.
Yeah, everyone I'm just curious you mentioned in your press release appropriate pricing for assets.
What what do you think is appropriate pricing in todays environment.
Last quarter. It was six six on the acquisitions just kind of curious.
Yes.
Yeah, No I'd say, it's it's a good question. So I mean, I think it's really going to be you know asset dependent.
You know depending on credit quality real estate quality, yeah at least term rental increases etcetera, and so feels like we're gonna start to see you know some some pretty good increases in cap rate as just that's kind of what you know what we're expecting in the end from the conversations that we're having with various sellers how much higher that goes I think.
As you know it depends on what happens in the capital markets as well as whether other buyers are able to kind of come back to the market. So it's got a it's got a lot of different factors there hard to say, where it goes but I think you know it should be meaningful to us.
I appreciate that and then you mentioned big loss.
You said, it's no longer an I G like credit after their recent result.
How do you think about that in the portfolio is that a temporary blip for them or something that maybe is.
Is that something you would maybe look to monetize.
Yeah, I mean, obviously, we're always looking at you know what we can sell and what the what the best economic outcome is for you know various different strategies by assets, but yeah. I mean look I mean at Big lots has got you know supply chain concerns you have freight costs. Both you know via truck under and over the ocean have have really pressured pressured margins.
That being said, our total debt to EBITDA at 2.1 times, which almost still meets our investment grade profile a definition, but we you know look I mean, I do think we're gonna see margin pressures persist.
But they've got over $400 million of liquidity. So I think you know theyre going to be able to weather.
What's going on right now and really doesn't provide any real concern as it relates to relates to their ability to meet their financial obligations and then we've got you know 10 locations that I think we feel really strongly in the real estate, where the rent is replaceable. So you know I think we've got a long way to go before we start to really have a major concerns there, but it's you know certainly you know the the trend.
It is not going in a positive direction at that time.
Okay. Thank you.
Yes.
Okay.
Thank you. Our next question comes from Todd Thomas with Keybanc.
Hi, Thanks.
Morning, I, just wanted to follow up a little bit on the investment activity and the slowing pace of investments that you're talking about which we think makes sense just given the volatility in your cost of capital in the market more broadly.
But were through October and you know I'm curious if there's any way to size up what the fourth quarter might look like in terms of acquisitions and just maybe help US also think about the old volume heading into 'twenty. Three you know again I realize the world's changed quite a bit but the pace.
Growth our external growth that you know I think investors have been thinking about was sort of in the $500 million range per year I'm, just curious what you might be thinking about.
You know over the next few quarters, if you could maybe provide some some insight.
Yeah, honestly I wish I could give you better guidance other than it's gonna be facts and circumstances, driven based off what the opportunity set is and and you know whether we start to see enough.
Volume move into you know the cap rates, where we feel like we're maybe not making the same spread that we did over the past couple of years, but you know you know kind of trending more more in that direction.
So, it's just a little bit difficult for us to give guidance on what we think we're going to do in 2023 of them are struggling to tell you what we're going to do in the fourth quarter of this year, you know Todd I mean, if I could just add a little bit to that either.
It's either going to take a look back I mean, you know at the beginning of the year. So far was like zero right. It's 3% now you know you've seen equity costs go up dramatically right and you know.
We've been able to kind of make a by buying assets.
I said in my prepared remark, you know better better yields than you know than the.
Peer group, but you know I, just think that the pace of change of the capital markets has just been so great in such a short period of time.
Must be irresponsible for us to go and start throwing numbers out there without getting a better look as to you know some of the changes that mark talked about earlier that we're starting to see the beginnings of it.
Okay, and and in terms of the fourth quarter.
Is this sort of.
Sort of the 125, maybe $135 million pace that we've seen as you know are you thinking something more in the $40 million to $50 million range or it might just sort of fall you know just a touch short of the 500 million for the full year as we kind of think about like the exit rate heading into.
23.
Yeah, I mean, it's gonna be yeah opportunity based I mean, we're gonna be opportunistic yeah. I think all things are on the table you know we've got some opportunity to take advantage of the fact that there is a 10 31 market out there to potentially sell some assets and then redeploy so there's a lot of different factors that we're considering.
A lot of different options are that I think are on the table are the thing that we don't want to do is take money in one pocket and just put it in the other and then we're bigger.
Without really any benefit to shareholders. So we think the best thing for shareholders is to consider all options on the acquisitions and dispositions you know aside and and try to maximize our you know the transaction volume that we're going to do and you know what that looks like is a it is still in flux.
Yes.
Okay.
Got it and then just last question also just following up I guess on the underlying credit of the portfolio and in the context of the discussion around big lots being lowered to sell by G. During the quarter.
Just curious as you look out you know if they're you know other retailers other tenants on your credit watch list over the course of the next few quarters as we head further into the cycle, where you see potential risk and you know not not looking for names specifically, but you know.
Just in the context of the overall portfolio and your exposure to <unk> I'd.
Like profiles.
Yeah, and I think it's a good question and really what we've seen with the tenants within our portfolio as you know, it's a very defensive portfolio, a very high credit quality portfolio not not a lot of debt coming due for the year for these tenants, which I think is gonna be interesting to see how some of the retailers are able or not able to.
To refinance their debt, but I think it should be indicative of the quality of the portfolio. When you consider at big lots is a company with almost $1 billion tangible net worth with $400 million of liquidity and a total debt to EBITDA is two one times, which by most definitions is not very leverage if that's the one that we're talking about on that.
I think that's you know it should be should be seen as a good sign and in fact, we've had a couple of credit upgrades within the portfolio.
Okay alright, thank you.
Thank you.
Thank you. Our next question comes from Nicolay <unk> with Scotiabank.
Oh, Hi, everyone. So first question is on you know drugstore investments here you did take your exposure up to this to the segment also the Cvs now specifically are you know what.
Percent of ABR I mean, how much higher are you willing to take the exposure for C V S and for the drugstore category.
Yeah, No Greg Great question, you know it was really we werent really planning on increasing our pharmacy exposure as much as we did but we saw a couple of opportunities specific with a Cvs and Walgreens that were that were very attractive you know attractive pricing are really strong locations.
We felt you know where the best risk adjusted returns that we could provide our investors I would not expect us to be adding to those names. In fact, you know we just mentioned dispositions that could be something that we look to to maybe offload a couple of those locations on the 10 31 market that you know pretty attractive cap rates and redeploy.
Into other retailers that we like are just you know just to improve our diversification, but yeah. I mean, you know when were the size that we are you know one or two transactions certainly you can drive up the concentration, but I wouldn't expect to see us move us move our concentration higher and in the near future.
Okay. Thanks, and then second question then and he's on you were talking about earlier you know how you thought about your weighted average cost of capital.
It kind of sounded like to me that if you were you were looking at your cost of debt. If you look forward based on the curve that it's not necessarily.
You know that is a cheaper cost than equity over the next year. If you kind of look at you know the over a full year on where interest rates could be I guess, how how are you thinking about that equity versus debt mix and it and going back to as well.
Average target I think it's four four and a half to five and a half times debt.
Debt to EBITDA. So I mean are they are these situations, where youre going to yell over equity is perhaps because of some of these dynamics.
Yeah, I mean, you know and we've over appetite to date right you know I mean, we were.
Below 30% on a market cap basis, you know debt to equity with a target of 33.
Hum.
Yeah, we're constantly thinking about you know the tools that we have in our toolbox and you know the.
The $200 million forward that we did in August is a great tool for us to use.
Equity prices started trading you know in a more acceptable range the ATM either spot or forward you know as another tool that we can use there, but the point that I was really trying to make is.
Think that just looking at spot rates in the current environment could really cause you to regret some of your decisions you know can lead to false positive investment decisions.
And similarly.
Similarly, you know the idea that the balance sheet is over appetite. If you know if debt capital we saw great opportunities with respect to debt capital.
Utilizing that to get a little bit more in line as you know an option on the table too so.
And then Martin I, you know Randy and Amy we talked about this like literally every day right. So you know we're constantly looking at the you know the.
You know the menu of opportunities that are out there.
And I think the greatest thing that we've been able to add as we've been able to be very very nimble right.
We were able to pull off that August offering you know right after.
You know, we announced second quarter earnings and similarly, we were very early into Q4.
For the term loan market, which is a market that's becoming significantly tougher. So yeah. All of those options are on the table.
Alright, it makes sense. Thank you.
Okay.
Thank you. Our next question comes from Linda Tsai with Jefferies.
Hi, appreciate the crickets, which you're allocating capital going forward.
Is your assumption that you stick with the 65% hygiene profile or what do you expect to capitalize on them more I G like tenants.
Yeah, I mean, I think you know we like the investment grade profile tenants just as much as we like the investment grade.
Tenants are in that the risk profile is in most cases, even slightly better for an investment grade profile that they they carry no debt and generate strong cash flow larger retailers. There are just fewer of them out there. So I think the opportunity set will likely dictate you know what we buy but I would expect the ratios of the portfolio.
Oh to remain fairly constant.
Okay.
And then could you comment on any general trends in the sale leaseback environment and whether you know higher cost inflation are catalysts for operators to do more sale leasebacks.
Yeah, and as you know and we've only done a handful of sale leasebacks, but I do think that when CFO as you start looking at refinancing their debt and they may have a little bit of sticker shock a I wouldn't I would assume.
That sale leaseback could start to make a little bit more sense than it has in the past.
Thanks.
Thanks Linda.
Yeah.
Ladies and gentlemen, there are no further questions at this time I would like to turn the Florida back over to Mr. Mark Manheimer for closing comments.
Thanks to everyone for joining today and for those of you attending the upcoming conferences, we'll look forward to seeing it then.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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