Q3 2022 Spirit Realty Capital Inc Earnings Call
Good day and welcome to.
Spirit Realty capitals third quarter 2000.
'twenty two earnings conference call.
All participants will be in listen only mode. If you need assistance. Please signal conference specialist by pressing the Starkey followed by zero.
After today's presentation there'll be an opportunity to ask questions.
Note that this event is being recorded.
Now I'd like to turn the conference over.
Mr Pierre revolt.
Senior Vice President of corporate Finance. Please go ahead Sir.
Thank you operator, and thanks, everyone for joining us for Spirit's third quarter 2022 earnings call.
Presenting on today's call will be president and Chief Executive Officer Jackson shape.
Chief Financial Officer, Michael Hughes.
Our Chief investment Officer can hi, Mike 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 on reasonable assumptions.
They are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those 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 really relating to these forward looking statements.
This presentation also contains certain non-GAAP measures reckon.
A reconciliation of non-GAAP financial measures.
The most directly comparable GAAP measures are included.
And the exhibits furnished to the SEC under form 8-K.
Which include our earnings release and supplemental investor presentation.
Materials are also available on the Investor Relations page of our website.
For our prepared remarks, I'm now pleased her introduce Jackson check Jackson.
Thanks, Pierre and good morning, everyone.
Our third quarter results continued to demonstrate the validity of our underwriting approach highlighted by low lost rent stable property cost leakage and occupancy over 99%.
Our portfolio benefits from diversification across 346 tenants.
Operating within 34 industries and.
12 distinct sub asset types.
Allowing us to produce a reliable stream of cash flow for our shareholders.
And once again increase our quarterly common dividend.
During the quarter, we invested $268 million in capital expenditures at a weighted average cash capitalization rate of 686%.
Our 49 basis point increase over last quarter.
And then 133 basis points spread.
So the capital we raised to fund this capital deployment.
Our capital deployment included 51 properties, which have approximately 15 years of weighted average lease term.
Average annual escalators of one 8%.
And a weighted average economic yield of 776%.
These acquisitions consisted of 46% industrial.
54% retail and other.
I'm pleased to announce that our other bucket was our first add on acquisition with you invited.
Formerly club Corp.
Since our initial transaction last year.
We partially funded these acquisitions with $74 million of disposition proceeds.
Predominantly from the sale of leased retail assets.
With a weighted average.
Cash capitalization rate of five 7%.
Resulting in net capital deployment of $194 million.
At a blended cash yield of 729%.
We sold five <unk> and a gardener school and a low five cap area.
Two Mac paper properties in the high four cap area.
And two smart and final grocery stores, formerly Hagen properties.
In the low six cap area.
As you will notice the percentage of industrial acquisitions rose meaningfully since last quarter from 18% to 46%.
And I anticipate that percentage to rise materially higher in the fourth quarter.
As the industrial segment is where we are seeing attractive sale leaseback opportunities with new and existing customers.
Many of our customers that operate light manufacturing distribution and Iowa facilities, the funding to meet their growth objectives.
And with other forms of corporate financings, becoming less available or attractive.
Sale leasebacks as a financing alternative becoming a more attractive option.
Despite this favorable dynamic we are being highly disciplined and selective in our pursuit of opportunities and.
And we believe pricing for these assets could become more attractive in the near to medium term.
To help fund these opportunities we continue to pursue prudent asset recycling by disposing of smaller retail assets with.
But cap rates have proven stickier.
This form of capital recycling will also help shape our portfolio.
As we dispose of retail properties and redeploy proceeds into the industrial segment.
Under new long term sale leasebacks.
At current market terms with tenants, who meet our capital now.
Finally, as we approached the end of 2022.
I reflect on the goals, we set three years ago at our Investor day.
Including a b R.
Non retail exposure.
<unk> per share.
As we sit here today.
I want to highlight that we are ahead of our Investor day, a b our goal by $61 million.
Our industrial exposure is over 20% and grilling.
And the midpoint of our <unk> per share guidance is 14 cents higher than our original 'twenty two 2022 target.
Looking back even farther since the spin off of us MTA in 2018, we have increased our ABR by 82% to $661 million.
Grown our industrial words like $108 million increased our Walt to 10.4 years and raised our public tenant exposure to 53%.
Over the same period, we have meaningfully improved our balance sheet liquidity internal processes and technology systems and.
And with this strong foundation.
Our portfolio and platform are well equipped to perform take.
Take advantage of the opportunities we are seeing today.
And increase shareholder value overtime.
With that I'll turn the call over to Mike.
Thanks Jackson.
During the third quarter of our annualized base rent increased $13 8 million to $661 million with $12 8 million driven by net acquisitions and $1 billion from organic rent growth.
Received $1 2 million of rent from the seven theatres released in 2020 and 2021.
Representing 87% of the stabilized rent.
As of October only three theaters remain under variable rent arrangements as the rest have fully reverted to base rent.
Other operating income was elevated this quarter to 2 million, which included approximately one and a half million in nonrecurring income predominantly from our government taking for highway expansion.
On the expense side cash interest increased to $3 3 million from last quarter with approximately $2 8 million driven by a 145 basis point increase in the weighted average interest rate on our bank debt.
During the quarter, we issued one 1 million shares of common stock to settle existing outstanding forward contracts.
Issued an additional 2.2 million shares through our ATM.
Generating $141 9 million net proceeds at an effective price of $42.72 per share.
Additionally, we again raised our quarterly dividend to $66 three per share representing an annual growth rate of three 9%, while maintaining our ASP per share payout ratio of 75%.
After walking on 800 million and term loans during the quarter and effectively fixing their payments through well timed interest rate swaps, we had no floating rate debt outstanding at quarter end.
Subsequent to quarter end, we received commitments for 500 million, two and a half year delayed draw term loan facility.
All of our funds to be drawn up to July 2nd 2023, and will mature on June 16th 2025.
This new facility provides us with significant debt capacity to pursue attractive acquisition opportunities.
Allows us to be patient when determining when to access the unsecured bond market and further demonstrates the strength of our banking relationships.
We ended the quarter with 1.3 billion of liquidity, consisting of $1 2 billion and revolver capacity and 110 million of cash which will further be enhanced by the neutrolin facility that we expect to close in the coming weeks.
Turning to guidance, we are narrowing our <unk> per share range to $3 55 to $3 and 57.
Increasing our midpoint by a penny which represents growth of nine 5% from the prior year.
We're maintaining our capital deployment target of approximately one 5 billion and narrowing our disposition range to $250 million to $300 million.
When we announced our 2022 guidance on January 10th.
Inflation fears were much lower.
The U S 10 year Treasury yield was 1.75%.
One month's chauffeur was 0.0 or 5%.
Our stock was trading at $48 per share.
Despite these significant changes in the macro landscape and our cost of capital since that time.
Our portfolio strength capital allocation strategy and ability to timely source various forms of well priced capital has allowed us to perform in line with the aggressive expectations. We laid out in January and raised our quarterly dividend for the second consecutive year.
Well capitalized and positioned to take advantage of future opportunities.
I will turn the call back over to the operator to open it up for Q&A operator.
Thank you now begin the question and answer session.
Good question you May Press Star then one on your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two.
This time, we'll pause momentarily to assemble our roster.
First question comes from Anthony Balloons J P. Morgan. Please go ahead.
Thank you and good morning can you talk about just the.
The ability to continue recycling capital the way you have been pretty accretive way just how deep that pool is to be able to do that and you know how much growth do you think you can drive in the future, but I still buying it with with yields above the yields of what you're selling.
Hey, good morning, Anthony I'll try to go with that.
If you look at what we did this quarter.
In terms of asset sales.
No they were all relatively smaller transactions.
Six of those.
Asset sales that we did in the quarter were 10 31 exchange buyers.
That resulted in about 35% of the total sales volume in the quarter.
If you compare that to the second quarter, which was an equally large relatively large just disposition quarter I think only three of those transactions in the second of four in the second quarter.
Or 10 31 buyers.
So I think as we look out to <unk>.
Try to think about our disposition plan, we think smaller is better smaller smaller granular assets are easier to finance right now because.
The other buyers the non 10 31 buyers were generally to high net worth individuals that probably paid all cash for these properties and there were some small funds that we were able to engage with and sell property too.
So what I would describe to you today is we have a large number of properties on the market currently.
Very price sensitive seller.
And I would describe.
All of these sales as generally non investment grade sales like in the third quarter. None of these were I G related tenants.
And so that would be like <unk> car washes.
You know small smaller assets that are more bite size seems to have some attraction.
So that's that's going to dictate the plan, it's really hard to project a target because I.
I think you've heard some of the other commentary from our peers talk about declining 10 31 deaths out there I think that is the case because you know that.
Upper leg of these transactions or are being affected by other non retail.
Our real estate sales.
But we still believe that we'll be able to find a way to accretively recycle and obviously that will in turn inform US you know what our acquisition appetite will be going into 2023.
Okay.
And just a follow up if I look at your acquisitions in the quarter. The 6.9% yield is there any lag to the market adjusting cap rates higher here and just trying to understand like if those were struck today would there be any adjustment upwards.
Any comments on where you know cap rate adjustment is right now in your view.
Yeah, I mean, I think if you were to look at there was definitely lag effect in the third quarter I can tell you our fourth quarter isn't already has a low 7% cash cap range in terms of what we expect to.
To close in the fourth quarter and what we're seeing today just yeah.
We're seeing things in the mid to high seven to low eight cap range for.
For assets that a year ago, or probably 150 basis points lower just to give you. Some benchmark. So it's it's the same assets just wider 150 wider especially in that industrial area.
On the retail side, Tony the we're seeing probably 50 to 75 basis point widening compared to a year ago. So yeah, where you'll start to see it impacted and our go forward acquisition product.
Production.
And so for US you know.
Dispositions free cash flow are really pretty critical for how we're looking at next year's plan, obviously, given where our equity more equity is trading right now we're not interested in necessarily issuing at these current levels.
Okay. Thank you.
Yeah.
Thank you next question will be from RJ Milligan of Raymond James. Please go ahead.
Hey, Good morning, just a question on leverage ended the quarter at five two times debt to EBITDA Jackson, you mentioned that you're not interested in issuing equity at these levels I'm, just curious where you are comfortable taking leverage without tapping the equity markets.
Yeah, I mean, we we've talked about in the past well first of all our ratings are really important to us so whatever we do.
We're not going to put that at risk.
We've talked in the past you know five to the mid fives, there's kind of a range of of leverage that that we target.
You know, we're obviously set up with the additional term loan facilities.
Go past that if we found the right opportunities.
To be honest, we'd only do that if we were confident that we could get the balance sheet back to a more normalized five to five five range.
That makes sense.
Yeah, Yeah that makes sense and it seems like you guys are leaning a little bit more into industrial and you mentioned that the cap rates are probably expanded their 100 basis points I'm just curious.
What what the expectation is in terms of absolute levels of cap rates in industrial.
Over the next several quarters.
I mean, if you I guess I would say like you have to remember, but from my last from the last quarter, we talked about probably too much about high yield indexes and term loans and spreads widening.
Well, that's that's continuing to persist for a lot of issuers.
And if you look at our sale leaseback percentage this quarter, it's it's about 60% close to 60% of our acquisition, while volume was felt new sale leaseback oriented.
In the first quarter that was 45% second quarter was 56%.
I can tell you in the fourth quarter, it's north of 80%.
But what that means is we are finding.
Opportunities where companies really need the capital with good use of proceeds and Theyre just evaluating a sale leaseback versus you know accessing high yield bond or bank debt or term loan.
And we're focused on mission critical assets in that segment. So I think I think youre going to see that that sale leaseback percentage continue to be very very high as we move into the fourth quarter and beyond because that's where we're finding the most attractive opportunities.
If you think about my comments earlier about the dispositions.
We have a large number of properties that are existing leased assets on the market. We're not a forced seller. If we don't get the right price, we're just not going to sell it and so what we can do is kind of lineup, where we think we're getting fair value for the asset.
And and transact and those that were not getting fair value, obviously, not sell well pull those assets for the market.
Well, that's what's happening in the market today, you have a large number of existing leased assets for sale retail industrial office.
And most of those are probably not going to sell I mean, the volumes are way way down.
But there'll be a small number of sale leaseback transactions.
With with companies that need to grow me to go on with their business and that's why we believe that that we're one of a very few number of companies that can kind of solve that.
Capital need right now.
A couple of our peers do it as well.
I appreciate the color. Thank you.
Sure.
Thank you a question will be from Brad Heffern of RBC capital markets. Please go ahead.
Hey, everyone lost rents stayed relatively low this quarter. It's at 30 basis points I guess has that changed at all in October or November and are there any signs of any tenants dress.
Well most of that loss rent was related to Regal, maybe like if you want to talk about that yeah, I mean definitely in the third quarter and does that bump up most of it was really regal yeah. They didn't pay September at their acquired two they did pay October November ever. So yeah, I would expect that to I mean related to Regal that would obviously reverse itself.
Yeah, and you know we all those leases are in effect and obviously, we're talking to wiggle along with many of our other many other landlords that that'll Regal properties right now.
Okay got it I wasn't specifically asking about Regal I was asking more broadly on just tenants dress in general.
The way, we always look at we consistently evaluate our tenant base obviously.
That we're finding these opportunities for tenants that need capital were also.
Very focused on our existing tenants.
Where they sit.
And how they're performing.
I would say the benefit of our portfolio and we've talked about this in the past is.
You know, it's very diverse from a tenancy revenue in industry and location standpoint across our 2100 properties, but more importantly, like we have very large sophisticated operators you know they've got.
Access to capital.
Generally don't really good job. So so, but obviously, we're very mindful of and we're paying attention.
Okay got it thanks for that and then there was a decent size drop in investment grade exposure quarter over quarter. It sounded like that was not due to disposition. So was that a downgrade or can you talk about what was driving that.
Thank God you can take that yeah, so what happened.
The biggest driver of that change during the quarter was the downgrade of coals from investment grade.
But none of the dispositions as Jackson mentioned, we're investment grade that's not it.
That's not a target for us on the disposition side.
It was largely driven by the downgrade of Coles.
A little bit of it also was driven by the acquisitions that we're doing today tend to not be investment grades. So we're adding more non investment grade and you had to downgrade at Kohl's.
Okay. Thank you.
Sure. Thank you.
Thank you. The next question will be from Josh you're down around Bank of America. Please go ahead.
Yeah, Hey, guys.
Yeah.
I guess I'm curious like.
On the dispositions is it more about optimizing the portfolio like how are you.
Hi, How're you wanted to work for the sales more about kind of optimizing capital raising I'm just curious how are you.
Balances objectives.
I would say its first is Boe.
<unk> really but the optimizing of capital is probably in the Curt Brian for Us currently.
Our current public traded cost of capital is Paramount.
Because.
You know we have a very diverse liquid granular portfolio. So we have lots of opportunities to try to harvest those opportunities and we invest in things, where we have a lot of conviction around right now.
But also it gives us an opportunity to continue to shape this portfolio.
So we are evaluating the different industries that we're in and trying to find that sweet spot of balance of diversification.
And I think for us.
Adding more industrial we think is a wise thing to do and which consistently been doing that and we'll try to do that going into 2023, obviously in the fourth quarter as well.
Hum, but the other thing it does Josh is it.
It's very informative to have a lot of properties on the market for sale.
We get to see.
The depth of the bidding universe.
How different groups are coming in and out of the market.
And that's just extremely valuable information for where I said when we think about is just the right time to be investing for us relative to maybe it might get better later, so there's just really.
As opposed to hearing it from brokers or.
Other consultants anecdotally like we know real time I can tell you like if you looked at the buyer list and bidding list between the second quarter and third quarters very very different.
The depth the number the type of buyers are very different.
And we're seeing that at all.
Disposition pipeline that we have right now it's very much.
Happening in a moment.
Okay. So we think it helps us.
Just to be a better buyer.
Okay.
And I guess.
If nothing really changes on your cost of capital.
Should we kind of assume that.
Like your net acquisitions.
Going to be smaller than in the past.
Our sales.
That's a good way to think about it.
Yes.
Yeah look it's I mean, it's.
I'm not I'm not excited about our cost of capital in terms of where our equity yield.
Our <unk> yields right now.
But that being said you know we generate a decent amount of free cash flow of the portfolio is up a size right now where it's large it's not super large super small, but it is large and diverse.
And I think what you can expect from us is.
We're gonna be extremely opportunistic on how we think we need to fund ourselves I think if you look back since that since I think I've been at this company and this team we've always.
We're pretty thoughtful about how we raise capital to fund our business.
Sometimes you know, it's it's the ATM, sometimes its do larger offerings, sometimes it's through dispositions.
And I think we'll continue to do that.
Yeah, I hate to sort of forecast what happens if this happened or that happens, but I said you know, we're not going to raise capital the dilutive number one.
And we're going to continue to push really hard on the dispositions a core priority in the company.
And if those things don't materialize, obviously you get leverage.
As a as a kind of a toggle you want to go that route but I've said also ratings are really important so well, we're going to be really thoughtful as we come out with our 2023 player and then.
And we're not going to be heroes or anything like that either so we'll just be very measured and try to find the best opportunity that matches up with what we believe are great opportunities to enhance this portfolio that we own.
Thanks Jackson.
Thanks, Josh.
Thank you next question will be from Ann don't swing just out with Mizuno. Please go ahead.
Hey, good morning.
Good morning.
I wanted.
I wanted to go back to the investment spreads for.
For a second but more on a look forward basis.
It looks like your cost of capital today somewhere in the high sixes curious.
Curious what type of spread do you think you can generate as you deploy incremental capital today, and then some thoughts or maybe can you discuss the pipeline what the cap rates and they'll look like thanks.
Well do pipeline first.
Yes, we're being extremely picky on on <unk>.
Things that we're looking at right now because the.
The number of opportunities has continued to increase and I think I'd characterize it.
The buyer base for the things that we're looking at it it's relatively small as a couple of our handful of our public peers.
The especially for some of these larger opportunities larger being north of $20 million.
And the private buyers that need mortgage debt I mean, they're really not they're not really able to do it I don't think right now.
And so.
I guess the way we think about it is.
Look we have free cash flow, we have disposition proceeds but that all goes into the cost of capital mix.
We know what our <unk> multiple and yield as you know we were able to get stock. So last quarter, you know in the low forties.
At these current levels.
Capex would have to be extremely extremely high for us to consider that I think.
And right now I would say.
Cap rates are still.
Our still widening I'm just not sure how wide do ultimately go but at some point I think you kind of run into a ceiling, but.
You know high Sevens to low eights is it's kind of a reasonable area, where we think we might be able to.
You get things done next year.
Sure.
Mid sevens to low eight cap rates for for assets once again that we're probably.
150 point 50.
50 basis points tighter a year ago. So it's not like we feel like we're buying low quality opportunities. These are very very good opportunities or just you're just not as much capital out there.
Got it okay. That's helpful. Appreciate that.
And then a question I guess stepping back you've typically given forward your guidance during third quarter earnings are it sounds like the decision. This year, it's probably a function of the macro uncertainty and needing more clarity on your sources and cost of capital.
Like many of US would try to get a sense, if it's reasonable to think of the third quarter.
$50 million is a good run rate I'll give him the elevated cost of capital and Brent pricing and a shift in the market and so I'm curious if that's fair and then what type of growth do you think you can generate without.
Issuing incremental equity capital and still operate within your leverage targets.
Yeah, I mean, we we didn't put the guidance out.
Particularly because of some of the challenges in the macro environment right now.
Yeah.
Wouldn't want to even try to guess.
That's right now.
Like I said, we have a large number of properties on the market and I can tell you exactly how large but when I say, it's large as large if we were able to execute at those levels that would that that would help us.
Drive a certain type of.
Acquisition activity next year, if if we're not able to achieve it.
You know it.
It's probably going to go down for next year.
So, but but it's harder to kind of the.
To answer that right now so that's why we didn't want to put it out there until until we get a little more information you'll see.
Through the close of this year and early.
I think it will be better for them to give the market an idea about next year's earnings.
And growth in acquisition volume.
I appreciate that and understand and then just one last one if I could.
Curious if you could update your view on potential M&A.
Maybe he has evolved or maybe I'm being impacted by the change in your cost of capital that the contraction in spreads.
It seems that the spread investing equation here.
Pretty meaningfully and likely weighs on the growth and likely limit to the upside with the stock. So just curious on the latest thinking from here. Thanks.
Yeah, I mean, I think one of the companies that was taken private obviously I think it was a unique situation.
Talking about store right and.
<unk>.
For me the positive.
Sign for that is you got a global sovereign wealth fund that has sort of embraced this.
Net lease asset class. That's that's wonderful I think that's wonderful for all of for us and for all of our peers.
So you know that company had just very unique ABS facilities like we've had in the past.
I think it enabled them to.
To kind of be able to generate the kind of cash on cash yields but that investor required.
I mean for us, we're not necessarily set up that way all of our debt unsecured.
You can see how our bonds trade well.
More importantly, I think.
It's hard to predict like M&A in the future I think look the environment is not great right now for it.
The macro environment is a little bit distasteful and.
And so usually that doesn't result in a lot of M&A.
It's maybe stock for stock, but also very difficult right now.
So I would say like for what we're focused on things that we can control. We wanted to make this portfolio and company better constantly improve it we believe that this shift into a higher percentage of industrial assets, new sale leasebacks long term leases higher annual rent bumps, but the rent bumps are exceeding two.
Right now we think that's going to position this company better in the future.
Whether we get the equity multiple or maybe we can attract.
Sovereign wealth funds to do things with us sure that'll that'll be great, but we.
We just want to make the company better and that's what that's what we're really trying to do right now and we think what we're doing is doing that.
Our control, but to answer your question I don't think there's going to be widespread M&A right now that the environment is just it's too uncertain for for example for a lot of companies right now.
Okay.
Sure. Thank you next our question will be from Michael Goldsmith UBS. Please go ahead.
Good morning, Thanks, a lot for taking my question can you remind us just how much prior right you've collected this year how much you have remaining for the fourth quarter and then what you expect bleeding into next year.
You talked about deferred Brett is that yes, or rolling out the program for Michael.
Yes, correct.
I think we have about 9 million left.
To collect and I believe look like.
60% up by the end of next year I.
I have to look back and I think we've collected about that this year and you all of our deferred rent.
Been repaid for the obligations of the tenants on time so.
It's been moving along I think that when we struck harder for.
All agreements at AR balance was well into the 20th initially coming out of Covid. So it has come down materially we've even had several tests prepay early so it continues to.
The drop.
Thanks.
I don't know that yet.
And then just on you know really the portfolio shifting from or at least the acquisition or investment is coming it's shifting to industrial from retail, but there's a big pick up in the home furnishing space and and that's one.
You may be facing a little bit more challenge in this current environment given.
There was a lot of yes.
There was a lot of home buying.
Furniture purchasing and home furnishing purchases through the pandemic. So just just trying to get a better understanding of what youre seeing in this category and why the focus on it in the third quarter.
Yeah. So the two home furnishing it was we bought a lazy boy and.
Paul Yeah.
Ladies Boise and Ashley furniture location.
Like I said those were existing leases they were not sale leasebacks.
Yes.
They made sense given at the time, when we were looking at that though on a relative basis.
But if you think about what we're doing now is is it just really shifting more to that sale leaseback opportunity that I talked about you'll see that shift in the fourth quarter and it's gonna be predominantly industrial in that fourth quarter.
So I would say some of that some of the assets that were acquired.
Earlier in the year committed that battle that.
That we're rolling in but my comments on <unk>.
Our moving forward is going to be primarily industrial ultra I'm least sale leaseback new sale leasebacks.
Got it and I go back to you.
I will just go back to your question on crude rate real quick just to make sure I am clear you know all the the deferred rent we've been collecting.
That was all recognized in earnings.
Last year, so none of that is affecting our earnings just to be clear. That's all that was recognized last year in the second quarter and so the rent that we collect it and continue to collect did not actually get back to earnings.
So you won't be facing.
You sound like you have to lap that next year.
Correct, that's right yeah, no that rent we've collected this year was recognized in earnings for this year. It was all recognize last year all in one quarter either.
Are there any you know as we look ahead I know you're not providing guidance, but are there any one time items from 'twenty from this year that you will have from that.
Potential benefits.
Yeah, I mean, I talked about like the other income that lot of them got a little chunky. This quarter. So you know that tends to be more nonrecurring.
Got it thanks, so much good luck in the fourth quarter.
Okay. Thanks, Michael.
Thank you next question comes from John Oliver Twist. Please go ahead.
Thanks, Good morning, one occasion.
So.
When you talk to your tenants are what's your best sense of for them the cost of relief versus the alternative funding sources and as that spread.
Has it gotten wider.
It gets more favorable or unfavorable as it pertains to do net lease.
Yeah.
For a lot of some of the companies that we've been targeting especially the non investment grade tenants.
There are a lot of these companies are sitting on sulfur plus 450 heads of credit facilities.
And like.
Secondary bonds might be trading at 11% double digit.
And if you kind of talk.
About this last quarter, but yes.
Yield issuance, new issuance volumes are way way down.
Part of that is that the new issue premium is so high right now for new add on bond.
As a secondary bond levels of trading so wide.
And I think that's just a function of there's a whole we have a longer discussion on why spreads are still wide right. Now obviously a lot of global cross currency U K. There's just a lot of things right now that are creating extremely widespread.
You know for us as a sale leaseback.
Alternative you know if we can lock in at 8.25%.
America, It's lower right then that's what they can issue at bank debt right now even new bonds.
But you know where the tenants kind of push back on us.
Well it makes sense.
If they issue a you know a bond or term loan debt at those higher rates. They can always prepay that debt.
Prepayment, where youll maintenance or diseases, they can actually prepay at the minute they enter into a sale leaseback on a mission critical asset with us.
It's a 20 year obligation can't get out of it.
And then has certain inflexibilities sometimes for them.
So when they look at.
Doing a sale leaseback versus just issuing corporate debt.
It just has to be probably a little bit lower just given some of this elevated spreads spreads and where were absolute.
Corporate rates are right now and so that's why I've said that we're not going to do 10% sale leasebacks right now I don't I don't see right now in the current environment.
But we are seeing that 150 basis point widening and I think it's just a function of supply and demand of capital that's willing to do it I E S.
Of our peers.
And.
If these companies.
I need to move on some of them are growing some of them are expanding some of them are doing mergers and they need the financing. So so we're kind of trying to thread that sweet spot really good credits that we believe good industries.
Really good real estate great leases.
At what we believe are our wide pricing from a historical standpoint, and we think that in the future spreads will normalize.
Normalized from where they are today eventually so.
That's that's that's kind of the lens that we're looking at it.
Okay and when you look at your 2023 lease expirations, we have about three 2% rolling.
Any early thoughts on how lease negotiations are progressing and broadly what we should expect in terms of retention rates or spreads.
Yeah, Hey, this is Ken.
Tom.
The lease expiration as soon as you got it.
To be.
Frank with you is just the basic blocking and tackling that we're doing every day, we're not only addressing 23, we're addressing 'twenty four 'twenty five and even in some cases 26.
But we're we're very happy with the way.
The progress that we're making you can see in that and the lease expiration schedule.
It's interesting if you look at the leases that are expiring and our courtyard 33, and beyond and that thereafter line item.
Managed to move that up for several quarters in a row. So.
We're very happy with the progress we're making.
So I guess I'll ask a different way.
Any reason to expect retention rates to be any different from what we've seen from you guys for the past like yourself.
We don't see anything materially different.
Okay. Thank you.
Thank you next question will be from Wes Golladay of Baird. Please go ahead.
Hey, good morning, everyone.
Take a look at the sale leaseback activity that Youre doing are you seeing better value at a particular price point and how has competition changed throughout the year.
Oh Wow.
I think that's the way I would answer it.
There's a lot of.
Sale leaseback opportunities that that will get done because they don't make sense and it makes sense for us I don't think it makes sense for any of them. So it's just that that's one sort of bucket.
What I would tell you is that.
Larger dollar size deals are.
They're just less people that can actually do those right now and that's that's an area that we're looking at very carefully right now.
So I think it's I would I would just say like there's a lot of companies that need capital and they are obviously kind of like Oh, I'll do a sale leaseback and I just don't think a lot of them are going to get done so.
No I don't think it's hard for me to Overgeneralize.
Now in answering a question all I can tell you from our lens we're seeing.
Lots of interesting stuff.
At a very wide pricing relative to what we saw a year ago.
We're just we don't have to be mindful that we don't have infinite sources of capital right now that that are accretive so what I'm trying to be very measured and methodical as we move forward from here.
Got it and then when you look at your cost of capital need all kinds of ways Fisher cost of equity, but you know this.
It looks like.
Adjusted for the 150 basis points change you've seen in cap rates, but is that the debt side that you're more concerned about on the cost of capital at the moment and we will keep you from dialing up more volume at this point.
Yeah, no what they actually were much more comfortable on the debt side. Yeah. We have we did 800 million term loan that we fix we have today are $1 2 billion dollar line is completely undrawn.
We had $100 of cash on the balance sheet and then we have this new $500 million term loan coming in.
Think about to start our liquidity from a debt capacity standpoint, with this new term loan I mean that will carry us all the way through next year, probably into 'twenty four without having to access.
You need the debt markets are from a debt standpoint.
I feel pretty set.
I think it's more of the equity side that we're focused on.
Okay got that and then revenue producing capex, there's a lot of stuff that goes into that that picked up. This year you mentioned about funding a lot of the acquisitions with dispositions and free cash flow. So just curious how you see the revenue producing capex trending next year.
No I think that that's a that's something that I think will continue to be a part of our investment structure. It. It's it's generally related to existing tenants and we think that it's important for existing tenants that we're prioritizing to kind of be constructive with them. Obviously, we have to adjust for the car.
Pricing environment with them, if we decided to do that but I would say like well have a mix of revenue producing capital as well as straight.
Straight up acquisitions that are new sale leasebacks that are industrial a.
Next year I, just can't give you the percentage of the volume right now.
Got it okay. Thanks.
Yep.
Thank you next question will be from Greg Mcginniss Scotiabank. Please go ahead.
Hey, good morning.
Jackson as we head into them you know maybe more challenging economic environment. How are you evaluating these non investment grade industrial sell leaseback tenants to determine those with good uses for the capital that you're providing them versus maybe looking for a cash out.
Yeah, well I would say, we're not focusing at all on cash outs.
It's it's the normal blocking and tackling you would want us to be focused on you know it starts with you know what type of industry, there and how are they positioned.
What does what does your balance sheet look like how much floating rate debt exposure do they have.
How much concentration do they have from their revenue sources, how reliant are they on FX changes how are they.
Was it just a variety of different things that you would go through a credit one on one.
For us the key thing is how mission critical is this real estate that we're looking at.
What is the rent relative to what we believe market.
What would be the potential we use for this facility. How critical is this industry like you know if if god forbid there had to be a restructuring.
What would that look like is it a seven or 11, how valuable with these properties b.
All of that kind of goes into our calculus before we kind of make a decision to move forward, but what I would tell you what we're not doing is high rent high levered.
Over rented set leasebacks, that's that's not what we're talking about here.
But I think if you look back you know kind of specifically referenced.
The sale of that Hagen property.
If you kind of roll the tape if you remember that that situation.
It was a $224 million acquisition.
Yep back in the day.
Obviously that hit the company filed for bankruptcy.
<unk>.
We were able to obviously, we structure our leases with new operators and obviously that was done with kind of the prior regime here, but well we've been committed to do is continue to sell those so if you sort of look at the tape we sold all but one of those properties at this point and generated sales proceeds of 214th.
9 million.
As well as generated.
Another 75 million in total rents and settlement fees since since the acquisition of that portfolio.
So it's been.
Most $100 million net gain over purchase price.
And 50% on the investment.
This goes back to why did why was that good real estate generally.
Locations that operators wanted to go into a very granular and liquid like those two smart and follows a result.
And so we've continued to take on that.
That that thesis on everything that we bought.
Everything we bought close up in here so.
Important and it's not it's not just it's not just the lease you know theres a lot of factors that go into it.
Decisions that we make what were sort of deploying capital.
Okay. Thank you I appreciate the color there Mike just a quick one are there any plans to swap the new term loan and if you did what might that all in rate look like.
Yeah, that's something we're going to evaluate it. So we have time before we would draw that down and we have until July .
I mean, if I look at it today I think that we'd be looking at swapping into the mid fours I think that's probably a little steep in the short and the curve is a little elevated yeah, it's two and a half to return law. So youre looking at the short end of the curve I think if you look at how we would we did the last swap we time that pretty well you know we do we did it actually well before we even closed that terminal because rates dipped.
So we took advantage of that.
Thank you we'll look at the same playbook here, we see the rates you know dive, where we think there's attractive price.
Swap and we are going to have six months to do that you know we always take the view that there would be a lot of that was gonna come out between now and July with the fed and that could affect the trajectory of rates and the curve.
And if you take the view that we want to stay floating yeah, we have.
Conviction that rates are actually come down over the life of that term loan and we use it and we have that conviction, we will leave it floating so I'd say, it's too early to tell.
We obviously prefer to be fixed where we can.
We're going to evaluate that and try to be opportunistic with how we approach that.
Okay, great. Thank you.
Thank you next our question will be from John muscle Cole God of Wattenberg Zelman. Please go ahead.
Good morning.
Alright, John So could you maybe just digging into the kind of industrial acquisition pipeline, a little deeper what's the bifurcation in there between the manufacturing and warehouse distribution assets and has the cap rate and kind of cap rate expansion you're.
You've seen over the last six months differed between those two kind of specific kind of industries.
I'll, let Ken Hey, John .
So what I would say is.
There is not a bright line, but we tend to look at more of a light manufacturing opportunities but.
I would I would submit that when youre looking at a light manufacturing facility or right.
A pool of facilities and the transaction. They typically have a distribution component, it's very common to have that component within the facility, but as.
As far as pure light manufacturing versus pure distribution I would suggest it's going to be more on the light manufacturing side.
In.
There might be a little more.
Yield expectation for those types of assets, but its not some.
Huge Dubai.
Okay, and then English.
Can you think about your theater assets is there a.
You can kind of read through I guess in terms of tenant credit how from what's going on with Regal or is that kind of a very isolated situation you're fine.
Yeah.
We clearly view theaters is kind of in their own bucket.
The industry.
Here's what I will tell you we have we tend to have a lot of regional theater operators within our theater bucket.
They are doing phenomenal. They are they are solid they came out of COVID-19 extremely well capitalized.
I would submit that in some cases better capitalized through the SBA program than they've ever been.
Regal has got its own.
One path.
We're going to we're going to deal with that.
Interestingly.
Our not only our regional theater operators, but others that we haven't we don't deal with today, we do get inbounds on the Regal assets about interest in them. So.
Theaters are definitely different, but we're comfortable especially with our regional operators.
Alright, that's it for me. Thank you very much thanks, John Thanks, Sean.
Thank you next question will be from Spencer, Iowa, Oh from Green Street Advisors. Please go ahead.
Thank you and maybe just sticking on that the tenant health.
For a second just given the high inflationary environment can you guys comment broadly on rent coverage in the portfolio and how that may have changed in the last six months.
It's actually a very stable so I sort of I guess, not just tell your way up I think about it.
But.
53% are public somewhere investment grades.
Or non investment grade some are just.
Yeah.
No rating.
And then we've got a 20.
29% P E bucket.
Generally you should expect or non investment grade debt facilities.
And there are capital structure on their portfolio companies.
And then we've got sort of another 19% that you know.
Individual operators, which by the way some of those are really large, especially on the restaurant side.
Pretty good credits.
So we don't have.
Sometimes see people look at us as Oh, you're a high yield portfolio, it's not really true.
I mean statistically is that true.
And it's also very diverse so I think what we're trying to really ascertain as we go through working with our credit team.
Especially on the non investment grade.
Tenant base.
Where are those sources of revenue coming from our.
Are there things on the horizon that that that could change their prospects. So obviously joint COVID-19 a lot of tenants were impacted by transportation costs.
It just it just because of logistical issues that were happening.
Now some of that's burning off right to read about what's happening with pork and the cost of moving goods containers and freight is coming down but theres. Other issues you know there's there's.
Companies that have global FX exposure or being impacted companies that and so I think for us as we try to really understand what that concentration of revenue it looks like and how it could be impacted and then obviously as I said earlier on balance sheet, you know where these companies are with floating rate debt where are they able to maturity.
How does your lender base kind of looking at them because I do think it's gonna be different this time COVID-19.
So they put a lot of pressure on on lenders, but there was a lot of forbearance.
This time I'm not sure you know it depends on how long and deep.
Economic kind of environment that we're going into persists, but I can tell you that we spent tremendous amount of time looking at it.
With it with the team.
Okay. That's really helpful color and then just one more on you know what no acquisitions being heavily industrial focus can you just give us a sense maybe directionally at how coverage for that particular property type compares to the portfolio average.
So.
What citizens about industrial.
There are a fair amount of them, where the unit level coverage is not applicable obviously, but we're going to look at corporate coverage.
And we certainly.
An ingredient when we do the underwriting.
I would say as you as we evolve into a heavier industrial.
There's going to be a lot of occasions, where unit levels not a factor.
We look at other things you know in industrial to the rent on the facility tends to be a very minor line item in there in the expenses.
Things that we're looking at rather than unit level coverage that make more sense for the asset.
But we certainly weren't going to.
We're looking at opportunities that are dilutive to the coverage that at least at the corporate level.
Okay, Yeah, sorry, I should've.
Caveat it that way, yes, that's talking about corporate okay, well. Thank you I appreciate the color.
Thanks Spencer.
Thank you next question will be from bundles I O of Jefferies. Please go ahead.
Hi, Good morning, when you do sell leasebacks, how much discretion do you have in terms of deciding which assets go into the deal and you know what are those conversations look like.
I can tell a year ago. They were really hard you know there was a lot of people. It was more of a seller's market.
So so it was a kind of taken a leave it or take it this way or that way terms were really tough from a buyer standpoint like tenants had a lot of leverage.
I would describe it she was completely flipped.
The money has a better ability to determine what is what like what goes in and what goes out and what the terms are and what the rates are.
It's really flipped just because.
My earlier comments there are a lot of sale leasebacks that are.
Well in the market are being.
Trying to be sought after that that will not get funded.
And so.
I think it's a great time right now just not just for pricing, but for sort of terms that we're able to get assignment language.
You know back in the day, you used to have covenants on sale leaseback I'm not sure. We're there yet but used to be like financial covenants on some of these things if you look over a long time ago.
Before all these companies.
Public it is active but right.
Right now the sale leaseback is really solving an important part.
Of our corporate capital structure right now for companies don't want to grow.
Obviously companies that want to take out equity are trying to do that as well but.
With respect most hopefully most people are pursuing those kinds of opportunities.
And then in terms of the types of assets, you're just supposing to recycle capital out of your asset mix you have retail industrial office, you know, which assets are you seeing reach fair value the fastest to the point, where you're willing to sell.
Yeah, well I mean, I think if you look in the second quarter, Linda like we got a lot of traction on like for instance, like a bofa building, we've got really great pricing, we sold some of our.
Industrial assets, because once again, it's very attractive pricing and also.
Wanted to tip believe it or not perhaps kind of proof of concept, we've been buying a lot of industrial property. Since this team got here and I think we've been successful at it and we're trying to demonstrate.
On ability to show people that we can buy things that makes sense and see compression in yields on the sale.
If you looked at this quarter. It was all small assets Taco Bell's little restaurants.
A couple of grocery stores.
I think as you look at the pipeline going forward, it's probably looking more like that smaller bite size.
Opportunities.
Not really larger assets.
But that could really change so as we go into the new calendar year, you know you're just starting out never know how plentiful of fund flows work spreads tightened in.
There's a there's obviously a lot of appetite, it's just that where people are trying to discover pricing.
So we can pivot our disposition plan.
To do larger.
Retail assets the larger department store.
Maturities or retail opportunities.
And you know if we were not successful there we consider selling industrial as well.
But right now I would just answer your question, it's a lot of small granular restaurants car washes.
Things that we believe.
Yes, $3 million to $5 million sized deals that we think can clear right now.
Got it thanks for the color.
Sure.
Thank you next question will be from Chris Lucas Capital One. Please go ahead.
Hey, good morning, guys actually Jackson, just following up on that a granular portfolio how much of your aggregate portfolio you'd think is comprised of sort of those.
More liquid better valued smaller assets.
I would say.
In terms of number of properties, we have 2100 properties.
I would say this.
I'm going to guess definitely the majority fall in that bucket of small and granular.
<unk> stores.
Auto repair shops caliber collisions that sort of thing.
Yes, we do have larger assets as well right. Some of these industrial properties, we're buying a bigger.
Not as liquid today, just given they need they need more mortgage financing and probably don't appeal.
Two.
That 10, 31 universe, but.
I would say the large majority of asset we have fit in that sort of $3 million to $6 million 7 million dollar size asset I mean, 'twenty 100 properties right. So.
Yeah. So there's there's no shortage I think what we focus on is whats when we sell a property you know whats the tax impact to us.
What's the lease duration you know what.
There's a certain type of asset that has a certain minimum walt on it that that makes sense for the buyer base out there to get the pricing that we're focused on so like this quarter you might see more drugstore salt for instance.
Okay, great. Thank you for that and then Mike.
Mike I just wanted to.
Sort of a detail I wanted to iron out so in the capital.
Capital deployment activity spreadsheet that you have in the deck, it's showing average annual escalators in the one and a half to one nine sort of through the trough.
Trailing eight quarters and then if I go forward Theres a forward sort of.
Average.
Rent increase number that you guys postulate is 2% I guess.
Are the numbers comparable am I missing something between that between the two slides.
Yeah. So the Ford number is basically the point in time members of now over the next 12 months kind of point to point, how much do we expect our rent to escalate organically and talked about it before but you know one thing that is the only thing that number a little bit as you know there's a movie theaters that we re let.
They had some pretty big Escalations as they stepped up from the base rents they were put in to their final.
Realized base rent right. We had there were some runway built in as those things ramped up with new operators.
That's gonna be done by the end of this year and I'd say you know pro forma if you pro forma those out of that number you're probably closer to our historical average of about 1.7%.
So that is adding a little bit of extra growth. This year. So as we flip into next year I expect our that number to come down a little bit probably around at 1.7% range.
That being said as we think farther out.
We continue to buy more industrial and sell more of the granular assets, which tend to have lower escalators then.
Industrial that were putting in we tend to be more of a 2% to 3% escalators.
And you'll see that number start to creep up over the longer term, but I think the near term you will see that kind of come down a little bit.
Movie theaters kind of stabilized.
Okay, and then just one one more for you Mike just on the on Regal can you just remind us sort of how you accounted for.
There are deferred rent and did you is there anything that you guys will need to write off based on the filing or we were on a cash basis or can you just kind of give us a quick history there.
Yes, they were not on a cash basis. They are today obviously.
We only had 135000 of cash rent that was deferred and recognized in revenue, which we reserve for the third quarter. So that was not fully reserved obviously the September rent. They didn't pay is also fully reserved because again they are on a cash basis. So that's all been reserved for in the third quarter. So there's nothing else no other impact.
With Regal other than you know, where we get to with their leases if that changes.
Okay, great. Thank you that's all I had this morning I appreciate the time alright, thanks, Chris.
And if you have a question. Please press Star then one.
The next question will be from Ronald Camden Morgan Stanley . Please go ahead.
Yeah.
Hey, just a couple of quick one for me just going back to the acquisitions, obviously the cap rate.
Moving up this quarter as you're sort of thinking about sort of next year right. There's a trade off between volumes and in cap rate. So is the thinking that.
You know should we be expecting sort of mark cap rate, a higher cap rate deals given sort of the cost of capital or would you be willing to sort of step.
Step back on the acquisition volumes just trying how are you guys thinking about that.
Hey, Thanks, a lot.
Thinking about both of those alternatives to be honest with you we haven't come in it just to sell the sell and buy to buy.
I mean, I think what we're doing is taking very measured.
Steps.
As I said, we have a lot of properties on the market currently.
It's going to inform us.
Not just on proceeds.
The cap rate.
Have another tranche that we're prepared to move forward on.
And we don't have to sell these once again, it's only if we get what we believe is kind of the right price for what's being offered.
And I think we're equally being measured on the investments that we're committing to we're evaluating so really we're trying to we are not getting ahead of ourselves one way or the other when I kind of oversell without a pipeline and we're not going to build a big pipeline and try to sell down.
Moving very much a lock step which.
Which is why I keep referencing large number of properties on the market.
And if the market improves where we think we can sell kind of larger.
Either pools or assets, well, obviously pursue that.
That's why we don't want to probably we don't want to give guidance because it's really hard to tell.
We're looking at all sorts of different alter.
Alternative scenarios here and so.
Well be in a better position to do that.
Part of next year after getting a lot of feedback from.
The assets that we have in the market and also what we're seeing as I said.
The cap rate side for acquisitions, but we think were.
We're being as smart as we can about giving us maximum optionality.
We can easily just sit and do nothing.
Obviously, we're not gonna sitting exactly but we just sit and just collect rent.
But we want to take it what we want to do right now.
<unk> taken advantage to try to improve this portfolio as we move into 2023 given.
All the things that just glad to on me.
On the investment opportunity with sale leasebacks with industrial companies. So that's kind of the plan right now.
Great and then my last one was just.
Just taking a step back just trying to get a sense, where you had that just strategically what sort of the cost of capital environment today right that markets are.
Hi, and and you know the equity sell down.
You guys got afford done this year, which looks look really smart and.
And so forth.
You're sort of thinking over the next two to three years, what other sort of tools options.
Can you sort of drawn in these periods when cost of capitals, maybe not there as it is a JV capital is it trying to time more just trying to get your sense strategically.
How do you sort of operating in when the cost of capital is not there.
Yeah, I think for me it starts with.
Execution operations.
Doing what we're supposed to do monitor credit.
Stay close to our tenants collect rent.
R R.
Formats, if you looked across Las Brett.
Pretty close leakage very low default rates and getting through Covid in my opinion, it's been very really strong.
We're going to have another opportunity I believe during this very uncertain time to be able to prove out same level of execution. So that's really first priority for this organization we're focused on.
If you kind of are able to do that I believe well like the market's kind of come they ebb and flow no high yield index.
Indexes are really out of favor right now.
In my experience that's.
That's not forever and not permanent.
Believe you'll start to see a rotation at some point, where high yield indexes really start to compress.
Maybe faster than industrial grade indexes and my suspicion is that that's when we're going to probably outperformed the macro environment starts to loosen up and we'll be in a great position to move forward based on that.
I don't think we're going to try to do.
Things that would be distractive right now from what I. Just described just primary blocking and tackling execution day to day for our 300 plus tenants.
<unk> 'twenty 100 portfolio company because.
We spent all this effort last three years building the sports with balance sheet, you want to take advantage of that at the right time and I think we will get that opportunity sometime in the next couple of years.
Great. Thanks, so much.
Thanks, Ron.
Thank you that concludes our question and answer session I'll turn the conference back over to Mr. Jackson for closing remarks.
Okay. Thank you operator I appreciate all of your interest.
Participating in this call. This morning, and we really look forward to seeing many of you out at NAREIT in San Francisco next week. Thank you.
Thank you.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.