Q4 2022 Spirit Realty Capital Inc Earnings Call

Speaker 1: To and that and.

Speaker 2: The Spirit Relativity Capital 4th quarter, 2022, earning conference call.

Speaker 2: All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Speaker 2: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please submit yourself to one question and one follow-up. Please note that the event is being recorded. I would now like to turn the conference over to Pierre Rervoul.

Speaker 2: Senior Vice President of Corporate Finance and Investor Relations, please go ahead.

Speaker 3: Thank you, operator, and thanks everyone for joining us for Spirit's fourth quarter 2022 earnings call.

Speaker 3: Presenting today's call will be President and Chief Executive Officer Jackson Chey and Chief Financial Officer Michael Hughes. In addition, our Chief Investment Officer, Ken Heimler, will be available for Q&A.

Speaker 3: Before we start, I want to remind everyone that this presentation contains for nothing statement.

Speaker 3: Although we believe these poor looking statements are based on reasonable assumptions, they are subject to known and unknown risk and uncertainties. They can cause actual results of different materially and thus currently anticipated due to several factors.

Speaker 3: I refer you to the State Harbor Statement in our most recent filings with the SEC for a detailed discussion of the risk factor relating to the sport and the statement.

Speaker 3: This presentation also contains specific non-gab measures.

Speaker 3: Reconciliation and non-gape financial measures, most directly comparable GAAP measures , are included in the exhibits. Burnish the SEC under 4-Made K, which include our earnings release and supplemental investor presentation.

Speaker 3: These materials are also available on the Investrel Relations page of our website.

Speaker 3: For a prepare the marks, I am now pleased to introduce Jackson check. Jackson.

Speaker 4: Thanks, Pierre, and good morning.

Speaker 4: We're pleased to report strong results for 2022, which exceeded the targets we announced in 2019.

Speaker 4: We achieved AFFO per share of $3.56.

Speaker 4: surpassing the midpoint of our 2019 investor day range by 14 cents. We also increased our total ABR to $681 million.

Speaker 4: while increasing our industrial exposure to 23%.

Speaker 4: with both hurdles exceeding our investor day targets.

Speaker 4: Furthermore, we maintain high occupancy low-lost rent.

Speaker 4: and stable, unreinverse property costs across our portfolio of 2115 properties.

Speaker 4: These results reflect our prudent underwriting approach.

Speaker 4: and well-diversified portfolio, least sophisticated operators.

Speaker 4: in durable industries.

Speaker 4: During the quarter, we invested $312.4 million in 24 properties at a 7.27% cash capitalization rate.

Speaker 4: 88.4% of these investments.

Speaker 4: We're in industrial assets.

Speaker 4: including distribution, light manufacturing, and industrial outdoor storage.

Speaker 4: With 90.2% of the investments originated through sales back transactions.

Speaker 4: We also invested $38.5 million in development and revenue producing capital expenditures.

Speaker 4: almost half of which was related to our $67 million investment.

Speaker 4: In a $125 million cutting edge facility for son opda a leading plant based food manufacturer.

Speaker 4: This facility opened for operations in December . Our disposition program also produced great results on the fourth quarter.

Speaker 4: We sold 21 occupied properties for $110.2 million at a 6.22% weighted average cash capitalization rate.

Speaker 4: Representing a positive 93 faces point spread.

Speaker 4: or a capital deployment cap rate.

Speaker 4: and resulting in a $33.3 million game.

Speaker 4: The occupied NYX included 42% retail and 47% medical.

Speaker 4: And only 4% of the sole properties were leased to investment grade tenants.

Speaker 4: For the year, we sold 278 million of least assets at a weighted average cash capitalization rate.

Speaker 4: of 5.47%.

Speaker 4: representing a 118 basis point spread for capital deployment cap rate.

Speaker 4: and generating a $94.2 million game.

Speaker 4: Only 24% of the sole properties were leased to investment grade tenants.

Speaker 4: Our capital recycling program, which started early in 2022, has been very successful.

Speaker 4: It has allowed us to further reshape the portfolio and accretively redeploy capital into asset classes and industries that we find attracted today.

Speaker 4: We expect continuous success with dispositions this year.

Speaker 4: in total through acquisitions and dispositions.

Speaker 4: Spirit has successfully completed more than 150 transactions in 2022.

Speaker 4: which is a testament to our people and the robust processes we have established.

Speaker 4: to our people and the robust processes we have established. As I previously discussed,

Speaker 4: The majority of our fourth quarter acquisitions were in industrial assets.

Speaker 4: We already have our fourth quarter acquisitions were in industrial assets, which continues to be a strategic focus for us.

Speaker 4: Given our growing exposure, we have featured notable achievements in this sector in our supplemental investor presentation. On page 13, we spotlight the sales of Shiloh, Sunny Delight, Beereo Space, and Mac Paper Properties. On page 13, we spotlight the sales of Shiloh, Sunny Delight, Beereo Space, and Mac Paper Properties. The news is being released on page 14.

Speaker 4: These were industrial properties that we purchased and later sold.

Speaker 4: realizing 85% gain and capturing 312 basis points of capric compression since we required these assets.

Speaker 4: On page 14, we highlight the fourth quarter acquisition of a manufacturing facility that also released the way into global.

Speaker 4: A top RV appliance manufacturer and supplier.

Speaker 4: In November , shortly after we closed on our sale leaseback, way inter-global was acquired by LCI Industries.

Speaker 4: a much larger public company and a major credit upgrade for Spirit. On the same page, we feature the development of the 270,000 square foot state of the art.

Speaker 4: Some off the facility. Illustrating how spirit can partner with industrial tenants.

Speaker 4: to build mission critical facilities. Finally, on page 15, we highlight select industrial acquisitions completed in the fourth quarter.

Speaker 4: including one distribution and two industrial outdoor storage facilities.

Speaker 4: We find these investments appealing because they are mission critical assets, at least to strong operators with low in-place rents. And while the acquisition yields are very attractive for us today, we anticipate that these facilities, just like the industrial dispositions, featured on page 13, will appreciate and value over time.

Speaker 4: One of our earlier investments within the industrial sector was the 129 million sales back transaction for a distribution center and two manufacturing facilities at least the party setting that we completed in 2019.

Speaker 4: We highlighted this investment at our investor day and are provided an update on page 16 of the supplemental investor presentation. What's important to note is that despite party cities ongoing bankruptcy.

Speaker 4: We expect the positive outcome for spirit given party city's dominant position in the party good sector and our assets high quality and mission critical nature. 85% of our investment is in the 900,000 square foot distribution center in Chester, New York, which is located in Orange County.

Speaker 4: This property serves as party city's primary distribution center, running at full capacity and handling over 45,000 skews for clients across the globe. Given its critical role in the company's operations, this facility epitomizes the concept of mission critical.

Speaker 4: In addition, Market Rents for Distribution Centers in Orange County stand at $11 per square foot.

Speaker 4: and are projected to increase by 6% this year. This is significantly higher than our current rental rate of $8.5 per square foot, which grows contractually at 2% per year.

Speaker 4: Our investment in this facility is well below replacement cost, and should we ever have the opportunity to re-let the asset?

Speaker 4: There's significant upside in this property due to the high tenant demand for distribution centers.

Speaker 4: The lack of others of this size and the difficulty of doing ground up development in this market.

Speaker 4: The two other facilities are smaller in terms of investment, but also have great stories. The Eden Prairie site is a manufacturing facility responsible for production of 60% of the world's mile-arbolives.

Speaker 4: This building is in a strong sub market and is vital to the innagram business.

Speaker 4: the manufacturing arm of Party City. Like Chester, it is an example of a mission critical asset.

Speaker 4: The Las Lutas facility is a high quality asset in an ex-holt location. Notably, there's already been sub-lease to Cupertino Electric at the same rental rate that Party City was paying.

Speaker 4: showing the versatility and quality of the light manufacturing assets we pursue. As a reminder, our approach to underwriting is based on analyzing industry duration and our tennis position within it.

Speaker 4: Examining tenant creditworthiness.

Speaker 4: and evaluating the real estate residual value underpinning the facility.

Speaker 4: While it's important to get all three right when you enter into a cell At least the encyclopedia will follow and gut all of us to include the sad intro recordings,

Speaker 4: We know that credits can change to the positive or negative for a variety of reasons. So the industry in real estate or paramount.

Speaker 4: In the case of Party City, the credit deteriorated. But we remain confident in the industry and Party City's position as a dominant Party good supplier and manufacturer and believe the real estate is extremely valuable. We therefore expect a positive outcome for spirit's investment.

Speaker 4: and believe this will be a good proof of concept for underwriting approach. As we think about the current year, we remain committed to taking actions that will create the most value for shareholders. We have set forth a fully financed capital deployment plan.

Speaker 4: utilizing free cash flow, asset dispositions, and in place debt to produce positive investment spreads in a volatile capital markets environment.

Speaker 4: Our focus for the upcoming years to showcase our portfolio strength and highlight our platform's effectiveness, which we expect to result in steady cash flows and dividends for our shareholders.

Speaker 3: With that, I'll turn it over to Mike to discuss the quarter and our 2023 guides. Thank you, Jackson. Good morning, everyone. Once again, our operations continue to perform at a very high level during the fourth quarter. We achieve a slight increase in occupancy of 0.1% to reach 99.9%.

Speaker 3: Our loss rent improved from 0.3% to 3.25% only 0.1%.

Speaker 3: Our wait hours lease term remains stable at 10.4 years. Our unreimbursed property costs remain steady at 1.4%.

Our ABR increased by 19.9 million, reaching 680.9 million. The increase was driven by net acquisitions of 15.1 million, organic rent growth of 4.89.

Our forward seems for sales growth has stabilized at 1.6 percent, as the majority of the movie theaters re-tenanted during COVID, which were driving the slightly higher growth, have largely returned to paying full-base rent rather than variable rent.

AFVO per share was 88 cents compared to 90 cents in the third quarter. The 2 cent decrease was primarily attributable to a reduction of 1.7 million in non-ten income and an increase of 1.8 million in cash interest expense. Reflecting a full quarter's impact of the 800 million in term loan borrowings.

which we swapped to a fixed rate of 3.5% in August . Trying to abolish sheet, we issued 1.6 million shares during the quarter under ATM program, generating net proceeds of 63.9 million. We ended the year at 5.2 times leverage with liquidity of 1.7 billion. Combrised of cash and cash equivalents.

Restricted cast and availability under our credit facility and delayed raw term ones.

We've expected drawing the term loan towards the middle of the year. In addition, our deferred rent balance declined by 7.4 million during 2022 to 7.9 million a year end. It should decline to 3.5 million by the end of 2023.

As a reminder, our deferred rent has already been recognized in earnings, therefore the repayment of deferred rent only impacts our balance sheet. Now for 2023 guidance, our AFO for share range is $3.53, the $3.59, with capital deployment of $700,900,000,000.

and dispositions of 225 to 275. The better understand our guidance, we have provided a walk from Q4 2022, annualized AF and FOPRSHARE to the midpoint of our 2023 AF FOPRSHARE on page four for a supplemental investor presentation.

As we note on page 4, we believe that annualized fourth quarter 2022 AFFO per share, equating to $3.52, is the right run rate for analyzing and understanding our 2023 guidance. As the fourth quarter includes the full impact of the aforementioned $800 million of term loans.

and minimal non-tenant income. Walking forward from the $3.52 per share, we expect about $0.04 from organic rent growth.

6 cents from our 2023 net capital deployment, plus 5 cents from lost rent reserves, which equal 1% of our AVR.

and less than other penny for inflationary G&A increases. Keep in mind that, as is usually the case at this point during the year, the lost room reserve is an assumption that is not specific to a particular tenant. The Jackson Mission, our capital deployment plan, is entirely funded through free cash flow, dispositions, and our existing debt capacity, with no reliance on the capital markets.

Should the capital markets turn more favorable or we find compelling risk-adjusted return opportunities, we will certainly consider taking advantage of those situations. But for now, we remain cautiously optimistic and disciplined in our approach to the year.

With that, I will turn the call back to the operator to open up Q&A. Operator? Thank you. We will now begin the question and for session.

To ask a question, you may press star then one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two.

Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from West Galaday with Baird. Please go ahead.

Hey, good morning, guys. Just a quick one on the net investment activity. What type of spread are you looking at for investments this year? I think last year you said you were around 118 basis points. Hey, West is Mike. Yeah, I mean, given the way we saw it and the way that we're going to use capital to acquire, we're looking at about 200 base points of spread.

Okay, fantastic. And then you do have that 500 million delay draw a term loan. Do you have to draw the whole thing, a key to a parcel on that? And what do you think about timing and putting on swaps? Or do you already have a swap for that? Okay.

Yeah, we haven't swapped it yet. There's something we'll continue to evaluate and got realistic about as far as timing. Contractually, we need to draw that by middle of the year, July 1st, although there is some flexibility that we can.

you know, used to negotiate longer term extensions on some of that if we need to. You have to do the whole thing. Or can you do partial? Yeah, well, you can do partial up until I first. So you can do partial and then by July first, you need to draw the whole thing. Unless we can track really good extension.

to negotiate longer term extensions on some of that if we need to. Okay, and you have to do the whole thing. Is it, or can you do powerful? Yeah, well, you can do partial up until I first. So you can do partial and then by July first, you need to draw the whole thing. Unless we can track, actually get an extension. Okay, fantastic. Thank you guys.

Yep, thank you. All right, next question comes from Handel St. Just with Mizzouha. Please go ahead. Hey, good morning. Thanks for taking my question. I guess the first question is, you guys backed out 3.2 million of deal pursuit costs in the quarter. I know you had a little bit last quarter, 470,000 I think. Curious if there's any comment or anything like to share on what drove that big increase with anything.

Well, in any comments you can make probably on that. Sure, hey, Handle, good morning, Jackson. You know, that that was a kind of a one off situation. It was a combination of there were, it was a large transaction that we were looking to acquire. Just spent quite a bit of time on last year. We also had obviously a large number of transactions that we completed. We closed over 100. The

Separate transactions and you know as cap rates were moving up throughout the year You know we dropped a lot of transactions if you know if tenants were either delaying or if Environmental due diligence or these terms didn't come back The way we had initially under oath the transaction committed to it We walked away so we I'd say it's a combination of

more transactions, more terminated transactions, and a large acquisition that we were looking at, potentially acquiring last year.

Okay, fair enough, we appreciate that color. And maybe there's a follow up on the five cents of reserve embedded in the guide here. I know you guys don't want to get into a conversation around specific tenants, but maybe can you talk a bit broadly about the watch list here exposure to kind of the unknown risk categories.

And then specifically party city mentioned that you don't anticipate any rent disruption during or after emergency for vehicle fees So just curious what scenario is both and so God for for that as well. Thanks Yeah, maybe I'll start first handle like we typically

You use a 1% reserve, just it's just a normal lost rep reserve. We've been historically what we've done last year was slightly less. From what we see today, obviously, Party City is going through a restructure right now. And we feel, as I talked about in my comments, we're highly confident in that asset, in the cash flows.

And if those cash flows change and we're wrong, we think there's actually upside those cash flows given the the wheel state and things I talked about it in the prepared remarks. As it relates to watch list, yeah, we're looking at more things. There's more things obviously just given the environment that we're sitting in.

I can actually tell you today that the realized active things that we're looking at in terms of lost friend are not here right now. So I don't just seem like to us to be to be more prudent with that 1% just as we look at it. And obviously I can tell you our company and teams goal is to do a lot less than 1%.

in terms of the last one at this year. So, we'll continue to update that as we go through the year to investors. And by now, we just think at the beginning of this year, just given some of the economic uncertainties that we want to be a little bit more conservative as we think about it. Yeah, and Hendo, Jack and Mitch, I mean, that is.

a normal assumption that we start the year with. One thing that makes it kind of a headwind to our guidance this year is that last year was, was just so good. We had very, very little loss friends. It's just from a year over year kind of laughing, a year standpoint, that assumption does create a headwind in our guidance. You know, and one thing, if you look at our unit coverage and corporate coverage, you'll notice that there wasn't much change between the third and fourth quarter. And look, you know, we're seeing good performance in a lot of lines of businesses, you know, ehrt? sour oler chr ?? satur o y d shorcone og the arr a anand

same but we're just obviously being a lot more vigilant staying close to our tenants right now. Thank you guys for sharing the colors.

The next question comes from Michael Goldsmith with UBS. Please go ahead. Morning. Thanks for taking my question. You and Heavy with industrial acquisitions this quarter, which has been telegraphed, but 75 percent of your activity was an industrial and industrial penetration picked up 230 basis.

And just generally with this macro backdrop, you know, what are you seeing on the retail side and is that just considered maybe more risky just given the economic environment?

Sure, I'll start thanks, Dr. Jackson. Look, I think one of the reasons why we were so successful this past quarter in the industrial area is that, you know, just challenges in the financing corporate financing markets. Bank debt, high yield, has made the same at least back option a more compelling financing option long term.

for corporate tenants and That's particularly the case that we highlighted this past quarter in the industrial space

I mean, for us, we have this three-pronged approach that we talk about all the time, industry duration, tenant credit, real estate. And we're going to stick to that. We've been doing that since we all joined here at this company since we've reshaped it.

beginning in 2017 and I think it's going to pay off. Obviously we talk a lot about party city. You know we fundamentally have underwritten assets that way in the industrial sector as well as retail. And we think that the things that we're buying today in the industrial sector are just super mission critical, especially some of this industrial outdoor storage facilities that we're buying.

That doesn't mean that we're not going to do retail. We still like it. We obviously are very close to a handful of tenants and industries that we're particularly still bullish around. But I think that the crack in the financing markets, corporately, have enabled us to be more competitive in this industrial space. That's why you're seeing it increase.

The mortgage financing market has sort of made it more challenging for some of the private equity players. Real estate private equity players that compete against us in this sector. So I think we're going to continue to make progress this year. And obviously is the markets.

Become to normalize and get more competitive again. You know, we may have to shift away from industrial But right now we're seeing really good opportunities to sort of fit the things that the criteria that we we underwrite to

normalize and get more competitive again. We may have to shift away from industrial, but right now we're seeing really good opportunities to sort of fit the things that the criteria that we underwrite, too. And we ought to go ahead and appreciate it.

No, I appreciate that, Jackson, and you kind of led into the second question. Just, you know, as we think about 23 and the concentration of where you're, where you're going to be dealing, like, can kind of this, can kind of this make up continue through, through this year? Or is it going to be a little bit more balanced? Like, it's 75% industrial.

sustainable or is it just going to be kind of a mixer or where there's opportunity overall? Yeah, I mean I could say like in the first quarter it's going to probably look similar to that. You know as we project out through the course of the year and you know obviously it's harder to predict that. I think a lot of our successes.

because of where the financing markets are, corporately in the mortgage market as well. That's having a positive impact for us, that the challenge over there in that market.

I think as those markets improve, it just will be more competitive for us to be able to keep increasing at this pace. So look, I think like we believe that we'll be able to do more in the industrial area. We're certainly going to do it in the first quarter. And as the year, it's hard to predict the rest of the year.

Yeah, we we have the flexibility to invest in both areas industrial and retail So we feel like given our guidance and how we're thinking about the business plan this year We feel very comfortable that you know, we'll be able to achieve these results Thank you very much good luck in 23 Our next question comes from Greg McInnis with Scotia Bank. Please go ahead Hey, good morning So looking at Q4 were you acquired at a 72 cap hot, you know 30 base

higher than where it's generally been. Could we see higher cap rates this year than there given the current financing environment and tenant demand for sale lease specs? And then just curious if you could give us some details on where you're seeing more or less competition for assets and whether you're feeling more constrained by capital availability or compelling transactions at this time. We'll be on the cap rate.

we're seeing that successes. As I said, corporations are looking at their real estate, especially in industrial companies, monetizing it for long-term financing, just given that we're non-investment-grade companies debt trade today. So I think that's gonna continue to play out positively for us.

Obviously, there's more competition for these types of assets. The little republic peers do the same investment strategy. So I think we'll see that going forward. And I think the other thing that you'll see this year for us.

If you look last year, you know, we did about 100. I think it's like 114 million of cat-backs in development.

This year, that number will be probably similar, if not a little bit higher, and it's gonna be at least a 50 basis point premium to the cap rate I just described, the seven quarter, seven and a half. So it's gonna be priced more appropriately, and we've already got a nice pipeline of...

I'll call revenue capital expenditure opportunities that are in the guidance for this year. So we'll continue to evaluate the market. We think, and then the last piece, to your question Greg, we've been very active on the disposition market. And if you look at...

the number of transactions that we sold last year. Part of it was reshaping, part of it was risk mitigation, part of it was just proof of concepts in some ways to how we've invested. So we feel like we've got a very good handle on sort of where the market is trending right now. 40% of those sales, like in the fourth quarter that we completed were 1031 buyers. Or tokens, or tokens. We know that we should increase prices, just 30% of payments, 80% of all, 30% of transfers we

60% with what I call private sort of institutions or individuals. So, you know, we'll continue to monitor the markets as we are buying and selling as part of the plan dictates for the operating plan for 2023. But I think we've got a good handle on what pricing is right now.

Thanks, maybe just touching on your revenue-producing X-comments. Is that built to suits or is that just investing in current portfolio with the tenants that are there right now?

It's a combination of the two. It's probably more biased to existing tenants that are looking to either...

improve the facility or increase the size and score footage of the facility. I think as time goes on, you'll see us start to highlight this year, you know, a tenant has XYZ space, you know, they want to increase the facility by 30%. You know, we're in an ideal position to provide that to anything because we're sitting there with the lease. It kind of need our approval actually in some cases to deal with the additional space that are on our sites. So...

It's kind of a win-win opportunity for us to reprice in some cases some of the capital that are going in to enhance the overall lease economics. So there's not going to be an interesting part of the story as we talk about that in the coming year. Okay, thanks. I could just add one quick one here. Just looking at the recent anteler acquisition. How do you get comfortable with that or other private equity back retailers as tenants? And historically, I've been more prone to bankruptcy and we're in a currently healthy environment, but it looks like it might get more challenging in the near future here. So just just curious how you go about evaluating those opportunities. Yeah, we're excited about that.

Well, you know, Jackson's mentioned we look at those opportunities, actually like we look at any of the opportunities that we come across. It's a three-legged stool, the industry, the tenant, and the real estate.

In this particular situation, we're very comfortable with the industry. Women's apparel, it's not going away. It's actually revenue for that market is higher now than it was in 2019. In the particular customer, the segment that our tenant targets has actually got up.

The expectations are for continued growth. So we're very comfortable in the industry. For the tenant, obviously this, our tenant operates both in Taylor and Loft. We've got limitations on how much we can go into the credit, but it's north of a billion dollars of revenue, Solid EBITDA.

very low leverage. And one thing that we like about this retailer is they are the very omnichannel component. Substance, proportion of the revenue is through e-commerce. So we we like that aspect. The third piece is the real estate.

These are absolutely mission critical. This is the DEC, the main distribution center for both of these brands. They also handles all of the e-commerce fulfillment. You've got one in the Columbus MSA, great facility, below replacement costs, inline rents. All the aspects you would want in the DEC, the 36-foot clear heights.

things like that. The other facility is just to the west of Indianapolis, the E-fulfillment. Again, this sets a major part of their revenues, so this is mission-critical to them.

But, you know, we're thrilled with all aspects, all three legs of the stool.

The biggest one being the lower replacement costs substantially below replacement costs so we're very happy with this acquisition I just say one thing you know we we do have a meaningful percentage of private equity backed you know tenancy in our company and we were very positive on second more They're very very high quality sponsor and

You know, just like helmet or freeman is over at home, you know, we just use your very very high quality very predictable Operators of businesses that you know run businesses well and ultimately sometimes monetize through IPO and merger So once again, we we like we like that and Taylor opportunity Next question

The things that we're looking at in the first quarter, you know, the industrial assets that we have, have two plus percent A on escalators. So we're seeing better opportunity on escalations, particularly in at least back at portrays in the industrial area.

Look, it's still competitive. I mean, we...

We look at a lot of different things before we kind of land on. He just has all three of the three prong underwriting pieces that we that meet are meaningful for us. So we tend to find that once we kind of walk those down, you know, it is competitive. There are other people that look at the world the same way we do.

So I might suggest that we're just out here not competing with people, but I would say generally in the in the industrial area.

You know, companies are looking at sale lease back, high yield bank financing as a means to an end. And so, you know, the terms get too egregious in the sale lease back, you know, then all of a sudden, you know, they look at corporate debt as an alternative. You know, in retail, retail has got a little bit more commoditized. You're not seeing what's

really competitive as it relates to buyers. Tenant's had a lot more leverage.

over buyers in that conversation, I just think there were just more buyers, more private buyers kind of willing to not look at some of this stuff because I think they're not as long-term oriented in terms of the whole periods. You know, for us, you know, we're buying these assets expecting to hold them for...

a lumpy up through the whole least term. So, environmental matters, least term matters, assignment matters for us. So, that's where we are, I think, in the current market. We're finding good opportunities, feel competitive when we get down there, but it's not as rampant as it was, say a year ago. So, that's where we are.

Okay, thanks for that, Jackson. And Michael, I just wanted to clarify on the unidentified reserves. Are we purely talking about lost rent when we're talking about that? Or is there some accounting reserve that you're planning to take? I'm just so confused about the terminology. Yeah. No, we're purely talking about lost rent reserves, so just an assumption around.

You know, things that could happen the portfolio throughout the year that could cause we're going to go away. Right. So it's just an assumption. It's not an accounting reserve. It's not anything that we've identified or is planned or that we have to take. It's just an assumption that very again, it's consistent how we've approached it. And all the other years, it's just a reserve for the unknown.

things that could happen to pull out throughout the year that could cause we're going to go away. Right. So it's just an assumption. It's not an accounting reserve. It's not anything that we've identified or is planned or that we have to take. It's just an assumption that very against consistent how we've approached it in all the other years. It's just a reserve for the unknown. Okay. Thank you. Yep.

Our next question comes from Josh Dennerline with Bank of America. Please go ahead. Yeah, hey guys. Just one follow up on the reserve and guidance. Sorry if I missed it, but how many cents was it in 2022? You.

It was about the same at the beginning of the year. Josh, it might have been a little bit slightly less, a little bit less than 1%. We typically look at 1% of AVRs or AVRs less, so from a dollar standpoint, it was certainly less.

But generally we target that 1% of AVR when we give our guns. Oh, okay, but where did it end up? I guess how many cents?

was in 2020. Oh yeah, but we're we're at end it up, um, you know, I think we ended up at about, I mean, point for the 3% for the year or something somewhere around there. About 30 dips for the entire year, I believe you average it out. So obviously much less than what our assumption is for this year. We have, we're ended up for the year.

Okay, okay, and then I guess over the years, what's kind of the range? Is that 30 bips to lowest you kind of ever saw and then like maybe what's kind of the highest kind of thing through a cycle? Yeah, that was definitely the lowest. I mean since the spin-off, it's generally been lower than 1%, I'd say the exception that would be 2020. 2020.

Maybe just kind of turning to competition for assets. I guess are you guys seeing more or less competition out there for assets that you're looking at?

I would say right now, you know, in the fourth quarter, obviously, you can see the results. First quarter, we feel really comfortable with a current pipeline. It seemed like there's a little bit drop in deal flow to be honest with you. Like, I probably heard that from other management teams.

We're still picking and finding opportunities that the volume of things that kind of meet our criteria

just seem to be less than, say, last quarter. I'm not sure if that's, I'm not sure what's causing that right now, but that being said, I think we're really comfortable with the guidance that we put out here that will be able to achieve, you know, really good, good opportunities in that seven quarter, seven-hour range.

And like I said, we've got a good runway of revenue producing CapEx that we have already buttoned down basically this year through the course this year. So we feel very comfortable with that right now. And look, it thinks change where there is more opportunity, more attractive cap rates. You know, obviously we...

We haven't factored any capital market activity in our guidance. Obviously, we can pivot if that happens. That makes sense, but right now we think we've sized.

the right opportunity for our targets this year given kind of what's happening in the market.

opportunity for our targets this year given kind of what's happening in the market. Jackson, if I...

reading into your comments is that kind of way to kind of flow right now for things you're interested in and apply that guidance is more back half loaded for acquisitions. I tell you, I think we're probably, it's probably equally weighted. I mean, from what we can tell right now. I mean, like it's, you know, interest rates are still.

pretty volatile right now, right? But as we started the year, you know, the forward curve has continued to increase. You know, when that happens and sort of the corporate markets get more into jession, I think that kind of gives us a better opportunity to lean into industrial sales aspects.

You know, if corporate debt becomes more favorable that creates competition for us as well as just people that compete with us on the sale East back for it. So...

So I think right now, because we feel pretty comfortable with our pipeline and what we put out there and if things change for the positive that make us accelerate acquisitions, you know, we'll clearly take advantage of that if the opportunity results itself. So, thank you very much.

I think this is a reasonable way to approach the marketplace given some of the economic uncertainty that's still out there.

Next question comes from Rob Stevenson with Janie. Please go ahead. Good morning guys. Can you talk about how the theater assets are performing today given the box office? And are there other looming near-term operator issues beyond regal?

And if you need to retent at anything today, how is the market for that today versus when you did the last batch of retenting that you did well on? Yeah, this is Ken. You know, the theaters had a phenomenal third quarter, fourth quarter was not as great, but they held the line.

What not, 2023, a big driver, excuse me, a big driver for the theaters is the release slate. 2023 looks pretty good and consistently throughout the year. Right now and that slate, you don't see any big gaps. So they've got a consistent

release dates for the the 10 poll films and that's what the big driver for theaters nowadays. You know it's interesting on the reuse front. It's you know it's public knowledge regal did reject one of our theaters. We've been.

for the 10 poll films. And that's what's the big driver for theaters nowadays. You know, it's interesting on the reuse front. It's, you know, it's public knowledge. Regal did reject one of our theaters. We've been pleasantly surprised.

with the inbound activity we've seen right now. It's very early days on that front, but it's not crickets. Whether it's other operators or other uses for that real estate. So, you know, we'll see as the year unfolds, but right now we're very happy.

So you have very stable outlook. Okay. And then how are you guys thinking about indoor farming and the potential returns and risk there versus owning the traditional 500 acres of farmland lease to a large farmer?

I mean, Robbie, we don't have any farm exposure right now. And I think right now we, to be honest, are they like our current lines of business are keeping us really busy right now.

Okay. I really call it on that. Appreciate the time. Our next question comes from Arshemani with Green Street. Please go ahead. Thank you. Michael, you mentioned targeting at 200 basis points, Fred for 2023. Can you give us. Thank you.

a rough ballpark estimate for what kind of nominal cap rate you would have to achieve on your acquisitions to roughly make that spread. Yeah, I mean, the Jackson mission we're targeting, seven and a quarter, seven and a half, cash cap rate for 2023. So at that cap rate, we can achieve that 200 base points of spread based on the way we're funding, which is free cash flow. So

a crew of dispositions and you're balance sheet that. That's a, and then in the first couple quarters you mentioned that this is really the most, the best opportunities you're seeing in a long time and then at least this, is that still the case and what's cleared out in your pipeline over the first part of this year? And just, you know, given the

favorable market environment, given how good the sales that market is for you today. Why do you think the public market is giving you not the best cost of capital relative to your peers, who aren't even as fairly that focused as you are. And I guess in internal discussions, what can you do to maybe improve that cost of capital to be able to capitalize on this opportunity that might be upcoming in 203 because it seems like you're more constrained on the cost of capital side than you know you're able to source deals but maybe not have a deal because the cost of capital. Yeah, I think it's yeah, I like questions, but I'll try it.

So I would just want to answer, you know, since 2019, you know, post the wind up of SMTA. You know, if you look at the midpoint of our AFFO guidance for this year, you know, our keg has been close to 5%. And that's been, you know, with a lot of economic, you know, macro headwinds, you know, COVID and invasion, you know, inflation, increase in interest rates. So we've been able to accomplish, you know, I think a reasonable growth rate since 2019.

I think if you look at our tendency, look, I think people have for whatever reason associated a higher risk to our tendency. So you know, party city is going to prove out. We're very, very confident. We're going to be able to show proof of concept there and the assets work a lot of money more than what we pay for it. We think that at home is another tenant that is top five tenant. We're going to be able to show proof of concept there and the assets work a lot of money.

They're headquartered in Dallas. We just, we meet with them. We just have recent meeting with them. We're very, very confident about what that company is going to do. Our real estate that we own and we believe in that credit. And we believe that we'll be able to, that'll be another good proof of concepts. So I think, of course, like, well, we have to do this year. The best thing that we can do to, I think, try to improve our cost of capital is to basically,

outperformed out lost rent number that we've highlighted as 1% this year. We think we can do it. Like we think it's reasonable to put that out there. But I think if we're able to beat that number this year, certainly from a tenant risk standpoint, people would not necessarily associate our portfolio in that way. We're originating more industrial opportunities. I think we're going to continue to keep pace with that, just given some of the dislocation in the corporate financing markets. So we're just going to make this company for a portfolio standpoint better. And look, we've we've gone big and now we're playing a little bit smaller in terms of number of transactions and volume. And I think this year will be a really good year for us to show kind of proof of concepts what this company can really do. I mean, we acquired an extraordinary number of transactions relative to what we've historically done last year. This year, it's like half of that, right? But I think one of the most important things that we're going to show is.

But the, you know, how creditworthy this portfolio is given some of the sort of comments that we've gotten in the past about risk of potential penalty.

you know, how creditworthy this portfolio is given some of the sort of comments that we've gotten in the past about risk of potential penalty. That's it, so thanks so much.

Our next question comes from our J. Milligan with Raymond James. Please go ahead. Take a more guys. I wanted to ask you about the 60 million that was issued on the ATM this quarter. Can you talk about the thought process and issuing equity at those levels? And can we expect more ATM issuance in 2023? Yeah, I was just a small amount. We want to make sure we kind of entered 23 at a good lovers level. There were still decent spreads in the fourth quarter when you look at that silver amount of equity. So I think we did a good spot for just good spreads last year, finish out the year and a good place on the balance sheet.

And that says up well for 23 based on our capital fund plan. You know, right now, you know, what stock price is, you know, we're not planning to issue any more equity. The entry price improves, material, and we see good acquisition opportunities that, you know, where the cap rate is at a place where we think the spreads are there. You know, we could certainly hit the ATM. That's definitely not off the table. You know, we could do something even bigger and accelerate later in the year if that makes sense. But for now, we feel like we ended 2022 in a good spot on the down sheet to set us up for a capital fund plan this year.

flow, disposition, and then increasing debt and I'm just curious, based on that guidance, where do you anticipate leverage ending the year, assuming the more equity issuance?

Yeah, I think our leverage will continue to be in that mid-5 range, it would typically target. We're always going to maintain conservative leverage and obviously maintain our triple B rating. That mid-5 range is where we're comfortable. Obviously we ended 2022 a little bit below that. We have some flexibility there to migrate into the mid-5. Yeah.

Yeah, I think our leverage will continue to be in that mid five range that we typically target. You know, we're always going to maintain conservative leverage and obviously maintain our triple B rating. So, you know, that mid five range is where we're comfortable. Obviously we ended 2022 a little bit below that. So I think we have some flexibility there to kind of migrate into the mid five. That's it for my fingers.

Thanks. Thank you. Our next question comes from Ronald Camden with Morgan Stanley . Please go ahead. Hey, just a couple of quick ones. Just looking at the deck, the bridge, the guide into is really, really helpful. So I see the sixth sense from net deployment, presumably that includes sort of the interest cost at once. I was just wondering if you could break out what the interest cost had wins is in 23. Yeah, so that includes any incremental interest on any incremental debt we're using to fund the acquisition. So that's built in there. You know, the interest expense headwind for 23 on the debt that we issued in 2022 is built into the Q4 2022 annualized F vote for share. Right. That's why we went off that because that Q4 88 cents. So we annualized had the full impact of the $800 million term on.

just my second one, just going back to sort of the acquisition guidance.

So I guess the first one is just, I'll really start understanding that sort of 800 million at the midpoint.

It sounds like the messaging is it's more sort of opportunity constraint than capital constraint at this point or is it both just trying to get a sense of that number. I would just say it's a little bit of both. I mean, look, for us, we talked about our cost of capital. It's not at the place where I believe it should be. And for us to issue capital and do larger amounts of volume, I don't think that makes a lot of sense. I think to me what makes sense is.

is really proved out what we've been doing last few years, which we believe we will this year. And at that point, we can look at potentially increasing volume with a more effective cost capital. I mean, so I think it's a combination of both. I mean, the opportunity set that we see is still there, but we don't think it makes sense, obviously, keep acquiring at a billion plus, given our current cost of capital. And we think we'll get, it'll be better for shareholders for us to kind of prove out all of the deals that we've transacted and we'll get, which we believe they are. Great. And then my last one, if I may, just sort of sticking with that cost of capital point.

I don't think I've heard this question asked on the call yet. I think in the past you talked about, you know, number one, potentially looking at JV capital, right? I'm in partnered with JVs as a source, and then maybe being open to sort of more strategic actions in the space with maybe others having a better cause of capital. Just curious where your heads at today. You know, the interest rate environment seems to have more staying power here. So both on the day V and sort of strategic actions.

Any comments you can share if you're helpful. Yeah, I would say probably, on the JB side, you know, I don't probably not, we're probably not going to pursue that, you know, this year. There's clearly opportunity for us to do it. They just complicates the story for us. And in terms of strategic, I mean, look, I think if we found a compelling transaction that could redefine what we're doing in English growth, obviously we would pursue that and finance it accordingly. My guess is we're going to end up just.

They seem kind of boring, but just sort of stick to this basic plan. And when we get to the end of the year, so hey look, everyone, you know, we've bought close to $5 million a real estate, really good real estate's performing really well. And we see more opportunities to do more. And I think that that that's going to be. I'll look back. I think that'll be an important aspect of what we do to try to get this cost capital in the right place. I mean, I can tell you or see your management team is very aligned long.

and that's all we're doing. And so we believe that what we're doing will basically improve our cost capital and put it in a good position. We have a specialist. Do two Everett has them with those in their business and so these

That's all we're, and so we believe that what we're doing will will basically improve our cost capital and put us in a good position. Thanks, Larsen. Thanks so much.

Next question comes from John Misaka with Gladden Bergtham. Please go ahead. Good morning. It's very, very, very, very, go back to this position and market quickly. You know, as we're kind of two months into the year here, what are you seeing in terms of the mix between institutional buyers and kind of more 1031 or individual buyers for the asset you're trying to capital recycle out of and you essentially had that 1031 buyer held up in kind of a new tax year, if you will. Yeah, this is Kim. The overall answer is that it's a mix of all those. Yes, the 1031 buyers are still there.

Well, you know, they may not be there in the numbers. They've been a, you know, a year, two years ago, but it's safe to say that there are 1031 buyers out there looking to transact about 40% of our disposed or, you know, individual buyers 1031 some cash about 60% or institutional. So we're seeing what we like, which is a healthy mix. We're not relying on one specific segment to complete dispositions. Okay, that's that. I think some of the buyers.

I also think like some of the buyers, you know, were focused on accelerated depreciation till not until last year. So some of the car washes present really good opportunities for that. So my guess is as the year progresses, you know, people will look to take advantage of accelerated depreciation and some of the some of the

assets types that we own that can provide that depreciation. Okay, that's very helpful. And then just a quick line item one, impairments were a little elevated in the corridor. Just wondering if there was something specific driving that or if that was just tied to dispositions or kind of future capital recycling. Yeah, I mean, I have that was related to regal. You know, initially we had a couple of properties on the rejection list. You know, ones come off for now. It was rejected. So we had been paired few there and then a few were just related to some future nonregals. Okay, that's helpful. Thank you very much.

that depreciation. Okay, that's very helpful. And then just a quick line item one, impairments were a little elevated in the corridor just wondering if there was something specific driving that or if that was just tied to dispositions or kind of future capital recycling. Yeah, I mean, above half of that was related to regal. Yeah, initially we had a couple of properties on the rejection list. You know, ones come off for now, one's been rejected. So we've been paired a few there. And then a few were just related to some future non-regals. Okay, that's helpful. Thank you very much.

Our next question comes from Linda Si with Jeffries. Please go ahead. Hi, good morning. Can you indicate what percentage of your investment guidance is due to revenue enhancing CAPEX? And is the idea that as long as you're more focused on industrial revenue enhancing CAPEX remains elevated? We did give an exact number. I kind of gave this number that we did what about 114 last year. It's going to be in that, probably going to be a little bit north of that. And it's going to be a mix of industrial retail. It's sort of very specific. So I would just say it's very tenant specific right now. Less, less industrial or retail. And then within industrial, how do cap rates vary, you know, whether it's distribution, manufacturing, industrial. And, you know, where are you seeing the best opportunities? You're going to come first. Yeah.

Right now, we're, you know, the acquisitions that we do tend to be a mix of those. If you compare a pure distribution to a pure light manufacturing, I'd suggest distribution's going to be a little lower cap rate. A lot of the facilities that we end up investing in typically have a mixture of those. It's a manufacturing facility with, as part of the real estate, is the ability to do distribution. But we're seeing great opportunities and all three of those. And in addition to that, we mentioned it earlier. The.

Industrial outdoor storage has been a nice little sector that we've found some great opportunities in Great thank you Next question as a follow-up from handles paint just with

I'll do you hope. Please go ahead. Hey guys, I wanted to come back. I don't think you gave it. Forgive me if you did, but can you outline what's in the pipeline as of today and any color on categories and range of cap rates. Thanks. Yeah, we didn't we didn't talk about pipeline. I think generally I'll just say our pipeline in the first quarter looks really good. I think cap rate is also similar to it better than the fourth quarter.

Hey guys, I wanted to come back. I don't think you gave it for you. Maybe you did, but can you outline what's in the pipeline as of today and any color on categories and range of cap rates. Thanks. Yeah, we didn't we didn't talk about pipeline. I think generally I'll just say our pipeline in the first quarter looks really good. I think cap rate is also similar to it better than the fourth quarter. And.

It's a good mix of industrial once again. We're finding those opportunities. Okay. And then Michael, for you, we'll follow up the 200 basis points of spread. You mentioned you're targeting. Maybe you can walk a few bit here. Just looking at traditional wax. I can't quite get there, given where you're cost of capital versus the deal you're seeing and the cap rates. So maybe you walk a few bit more of the color on how you're arriving ballpark at that 200 basis points. Thanks. Sure. Well, you know, we have, I mean, you have our disposition guidance, you know, which you can sign whatever cap rate you want to. We look at the cap rate as part of our cost of capital. We have about 125 and then free cashflow, different deploying. And then we're using our our delayed draw term loan as the debt piece of it.

You know, which is so for plus 95 base points. Got it. Okay. So I think we could follow up online, but I appreciate it. Our next question is a follow up from John Makaka with Lundberg, Vowman. Please go ahead. Sino, we're over the hour mark here. They'll be quick, but just kind of follow up to my prior question. And, you know, what are you expecting in terms of recoveries or renewals for the leases that are expiring in the quarter? Just kind of anything to be a big in a guidance or just kind of general thoughts would be helpful. Yeah, yeah, this is good. What we for 2023 what we think as far as you know, there's.

the two primary metrics renewal recapture. We do think renewals are going to be a little bit lower than historic, which was around the 90% mark on the recapture. We think we're going to be in the same range as historic, which is the mid 90s. Very helpful. Thank you. This concludes our question and in the next session. I would like to turn the conference back over to you.

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