Q3 2023 NETSTREIT Corp Earnings Call
Greetings and welcome to <unk> Corp, third quarter 2023 earnings call. At this time, all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to introduce your host Anyon director of Investor Relations. Thank you you may begin.
Yeah.
We thank you for joining us for net Street's third quarter 2023 earnings conference call.
Addition to the press release distributed yesterday after market close we posted a supplemental package and an updated investor presentation, which can be found in the investor Relations section of the company's website at Ww.
Green Dot com.
On today's call management's remarks, and answers to your questions may contain forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
Forward looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today for more information about these risk factors. We encourage you to review our Form 10-K for the year ended December 31st 2022, and our other SEC filings.
Forward looking statements are made as.
If the date hereof and that street assumes no obligation to update any forward looking statements in the future.
It has shown certain financial information presented on this call includes non-GAAP financial measures.
Our earnings release, and supplemental package for definitions of our non-GAAP measures reconciliations to the most comparable GAAP measure and an explanation of why we believe such non-GAAP financial measures are useful to investors.
Today's conference call is hosted by <unk>, Chief Executive Officer, Mark Manheimer, and Chief Financial Officer.
We will make some prepared remarks, and then we will open the call for your questions now I'll turn the call over to Mark Mark.
Good morning, everyone and thank you for joining us today for our third quarter conference call.
With the recent changes in the capital markets and subsequently the property market I want to begin with how <unk> is positioned for what we foresee as an increasingly challenging landscape for the consumer and by extension certain retailers.
We will also discuss where we see opportunities and how we plan to operate in this environment.
The challenges we expect to occur for many retailers center around a consumer that is unlikely to spend at the same level that they have.
In years past.
Especially when it comes to purchases by lower income consumers on more discretionary type of items.
While a small handful of our tenants have a diversified product mix that includes some exposure to discretionary items that may come under some pressure the portfolio was built around necessity retailers off price value merchants and resilient service providers. We believe this defensive industry focus coupled with our tenants' strong balance sheets and ready access to capital.
Positioning our portfolio to deliver predictable cash flow generation over the long term.
While there may be some headline risk associated with topline performance and gross margin pressures for some of our investment grade tenants, we do not see these pressures threatening their ability to meet their financial obligations, including paying rent.
We continue to be vigilant in monitoring our portfolio and where we have seen risk we have actively recycled and redeploy capital into less challenged assets are generally higher higher going in cash yields.
Turning to credit our watch list consisted of just one kind of big lots, which now represents one 9% of ABR versus two 4% last quarter.
Well, we may look to further decrease this exposure over the coming quarters, we do want to highlight that the nine infill assets that we now have solid demographics below market rents and excellent foot traffic.
More specifically our remaining locations have an average five mile population density of over 100000 people and an average household income of the Bakken.
$80000, which is attractive for most retailers aren't looking for expansion markets.
Additionally, we believe our average rent per square foot of $6.90 is well below market.
Lastly, when using placer AI to track store level foot traffic, our big lots rank in the top 75 percentile of the entire chain on average.
Again, while we may continue decreasing our exposure to big lots, we do not believe that there is long term economic risk to these assets given the positive underlying fundamentals of the real estate, which is a testament to how we have underwritten our portfolio since inception.
The other area of risk that we see developing across the retail space resides and tenants that have a high exposure to floating rate debt and our low cost debt that is maturing soon.
Given the financial transparency, we were we received from our tenants each quarter, we are able to quantify our attendants exposure to the aforementioned.
Specifically at less than 9% of our tenancy as measured by ABR has debt coming due between now and year end 2025, and the majority of this concentration or seven 5% is with Walgreens, so as exceptional access to capital.
With that in mind and based on our limited exposure to retailers that are reliant on discretionary spend from low income low income consumers, our tenant base, having little to no refinance risk over the next few years and only two 3% of our ABR external expiring through 2025 year and we continue to expect our portfolio to generate consistent.
And cash flow as we navigate a potentially choppy macro environment.
Turning to the portfolio as of September 30th we had 547 investments that were at least 85 tenants that operate within 26 retail industries across 45 states.
The annualized base rent for that for our portfolio was $124 $3 million 83, 3% of which is leased to tenants with investment grade ratings were investment grade profile.
Occupancy remains at 100% and a weighted average remaining lease term was 9.3 years more.
Moving on to external growth, we closed on $117 $5 million of investment this quarter at a blended cash yield of 7%.
The weighted average lease term remaining on these investments was 10 years and 97, 2% of these investments were leased to investment grade or investment grade profile tests.
Turning to quarterly disposition activity and loan pay offs, we divested of six properties for gross proceeds of $13 $5 million at a blended cash yield of six 9% continuing to demonstrate our ability to accretively recycle capital, while improving the quality and risk profile risk profile of our portfolio.
All told we completed $103 $9 million of net investment activity in the third quarter, which brings our year to date net investment activity to $327 $9 million.
While we are seeing significantly more opportunity for acquisitions in the fourth quarter at higher cap rates than what we would have seen in 2023. We're also seeing plenty of opportunities to sell assets at stubbornly low cap rates to trade buyers and thus plan to ramp up our salad selling efforts.
To take advantage of this spread.
Before I hand, the call off to Dan I want to provide additional commentary on our strategy and expectations as we finished 2023 and head into 2024.
Since our inception and IPO several years ago, we have exercised diligence and creating one of the highest credit quality net lease portfolios into freestanding retail space by partnering with the strongest retailers in the country.
We have had no rent interruptions to date, even through a global pandemic and have experienced zero vacancies.
With the current narrative being dominated by headlines discussing looming recessionary concerns higher for longer interest rates and rising delinquencies and consumer credit. We believe the underwrite underwriting discipline, we have exercised since inception have positioned our portfolio to outperform during a time of heightened macro uncertainty with that I'll, let Dan go over our third quarter.
Our financial results balance sheet, and 2023 guidance update.
Thank you Mark and thank you everyone for joining our call today.
Turning to our third quarter earnings release yesterday after the market close we reported net income of $4, two nine or six cents per diluted share.
Core episode totaled $21 $2 million for the quarter were 31 cents per diluted share.
H S L totaled $21.4 million for the quarter was 31% 31 cents per diluted share a 3% increase from the prior year period.
Total G&A expense, excluding onetime items was $5 1 million, which represented 14, 9% of total revenues. This compares favorably to last quarter in the prior year quarter G&A as a percentage of revenues was 16% and 18, 2% respectively.
Look out to next year, our G&A should continue to rationalize relative to our asset base in total revenues as the company has reached the proper scale to effectively operate our business on a go forward basis.
Moving onto the balance sheet total net debt was $567 $5 million at quarter end and our weighted average interest rate was 357%.
In addition, when including the impact of extension options, which are solely at our discretion. We have no debt maturing until January 2027.
Turning to capital markets activities Reais to $126 million of equity through our ATM during the quarter, which was primarily completed on a forward basis.
And we had $98 7 million of ATM equity that remained on songs.
As previously announced on July 3rd because our new $259 senior unsecured term loan with a delayed draw option, which is a fully extended maturity date of January 2029. The German includes an accordion feature that allows the company to increase the total alignment loan amount to 400 million.
At closing, we drew $150 million and plan to draw the remaining $100 million in the first quarter of 2024.
Before he extra $250 million term loan at an all in fixed rate of 4.99% through January 2029.
At quarter end, our liquidity was $564 six nine which is comprised of $7 9 million of cash on hand, 358 million available on our revolving credit facility $98 7 million of available forward equity and the $100 million remaining available principal on our 'twenty 'twenty nine trauma.
From a leverage perspective, and adjusting for the foreign equity.
Our net debt to annualized adjusted EBITDA was four two times at quarter end, which remains coffee below our long at the low end of our targeted leverage range of four and a half to five and a half times.
Moving to guidance, we are updating our <unk> per share guidance range to $1 21 to $1 23 from $1 20 to $1 23, which includes year over year growth of 5% at the midpoint.
On the external growth strong we now expect to close around 450 million of net investment activity.
Lastly, turning to our dividend on October 24, the board declared a quarterly cash dividend of 25 cents per share the dividend will be payable on December 15th to shareholders of record as of December 1st based on the dividend amount or have a payout ratio for the third quarter was 66%.
With that operator, we will now open the line for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
<unk> been using speaker equipment, it may be necessary to pick up your handset before pressing the starkey.
One moment, please while we poll for questions.
Our first question comes from Todd Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, Thanks, good morning.
Mark first question, you mentioned that you're seeing attractive capital still.
Still available as you look at recycling capital, what what's the spread look like today between our disposition and acquisition cap rates that you're saying.
Yeah sure. So I mean, where we're focused on really trying to find the the trade buyer in 10 31 exchanges. So in kind of a one off type situations.
We're selling assets anywhere from call. It a five cap to a seven cap depending on the lease term and where we think we can redeploy that capital are always hesitant to give a real concrete number on where we're going to know where we're going to go with dispositions just because we're relying on other parties to complete the transaction in that.
That's out of our control so the mix could be get really swing that one way or the other but for like kind you know types of of assets, where we think we're picking up anywhere from you know typically 50 to 100 basis points.
Yeah.
Okay, and then it sounds like you're starting to see you know investment yields improve a little bit on on new deals that you're looking at can you. Just describe you know a little bit more about what you're seeing there in terms of price trends you know I guess sort of you know these are the.
Sort of 2023, you know cash yields that you've achieved and sort of the 7% in the in the third quarter.
Yeah sure no absolutely we are seeing cap rates move up and so you know we at one point, we're acquiring assets in kind of the low sixes and that kind of trended up to mid sixes, yeah end of year last year and early this year up into the high fix it and now a seven cap and in the most recent quarter, we would expect the fourth quarter or two.
The even higher than that or certainly not looking to transact yeah really anything in the sixes. So you know I would expect to see you know 20 plus basis points in the fourth quarter. Some of that is really just going to be dragged down by some developments that we had signed up in the past that we're already you know already funding I think on new transactions.
That are likely to close more in the FERC in the first quarter, we're likely to pick up even another 2030 basis points beyond that.
Okay, and then just last question I guess.
Realize you know conditions are sort of fluid here, but you know I was just wondering if you can.
Maybe provide a little bit of insight around how youre thinking about investments.
And maybe you know.
Dispositions as well so net investments you know really heading into 2020 for them just given the current environment today.
Yeah sure I mean, I think with where we're seeing the acquisition market.
Market, while it's getting better it's really I don't think we're getting enough spread to go out and raise equity into play capital I you know what.
We see it today, yeah, we do see opportunities like we can have like we mentioned on the disposition and then redeploying through capital recycling and see some pretty attractive opportunities there, but we'd really need to see a material improvement in our stock price or see cap rates really move into the eights are for us to consider turning it you know turning.
Speaking of of acquiring assets and raising equity.
Okay alright, thank you.
Our next question comes from Joshua generally with Bank of America. Please proceed with your question.
Hi, This is farrell.
This is Josh.
Just a quick question about as you had mentioned are the headlines of pharmacy, specifically I was curious about what's your current acquisition are you seeing a change in competition for the assets that you're going after kind of like the higher.
Credit quality assets.
Yeah.
Yeah, I mean, I think we've really kind of seen this most of the year and probably even more so today, whereas where the private buyer is more or less gone.
You know the you know the opportunity standpoint, it's really never been better and my entire career that being said yeah. The cost of capital is also a challenge study.
Got it and we need to kind of balance that but really developers and tenants trying to grow even sale leasebacks are you know certainly are seeing a lot of opportunity. There. It's really gone from a full blown seller market to a full blown buyer market with.
With no bids really are in the private market other than the occasional 10 31 buyer at which we're trying to take advantage of on the disposition market and so you know it's it's really you know looking at the overall transaction market is likely down 70 80 per cent, but competition is down really 90, 95%.
Operator: Greetings and welcome to Netstreit's third quarter, 2023 earnings call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
Operator: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
Great. Thank you.
Our next question comes from Eric Wolfe with Citi. Please proceed with your question.
Amy An: If now I pleasure to introduce your host, Amy An, director of investor relations. Thank you, you may begin. We thank you for joining us for Netstreit's third quarter, 2023 earnings conference call. In addition to the press release distributed yesterday after market closed, we posted a supplemental package and an updated investor presentation. Those can be found in the investor relations section of the company's website at www.metstreet.com. On today's call, management remarks and answers to your questions may contain forward-looking statements as defined in the private security litigation reform act of 1995.
It's actually Nick Joseph here with Eric just back to sourcing of investments.
Kind of curious your thoughts and kind of the rationale of issuing equity in the mid sixteens, given kind of a N a V at.
At least street entities in the bank teams and where you've talked about investment spreads and transaction cap rates. Historically, so just trying to understand the thought process, there and kind of a value accretion calculation.
Amy An: Forward-looking statements address matters that are subject to risk and uncertainties that may cause actual results to differ from those discussed today. For more information about these risk factors, we encourage you to review all foam 10K for the year ended December 31st, 2022, and our other SEC filing. All forward-looking statements are made as of the date hereof and Netstreit assumes no obligations to update any forward-looking statements in the future. In addition, certain financial information presented on this call includes non-gap financial measures.
Yeah, Hey, Nick it's Dan Donlan.
You know when you think about that price and you include that you know the.
The de Minimis net price of that and you think about where we raised the recent term loan and then the impact of free cash flow. You know, we got to basically a 100 basis point spread relative to where we saw our pipeline shaping up into the fourth quarter. So that's really kind of we focus.
On an earnings growth, we obviously look at implied cap rate as well and it was probably you know.
Marginally dilutive to implied cap rate by 10 basis points yourself.
So that's the way we looked at it and you know it certainly was accretive to our eighth so per share.
Amy An: These refer to our earnings release and supplemental package for definitions of our non-gap measures reconciliations to the most comparable gap measure and an explanation of why we believe such non-gap financial measures are useful to investors.
Yeah, I guess what are the advantages that you have is that your smaller and so you can kind of grow off of that base and so how do you think about 100 basis points investment spread off of that and kind of taking away some of that advantage versus putting pencils down and waiting for a better opportunity.
Operator: Today's conference call is hosted by Netstreit's chief executive officer, Mark Mannheimer, and chief financial officer, Dan Diamond. We will make some prepared remarks and then we will open the call for your questions.
Yeah sure I mean, it you know yeah, we'd like to get back to a more normalized spreads, which you know I think we've said before as kind of 150 to 175 basis.
Mark Mannheimer: Now I'll turn the call over to Mark. Mark?
Mark Mannheimer: Morning everyone and thank you for joining us today for our third quarter conference call. With the recent changes in the capital markets and subsequently the property markets, I want to begin with how Netstreit is positioned for what we foresee as an increasingly challenging landscape for the consumer and by extension certain retailers. We will also discuss where we see opportunities and how we plan to operate in this environment. The challenges we expect to occur for many retailers center around a consumer that is unlikely to spend at the same level that they have in years past, especially when it comes to purchases by lower-income consumers on more discretionary type items.
Basis points spread but yeah, we feel like 100 basis points is adequate and provide you know provide some growth in there now scaling into the DNA is also.
That is what we view is helpful.
Thanks, and maybe just finally, if you are if you did put pencils down to do no deals are kind of going forward or beyond what's in the pipeline today, what would that imply for growth in 2024.
Mark Mannheimer: While a small handful of our tenants have a diversified product mix that includes some exposure to discretionary items that may come under some pressure, the portfolio is built around necessity retailers, off-price value merchants, and resilient service providers. We believe this defensive industry focus coupled with our tenant's strong balance sheets and ready access to capital, position our portfolio to deliver predictable cash flow generation over the long term. While there may be some headline risk associated with top line performance and gross margin pressures for some of our investment-grade tenants, we do not see these pressures threatening their ability to meet their financial obligations including paying rent. We continue to be vigilant in monitoring our portfolio and where we have seen risk, we have actively recycled and redeployed capital into left-challenged assets and generally higher going in cash.
Yeah, Hey, Nik you would do it.
Basically imply kind of low single digit year over year in April so growth. The building blocks of that is internal rent growth of about 1% you know credit losses of around 30 basis points reinvestment of our free cash flow after dividends, it's call it $32 million of free cash flow after dividends you know obviously.
The full year impact of 2020 Three's investments in you know leverage in and around.
The midpoint of our range I, what I'd say is if we you know we fixed our $175 million of 'twenty 'twenty four term loan to you push it out to 2027, you know had we not done that we probably wouldn't be looking at more mid single digit <unk> growth year over year, but we thought it was prudent.
But in the environment. We're in in May and in June two to push off that term loan in and swap it.
To a fixed rate and so.
I'm glad we did it.
Thanks, that's very helpful.
Our next question comes from Greg Mcginniss Scotiabank. Please proceed with your question.
Mark Mannheimer: Fields. Turning to credit, our watch list consists of just one tenet big lots, which now represents 1.9% of ABR versus 2.4% last quarter. Well, we may look to further decrease this enclosure over the coming quarters. We do want to highlight the that the nine-info assets that we now own have solid demographics below market rents and excellent foot traffic. More specifically, our remaining locations have an average five mile population density of over 100,000 people and an average household income of approximately $80,000, which is attractive for most retailers when looking for expansion markets.
Hello, everyone. Thanks for taking the question. So obviously it takes time for sellers to recognize reality and.
And for cap rates to increase so how are you weighing deploying capital today.
These seven low seven cap rates versus holding back potentially collecting some cash interest income and investing in a few quarters once cap rates move higher based on our math long run IRR tends to really appreciate another 25 to 50 basis points of investment yield.
Mark Mannheimer: Additionally, we believe our average rent per square foot of $6.90 is well below market. Lastly, when using Placer AI to track store-level foot traffic, our big lots rank in the top 75% aisle of the entire chain on average. Again, while we may continue decreasing our exposure to big lots, we do not believe that there is long-term economic risk to these assets given the positive underlying fundamentals of the real estate, which is a testament to how we have under it in our portfolio since inception.
Yeah, no sure it's that and that's a good question I you know, we're really for the fourth quarter largely done with the acquisitions. Yeah. We you know the guidance I think this way the slate.
Tweak there really relates to you know we've got some properties that were looking at selling and we're relying on other buyers to come through so if they don't come through then that number might be a little bit higher than $450 million of it if they all come through then it might be a little bit less but that's somewhat out of our control but.
But yeah, we we have some time to deploy the capital from our you know from the most recent equity raise and we do feel like cap rates are likely to be higher early 'twenty 'twenty four is and where they are today, how much higher they go a little bit difficult to say, but we certainly want to reserve some dry powder for early next year.
Mark Mannheimer: The other area of risk that we see developing across the retail space resides in tenets that have a high exposure to floating rate debt and or low cost debt that is maturing soon. Given the financial transparency we received from our tenets each quarter, we are able to quantify our tenets exposure to the aforementioned. Specifically, less than 9% of our tenets measured by ABR has debt coming due between now and year end 2025, and the majority of this concentration or 7.5% is with Walgreens who has exceptional access to capital.
Fair enough.
And then year to date, you've had 189000 of earned development interest, which has been offset by the near 700000 of capitalized interest expense through a F. O. It is it possible for that to current so headwind to turn into a positive or a tailwind to 'twenty 'twenty four.
Mark Mannheimer: With that in mind, based on our limited exposure to retailers that are reliant on the discretionary spend from low income consumers, our tenant-based having little to no refinance risk over the next few years, and only 2.3% of our ABR expiring through 2025 year end, we continue to expect our portfolio to generate consistent cash flow as we navigate a potentially choppy macro environment.
Yeah, Yeah, I mean, it should continue to grow that that's really the interest we receive from developers as we're funding.
Their developments so you should see it start to tick up.
Overtime I don't I don't think a it's ever going to eclipse that the capitalized interest.
Mark Mannheimer: Turning to the portfolio, as of September 30, we had 547 investments that were at least the 85 tenants that operate within 26 retail industries across 45 states. The annualized base rent for our portfolio was $124.3 million, $83.3% of which is least the tenets with investment-grade ratings or investment-grade profiles. Our occupancy remains that 100% and our weighted average remaining lease term was 9.3 years. Moving on to external growth, we closed on $117.5 million of investments this quarter at a blended cash yield of 7%.
Were those.
That part is maybe some of the headwinds on them.
And deals that you agreed to perhaps before cost of capital increase this much.
Yeah look I mean, some of the developments that we entered into or in the first and second quarter and the yields on those.
Kind of low low sevens high sixes I would note that they had much longer lease terms and what has historically been achieved with those retailers as as well as you know annual annual bumps, which you know it was has not also been historically are recognized as well.
Mark Mannheimer: The weighted average lease term remaining on these investments was 10 years and 97.2% of these investments were at least the investment-grade or investment-grade profile tenants. Turning to quarterly disposition activity and loan payoffs, we divested up six properties for gross proceeds of $13.5 million at a blended cash yield of 6.9%. Continuing to demonstrate our ability to a creatively recycled capital while improving the quality and risk profile of our portfolio. All told, we completed $103.9 million of net investment activity in the third quarter, which brings our year-to-date net investment activity to $327.9 million.
And last follow up here.
Good yeah, Yeah I can appreciate how you guys were able to to change some of those lease terms that we hadn't seen in the past, which definitely is a positive for those but and thinking about.
Here going forward are have those same retailers been open to further increasing our potential.
Yields on those investments.
Yeah, I mean, I think you know some of the retailers that are really pressed to grow their store count.
They really need institutional capital to come in they can't rely on the 10 31 market like they had in the past or they're a developer and it worked so hard.
Mark Mannheimer: Well, we are seeing significantly more opportunity for acquisitions in the fourth quarter at higher cap rates than what we have seen in 2023. We are also seeing plenty of opportunities to sell assets that stubbornly low cap rates to trade buyers and thus plan to ramp up our selling efforts to take advantage of this spread.
Hard to say exactly where all those negotiations go as they are ongoing but I I think you know if you need institutional capital most institutions like us are like to have annual increases in the leases. So I would expect that to continue on the margin.
Great. Thank you.
Mark Mannheimer: Before I hand the call off to Dan, I want to provide additional commentary on our strategy and expectations as we finish 2023 and head into 2024. Since our inception and IPO several years ago, we have exercised diligence in creating one of the highest credit quality, monthly portfolios in the free standing retail space by partnering with the strongest retailers in the country. We have had no rent interruptions to date even through a global pandemic and have experienced zero vacancies.
Our next question comes from Handel St. Louis, Missouri.
Please proceed with your question.
Hi, Good morning. This is Ravi baby underlying Rondell hope you guys are doing well.
During the quarter you issued equity when the stock was at 16 50 can we consider this a watermark as to when you would consider issuing equity again.
Yeah, Hey, Ravi look the you know where where you raise equity is highly dependent upon the opportunities that you see right now the opportunities that we see relative to where our cost of equity is it's there's not adequate spread there. So I'm, we're not going to ever put a number on where we would raise capital or not raise capital. It's ultimately going depend upon the opportunity.
Mark Mannheimer: With the current narrative of being dominated by headlines, discussing looming, recessionary concerns, higher for longer interest rates, and rising relinquencies in consumer credit. We believe the underwriting discipline we have exercised since inception have positioned our portfolio to app reform during a time of heightened macro uncertainty.
Set where that's priced.
And where we trade relative to that opportunity set.
Dan Diamond: With that, I'll let Dan go over our third quarter financial results, balance sheet, and 2023 guidance update.
Got it and you ended the quarter with a leverage at four two and inclusive of the of the Ford.
Dan Diamond: Thank you, Mark, and thank you everyone for joining our call today. Turning to our third quarter earnings release yesterday after the market closed, we reported net income of 4.29 or 6 cents per deluded share. Core FFO totaled $21.2 million for the quarter for 31 cents per deluded share. A FFO totaled $21.4 million for the quarter or 31 cents per deluded share a 3% increase from the prior year period. Total GNA expense, including one-time items was 5.1 million, which represented 14.9% of total revenues.
What are you willing to let leverage tick up to in order to execute on your capital deployment goals.
So you know our stated leverage range is four and a half to five and a half times and I think you should expect us to operate within that range in 'twenty 'twenty four and beyond.
Obviously that we're mindful of the range and I think you're probably likely see a shade closer to the midpoint of that range if overtime.
Got it thanks guys.
Thanks.
Yeah.
Dan Diamond: This compares favorably to last quarter and the prior year quarter, when GNA adds percentage of revenues was 16% and 18.2% respectively. As we look up to next year, our GNA should continue to rationalize relative to our asset base in total revenues, as the company has reached the proper scale to effectively operate our business on a go for basis.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Alec, peaking with Baird. Please proceed with your question.
Hey, Thank you guys for taking my question quick question just on disposition saw a slight uptick in that do you guys plan on continuing to.
Dan Diamond: Moving on to the balance sheet, total net debt was $567.5 million at quarter end, and our weighted average interest rate was 3.57%. In addition, when including the impact of extension options, which are solely at our discretion, we have no debt maturing until January 2027. Turning to capital markets activities, we raised $126 million of equity through ATM during the quarter, which was primarily completed on a forward basis. As with quarter end, we had 98.7 million of ATM equity that remained on sales.
Dispose of some properties in the portfolio and what's the opportunity set there.
Yeah, we do I would expect the dispositions to ramp up a little bit here in the fourth quarter and potentially beyond the.
The fourth quarter, we do see a pretty attractive opportunity to not only accretively recycle capital, but also extend at least arms about replacing those assets with a with a longer lease term assets with better rental increases and potentially better properties and we believe we can do that accretively.
Dan Diamond: As previously announced on July 3rd, we closed a new $250 million senior on secure term line with delay draw option, which has a fully extended maturity date of January 2029. The term line includes an according feature that allows the company to increase the total loan amount to $400 million. At closing, we drew $150 million and plan to draw the remaining $100 million in the first quarter of 2024. We fully had to $250 million term line at an January 2029.
Got it. Thank you that's it for me.
Yeah.
Thanks.
Our next question comes from Linda Tsai.
Jefferies. Please proceed with your question.
Hi last quarter, you didn't have any shares outstanding under your forward equity program, but then this quarter you have about $6 million.
Dan Diamond: At quarter end, our liquidity was $564.69, which is comprised of $7.9 million of cash on hand, $358 million available on a revolving credit facility, 98.7 million of available forward equity, and the $100 million remaining available on our 2029 term. Reloved to perspective and adjusting for the forward equity, our net debt to annualized adjusted EBITDA RE was 4.2 times at quarter end, which remains comfortably below our long odd below end of our target leverage range of 4.5 to 5.5 times.
Yeah, Yeah, Yeah, that's correct.
Oh just wondering.
What happened during the quarter.
Yeah, we we sold we sold those shares during the quarter through a afford block.
Yeah.
Okay got it.
And then just on big lots are there any updates there on a.
I know there are on your watch list, but.
Dan Diamond: Moving to guidance, we are updating our AFA Foepers share guidance range to $1.21 to $1.23 from $1.20 to $1.23, which imputes year-veer growth of 5% at the midpoint. On the external growth fund, we now expect to close around $450 million from that investment activity.
Just any overall view on you now.
What's happening with them.
Yeah sure I mean, obviously they've had a a a less than great run over the past several quarters are but you know they are making some efforts to.
Dan Diamond: Lastly, turning to our dividend, on October 24th, the board declared a quarterly cash dividend of $0.20.5 per share. The dividend will be payable on December 15th to shareholders' record as of December 1st. Based on the dividend amount, our AFA Foepay out ratio for the third quarter was 66%.
To try to improve their their free cash flow, which was neutral last quarter, but that was really driven by cuts to their working capital of India, you really can't do that.
For several quarters in a row. So we're really kind of trying to look to see them improve their operations and get the positive EBITDA after capex to start to feel better about their tenant health, but we are.
Operator: With that operator, we will now open the line for questions. Thank you. We will now be conducting a question-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we pull for questions.
Expecting to see some improvement in the gross margin here in a month when they announce earnings so we'll be looking forward to that.
Thanks.
Our next question comes from Keybanc, Ken with true Securities. Please proceed with your question. Thanks.
Thanks, Good morning.
If you had to go raise new debt from the bank Margaret today, how what are you getting quoted.
Yeah. He came from Keybanc, where we're getting quoted in the mid fives.
Todd Thomas: Our first question comes from Todd Thomas with the Keybank Capital Markets. Please proceed with your question. Hi, thanks. Good morning. Mark, first question, you mentioned that you're seeing attractive capital still available as you look at recycling capital. What's the spread look like today between disposition and acquisition cap rates that you're seeing? Yes, sure. We're focused on really trying to find the trade buyer in 1031 exchanges. One-off type situations, we're selling assets anywhere from five cap to seven cap depending on where we can redeploy that capital.
But to be Frank we've already we have you know 100 million basically of unsettled equity, we have 100 million that we've yet to draw down on the existing term loan there really isn't any need right now to to pull down any type of do any incremental long term debt issuance. If you give them cost term loan debt long term debt.
Okay.
And in terms of drugstores, if you look at.
The closure of plants that have come out recently.
Any kind of broader.
Common themes that you're seeing or is it just four wall coverage and when you overlay that with your tenant exposures any kind of impact that you might see longer term.
Todd Thomas: Always hesitant to give a real concrete number where we're going to go with disposition, just because we're relying on other parties to complete the transaction. That's out of our control so the mix could really swing that one way or the other. But for like-kind types of assets we think we're picking up anywhere from typically 50 to 100 basis points. Okay, and then it sounds like you're starting to see investment yield improve a little bit on new deals that you're looking at.
Yeah, I mean, we we don't think we're going to have any impact a with all the locations that we have we've got a very good really good relationship both with Cvs and Walgreens are we do not have any red X Ray data exposure are and so you know we talked to them before we're acquiring assets and really get updates as well as we see news like this in the end.
And call them up and you know unfortunately with they've been very open with us and telling us that the stores that we have are not on any closure list, but yeah as it relates to the ones that they are closing some of those are leases that are that are rolling over where they already have a presence in some of those markets yes.
Todd Thomas: Can you just describe a little bit more about what you're seeing there in terms of price trends? I guess these are the 2023 cash yield that you've achieved and sort of the 7% in the third quarter. Yeah, sure, absolutely. We are seeing cap rates move up and so we at one point we're acquiring assets in kind of the low sixes and that kind of trended up to mid-sixes end of year last year and early this year up into the high sixes and now a seven cap in the most recent quarter.
They've grown through some mergers over the years and really have multiple stores and in the same markets in and they feel like they don't really need that number of stores in those markets and so and then there are obviously some locations that just don't generate positive cash flow. So those are the ones that they they've looked at close.
Okay. Thank you.
Yeah.
Yeah.
We have reached the end of our question and answer session I would now like to turn the floor back over to Mark Manheimer for closing comments.
Todd Thomas: We would expect the fourth quarter to be even higher than that. We're certainly not looking to transact really anything in the sixes so I would expect to see 20 plus basis points in the fourth quarter. Some of that's really just going to be dragged down by some developments that we had signed up in the past that we're already funding. I think on new transactions that are likely to close more in the first quarter or likely to pick up even another 20-30 basis points beyond that.
Thanks, everybody for joining us today, we look forward to seeing you in the next few weeks at the conferences and appreciate everybody's time.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Yeah.
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Todd Thomas: Okay. And then just last question, I guess. You know, I realized, you know, conditions are sort of fluid here, but, you know, I was just wondering if you can maybe provide a little bit of insight around how you're thinking about investments and maybe, you know, disposition as well. So net investments, you know, really heading into 2024 just given the current environment today. Yeah, sure.
Yeah.
Mark Mannheimer: I mean, I think with where we're seeing the acquisition market, while it's getting better, it's really, I don't think we're getting enough spread to go out and raise equity and deploy capital, you know, where we see today, you know, we do see opportunities like we, you know, like we mentioned on the disposition and then redeploying through capital recycling and see, you know, some pretty attractive opportunities there, but we'd really need to see, you know, a material in, you know, improvement in our stock price or see cap rates really move, you know, into the eight for us to consider turning, you know, turning on the speculative of acquiring assets and everything equity. Okay. All right.
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Mark Mannheimer: Thank you.
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Farrell Granath: Our next question comes from Joshua Dennerling, the think of America. Please proceed with your question. Hi, this is Farrell Granath on behalf of Josh. Just a quick question about, as you had mentioned, the headlines of pharmacy specifically, I was curious about what your current acquisition, are you seeing a change in competition for the assets that you're going after, kind of like the higher credit quality assets? Yeah, I mean, I think we've really kind of seen this most of the year and probably even more so today, where the private buyer is more or less gone.
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Farrell Granath: You know, the opportunity standpoints really never have been better in my entire career. That being said, you know, the cost of capital is also a challenge. So, you know, we kind of, we need to kind of balance that, but really developers and tenants, you know, trying to grow even sale aspects, you know, certainly seeing a lot of opportunity there. It's really gone from a full blown seller market to a full blown buyer market with no bids really in the private market, other than the occasional 1031 buyer, which we're trying to take advantage of. On the disposition market. And so, you know, it's, it's really, you know, looking at the overall transaction market is likely down 70, 80%, but competition is down really 90, 95%.
Farrell Granath: Great.
Operator: Thank you.
Nick Joseph: Our next question comes from Eric Wolff. Please proceed with your question. Thanks, actually, Nick Joseph here with Eric.
Dan Diamond: Just back to sourcing of investments, you know, just kind of curious your thoughts on kind of the rationale of issue inequity in the mid 16s, given the NAB, at least read NABs in the 19s and where you talked about investments spread and transaction cap rates historically, so just trying to understand the thought process there and kind of the value creation calculation. Yeah, hey, Nick, it's Dan Donlin. You know, when you think about that price and you include that, you know, the, the diminumist net price of that and you think about where we raised the recent term loan and then the impact of free cash flow, you know, we got to basically a 100 basis point spread relative to where we saw our pipeline shaping up, you know, into the fourth quarter.
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Dan Diamond: So, you know, that's really kind of we focus on on earnings growth. We obviously look at implied cap rate as well, and it was probably, you know, marginally dilutive to implied cap rate by 10 basis points or so. So, that's the way we looked at it and, you know, it certainly was a creditor a foe per share.
Dan Diamond: Yeah, I guess one of the advantages that you have is that you're smaller and so you can kind of grow off of that base. And so how do you think about a 100 basis point investment spread off of that and kind of taking away some of that advantage versus putting pencils down and waiting for a better opportunity? Like 100 basis points is adequate and provides, you know, provides some growth and they're, you know, scaling into the DNA is also, you know, something that is we view as helpful.
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Dan Diamond: Thanks, and maybe just finally if you if you did put pencils down that did no deals kind of going forward or beyond what's in the pipeline today, what would that imply for growth in 2024? Yeah, hey Nick, it would it would basically imply kind of a low single digit year via AFFO growth, you know, the building blocks of that is internal rent growth of about 1%. You know, credit losses around 30 basis points, you know, reinvestment of our free cash flow after dividends, it's called it, you know, 32 million of free cash flow after dividends.
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Dan Diamond: You know, obviously the full year impact of 2023's investments and, you know, leveraging it around, you know, the midpoint of a range. What I'd say is if we, you know, we fixed our $175 million or 2024 term loan to push it out to 2027, you know, had we not done that, you know, we probably would be looking at more mid single digit AFFO growth year of year, but we thought it was prudent. You know, getting within the environment we were in and May and June to push out that term loan and swap it to a fixed rate, so we're got to be dead.
Yeah.
Hmm.
Dan Diamond: Thanks, that's very helpful.
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Greg Mcginniss: Our next question comes from Greg McGinnis with special bank, please proceed with your question. Hello everyone, thanks for taking the question. So obviously it takes time for sellers to recognize reality and for cap rates to increase. So how are you weighing deploying capital today at these seven low seven cap rates versus holding back, potentially collecting some cash. Interesting common investing in a few quarters want to cap rates move higher based on our math long run IRR tends to really appreciate another 25 to 50 basis points of investment yield.
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Greg Mcginniss: Yeah, no, sure, and that's a good question. You know, we're really for the fourth quarter largely done with the acquisitions. You know, we, you know, the guidance, I think this way, this late tweak there really relates to, you know, we've got some properties that we're looking at selling and we're relying on. Other buyers to come through, so if they don't come through, then that number might be a little bit higher than, you know, $450 million of it, if they all come through, then it might be a little bit less.
Greg Mcginniss: But that's, you know, somewhat out of our control. But yeah, we have some time to deploy the capital from, you know, from the most recent equity raise and we do feel like cap rates are likely to be higher early, you know, 2024 than where they are today. How much higher they go, a little bit difficult to say, but we certainly want to, you know, reserve some drive powder for early next year.
Greg Mcginniss: Fair enough. And then, year to date, you've had 189,000 of earned development interest, which has been offset by the, you know, near 700,000 of capitalized interest. It's expense through AFFO. Is it possible for that to, you know, current AFFO headwind to turn into a positive or a tailwind in 2024? Yeah, I mean, it should continue to grow. That's really the interest through receive from developers as we're funding, you know, their development.
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Greg Mcginniss: So, you should see it start to kick up, you know, over time. I don't think of it as ever going to eclipse the capitalized interest. Were those, that part is maybe some of the headwinds on, and deals that you agreed to, perhaps before, cost the capital increase this much? Yeah, look, I mean, some of the developments that we entered into were in the first and second quarter, and, you know, the yields on those, you know, were kind of low, low sevens, high sixes.
Mhm.
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Greg Mcginniss: I would note that they had much longer lease terms than what has historically been achieved with those retailers as well as, you know, annual, annual bumps, which, you know, has not also been historically recognized as well. So, when you think about the follow-up here. Good. Yeah. Can appreciate how you guys were able to change some of those lease terms that we hadn't seen in the past, which definitely is a positive for those, but in thinking about, here going forward, have those same retailers been open to further increasing, you know, potential yields on those investments?
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Greg Mcginniss: Yeah, I mean, I think, you know, some of the retailers that are, you know, really pressed to grow their store count, they really need institutional capital to come in. They can't rely on the 1031 market like they hadn't passed through their developer network. So, hard to say exactly where all those negotiations go as they're ongoing, but I think, you know, if you need institutional capital, most institutions like us like to have annual increases in the leases. So, I would expect that to continue on the margin. Great.
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Greg Mcginniss: Thank you.
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Operator: Our next question comes from Handle Sanchez with Mzo. Please proceed with your question.
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Robbie Vaidya: Hi, good morning. This is Robbie Vady on the line, Brandel. I hope you guys are doing well. So, during the quarter, you issued equity in the stock with that $16.50. Can we consider this a water market so when you consider issuing equity again? Yeah. Hey, Robbie, look, the, you know, where you raise equity is highly dependent upon the opportunities that you see. Right now, the opportunities that we see relative to where our cost of equity is, it's there's not adequate spread there.
Yeah.
Hmm.
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Robbie Vaidya: So, we're not going to ever put a number on where we would raise capital, or not raise capital. It's ultimately going to depend upon the opportunity set where that's priced and where we trade relative to that opportunity set.
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Dan Diamond: Got it. And the end of the quarter with the leverage at 4.2 and inclusive of the, of the Ford. What are you willing to let leverage pickup to Nardex and your capital deployment goals? So, you know, our state of leverage range is 4.5 to 5.5 times, and I think you should expect us to operate within that range in 2024 and beyond. Obviously, they were mindful of the range and I think you probably likely see a shade closer to the midpoint of that range if over time.
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Operator: Thanks, Beth. Thanks. As a reminder, if you would like to ask a question, please press star one on your telephone keypad.
Alec Pagan: Our next question comes from Alec Pagan with Baird. Please proceed with your question. Hey, thank you guys for taking my question. Quick question, just on disposition, saw a slight uptick in that. Do you guys plan on continuing to dispose of some properties in the portfolio? What's the opportunity set there? Yeah, we do. I would expect the dispositions to ramp up a little bit here in the fourth quarter and potentially beyond the fourth quarter.
Alec Pagan: We do see a pretty attractive opportunity to not only accretively recycle capital, but also extend that lease terms by replacing those assets with longer lease term assets with better rental increases and potentially better properties. And we believe we can do that accretively. Got it. Thank you.
Alec Pagan: That's it for me. Thanks.
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Linda Tsai: Our next question comes from Linda Si. It's Jeffries. Please proceed with your question.
Mhm.
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Linda Tsai: Hi. Last quarter, you didn't have any shares outstanding under your forward equity program, but then this quarter you have about six million. Yeah, that's correct. Oh, just wondering what happened during the quarter. Yeah, we sold the shares during the quarter through a forward block.
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Mark Mannheimer: Okay, got it. And then just on big blocks, are there any updates there on, you know, I know they're on your watch list, but just any overall view on, you know, what's happening with them? Yeah, sure. I mean, obviously they've had a less than great run over the past several quotas. But, you know, they are making some efforts to, you know, to try to improve their free cash flow, which was neutral last quarter, but that was really driven by cuts to their working capital.
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Mark Mannheimer: And you really can't do that for several quarters in a row. So we're really kind of trying to look to see them, you know, improve their operations and get the positive EBITDA after CapEx to start to feel better about their tenant health. But we are expecting to see some improvement in their gross margin here in a month when they announce earnings. So we'll be looking forward to that.
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Mark Mannheimer: Thanks.
Okay.
Yeah.
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Keben Kim: Our next question comes from Keben Kim with true of securities. Please proceed with your question. Thanks.
Okay.
Keben Kim: Good morning. If you had to go raise new debt in the bank martyrs today, what are you getting quoted? Yeah, hey, Kate, we're getting quoted in the mid-fives, but to be frank, we have 100 million basically of one subtle equity, we have 100 million that we get to draw down on the existing term loan. There really is any need right now to pull down any type of, to do any incremental long-term debt issuance if you can even call term loan debt long term debt?
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Mark Mannheimer: Okay, and in terms of drug stores, if you look at the closure plans that have come out recently, any kind of broader common themes that you're seeing or is it just formal coverage, and when you overlay that with your kind of exposures, any kind of impact that you might see, longer term? Yeah, we don't think we're going to have any impacts with the locations that we have, we've got a very good, really good relationship, both with CBS and Walgreens, we do not have any rated exposure.
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Mark Mannheimer: And so, we talked to them before, we're acquiring assets and really get updates as we see news like this, and call them up, and fortunately, they've been very open with us and telling us that the stores that we have are not on any closure list. But yeah, as it relates to the ones that they are closing, some of those are leases that are rolling over where they already have a presence in some of those markets, they've grown through some mergers over the years, and really have multiple stores in the same markets, and they feel like they don't really need that number of stores in those markets. And so, and then there are obviously some locations that just don't generate positive cash loss, so those are the ones that they've looked to close.
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Mark Mannheimer: Okay, thank you.
Operator: We have reached the end of our question and answer session.
Mark Mannheimer: I would not like to turn the floor back over to Mark Montgomery for closing comments. Thanks everybody for joining us today. We look forward to seeing you in the next few weeks at the conferences, and appreciate everybody's time. Thanks. This includes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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Operator: John's, John's, John's, John's, John's.
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