Q3 2023 NNN REIT Inc Earnings Call
Greetings and welcome to see and and and we incorporated third quarter 2023 earnings call.
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<unk> and answer session will follow the formal presentation.
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I will now turn the conference over to your host Steve Horn, Chief Executive Officer, Sir you may begin.
Thanks, Alan Good morning, and welcome to enter then REIT third quarter 2023 earnings call.
Joining me on the call as Chief Financial Officer, Kevin Habicht.
As this morning's press release reflects <unk> performance in 2023 continues to produce strong results, including high occupancy solid acquisitions, driven by proprietary relationships, which is the <unk> mode to creating quality earnings.
We're in position to continue the performance during the fourth quarter as our pipeline and capital are in place.
Based on our year to date performance, we announced a further increase in our 2023 guidance for core <unk> to a range of $3 19 to $3 23 per share and we raised the midpoint of total acquisition volume to 750.
From 650 million.
Before I get into the day to day operations and market conditions, I would like to discuss significant third quarter and thanks for the company first.
First I am excited to welcome Mr. John Adamos to the executive team as head of portfolio operations, John joined <unk> in 2003 and has been a valuable contributor since day. One currently over he is overseeing the asset management leasing underwriting dispositions and development financing functions for the company.
Confident we have the right person and waking up every day thinking about the best way to extract value for the shareholders out of the already solid in that portfolio.
In addition on the capital markets front, we completed a $500 million 10 year unsecured bond offering with a five six coupons and traditional and then fashion execution and timing of the deal in today's market are looking pretty stellar.
More importantly, the timely transaction.
Terrific position to continue executing the strategy.
<unk> long standing discipline of being selective while deploying capital and opportunistic raising capital over the decades, and then in great shape and a time of prolonged uncertainty like today's macroeconomic conditions and disciplined maintaining a solid balance sheet and reasonable acquisition volume.
It does put it in a place to execute the remaining deal flow for 2023, but more importantly to execute 2024 with limited if any needs to access to capital markets at the end of the quarter. We had nothing drawn on our $1 1 billion line of credit after completing over $550 million of volume.
During the first nine months coupled.
Coupled with line of credit with <unk> industry, leading free cash flow as a percentage of acquisition volume, we are ready to execute when the right opportunities present themselves.
Shifting to the highlights of the third quarter financial results our portfolio of 3511.
Freestanding single tenant properties continue to perform exceedingly well with 10, one years of term maintained high occupancy levels of $99, two which remains above our long term average of 98% plus or minus and only 27 vacant assets.
With regard to acquisitions during the quarter, we invested $212 million to 46, new properties at an initial cash cap rate I can't stress enough cash cap rate of seven four and with an average lease duration of $16 five.
18 of the 34 closings were under $5 million, which shows <unk> believes that the smaller deals still move the needle and we believe smaller fungible real estate is the best risk adjusted investment.
The first nine months, we invested roughly $550 million and 125 properties at a cash cap rate of seven two which is about 100 basis points higher than the comparable period in 2022.
Currently the industry continues and the price discovery mode and that is resulting in the overall market volume down nearly 50%, but we do see the bid ask spread showing signs of tightening. So we will continue our thoughtful and disciplined underwriting approach. There has been an increase in cap rates for <unk> and then as the year progresses, and we are seeing that trend continue.
And then that has been listed on the New York Stock Exchange. This 1994 is one of the few net lease companies that is operated with success in the high interest rate environment with a proven operating model and strategy over many decades.
The model is about prudent capital allocations, creating predictable consistent high quality cash flow by emphasizing acquisition volume through sale leaseback transaction with our stable of relationships using the companys long term triple net lease form which is a lot more landlord friendly than a 10 31 market deal.
During the quarter, we sold 13 properties tumor banking raised $49 million of proceeds at a six point out cap rate and reinvest it at a seven four year to date, we have now raised approximately $90 million of proceeds from the sale of 26 assets, which included seven Bacon at a five eight cap rate.
Our mission has always been re leased vacancies, but we will continue to sell nonperforming assets. If we do not see a clear path to generating rental income within a reasonable timeframe.
Our balance sheet is one of the strongest in the sector. Our credit facility has plenty of capacity as I mentioned earlier, we have no outstanding balance we have no material debt maturities until mid 2024, and we have the industry best 12, six year weighted debt maturity and then then is well positioned to fund our remaining 2023 acquisition guidance.
With that let me turn the call over to Kevin for more color and detail, our quarterly numbers and updated guidance.
Thanks, Steve and as usual I'll start with the cautionary statements that we will make certain statements that may be considered to be forward looking statements under federal Securities law. The company's actual future results may differ significantly from the matters discussed in these forward looking statements and we may not release revisions to these forward looking statements to reflect changes in <unk>.
After the statements were made.
Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in this morning's press release, okay with that.
Headlines from this morning's press release report quarterly core <unk> results of <unk> 81 per share for the third quarter of 2023.
That is up two or two 5%.
Over a year ago results were <unk> 79 per share.
First nine months 2023 results were $2 42 per share, which represents an increase of 3% over prior year results.
<unk> for the first nine months.
<unk> $2 44 per share and that represents a one 2% increase over 2022 results.
As we've disclosed since 2020, the last page of our press release provides detailed.
The pandemic deferred rent repayments.
As tenants fulfill their deferred rent obligations that repayment amounts as you can see our slowing from $14 5 million in 2022 to $3 1 million in 2023, and then at the bottom of that page 13, we've provided pro forma per share amounts. Excluding these repayments in <unk>.
2022 and 2023.
To provide a look at the recurring fundamental per share performance.
These adjusted results showed nine months per share growth of three 9% for core.
<unk>, that's instead of the 3.0% headline number and also shows three 4% growth for <unk> and X instead of the one 2% headline number so 90 basis points higher for core of 220 basis points higher for <unk> versus the headline numbers. We think this just gives.
You're a better picture of the core fundamental operating results of our business, but overall a good quarter in line with our expectations.
Moving on our <unk> dividend payout ratio for the first nine months of 2023 was approximately 68%.
Which resulted in approximately $141 million of free cash flow for the first nine months after the payment of all expenses and dividends.
And this equates to a $188 million annualized free cash flow rate.
Occupancy was 99, 2% at quarter end, that's down 20 basis points from prior quarter and year end 2022.
G&A expense was $10 2 million for the quarter, representing 5.0% of revenues.
Five 4% for the first nine months of 2023, but our midpoint guidance for this line item remains at $44 million for the full year of 2023, which would put our put it close to five 3% of revenues for the year.
We ended the quarter with $802 million of annual base rent in place for all leases as of September 32023.
As Steve mentioned today, we increased our 2023 core <unk> guidance, increasing the bottom end by <unk> <unk> and the top end by one penny to a range of $3 19 to $3 23 per share.
<unk> guidance was increased by the same amount to a range of $3 22 to $3 26 per share.
This new guidance suggests two to two 5% growth in core <unk> for 2023 versus 2022 on the headline number but again, if the deferred rent repayments are eliminated from both years than core <unk> growth would be in the three to three 5% range.
Similarly <unk>.
<unk> per share would go from around 1% growth at the midpoint for 2023 to around 3%.
Growth, if we exclude the deferred rent repayments.
As we've previously discussed the more modest growth in per share results for 2023 reflects in part.
The high bar created by last year's nine 8% growth.
The lack of tailwind that were helpful. In 2022 as well as the slowdown in the scheduled deferred rent repayments as noted on page 13.
The 2023 guidance as a key supporting assumptions are on page seven of today's press release with the only notable change as Steve mentioned, the $100 million increase in our 2023 acquisition volume guidance is now a range of $700 million to $800 million.
Switching over to the balance sheet, we remain we maintain a good leverage and liquidity profile with $1 $2 billion of liquidity at quarter end with.
We funded approximately half.
Of our year to date $550 million of acquisitions with free cash flow disposition proceeds and a little bit of equity issued issued a very early this year.
In mid August we opted to issue $500 million of 10 year unsecured debt with a five 6% coupon and a five 9% yield.
Well, we really had no pressing need to issue debt. We just wanted to stay in front of the curve and what appears to be a growing supply of debt issuance from a variety of sources, but as I've said, we'll know in a couple of years the wisdom of issuing that debt. So far it feels like a reasonable call and there is also very.
Real value and maintaining our low balance sheet risk.
Our weighted average debt maturity remains over 12 years, which will help us slow coming.
Coming refinance headwind that all reach their phasing.
All of our debt.
All of our debt outstanding is unsecured and fixed rate.
A couple of numbers net book to gross book assets was 49% net debt to EBITDA was five four times at September 30 interest coverage and fixed charge coverage was four six times for the third quarter.
We are happy to see more attention and discussion in the marketplace about capital allocation. Those of you who know us well have heard is hanging that from.
The last few years, we believe it's one of the more fundamental issues for any REIT or frankly any company.
Valuing equity equity adequately whether that equity is produced by free cash flow disposition proceeds or new equity issuance is at the heart of growing per share results in our opinion, a low view of the return requirement for deploying equity and debt capital likely.
Leads to sub optimal accretion when deploying that capital.
Not valuing equity capital appropriately also frequently leads to asset growth over time that is in our minds not sufficiently accretive to per share results.
So we're glad the topics getting more attention. Unfortunately, only now that the capital markets are off here in the pie eating contest in recent years is producing some indigestion in every corner of the investment world.
Over the last few months, we've been talking with investors about what the world might look like in a no new equity environment.
Which is why we are glad that our free cash flow from operations relative to our typical acquisition volumes will help us better navigate that rocky capital market environment, We will likely give more details in this regard on next quarters call in connection with our 2024 guidance so in closing.
Think we're relatively good position to navigate the elevated economic and capital market uncertainties and to continue to grow per share results, which we view as the primary measure of success and we are mindful. This is a long term multi year endeavor.
Fundamentals of our business remain in good shape occupancy, releasing renewables acquisition and disposition volumes and cap rates. So we feel good about where we are at the moment, but that we will open it up to any questions.
Thank you Sir at this time, we will be conducting our question and answer session.
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One moment, please where we pull for questions.
Thank you our.
Our first question is coming from Josh <unk> with Bank of America. Your line is life.
Yeah, Hey, guys I appreciate the time I'll, maybe I'll just start with a big picture question, just just kind of thinking through the dynamic that we're seeing in the public markets.
How should we kind of think about like the response in the private markets for cap rates going forward.
Hey, Josh appreciate the question Steve.
That market, we don't bump into them, especially in the last 18 months, we haven't seen that at all however, the bigger take share as far as cap rates, we're seeing a trend up in cap rates for <unk> target market.
More as a result of M&A and still being selective if I had to do 131 $5 billion might selectivity goes down. So therefore I have to win more deals, but our relationship with tenants who are sophisticated understand with that market.
Pricing that cap rates have to go up so we're seeing a pickup in you see it in the numbers now 15 to 20 basis points, a quarter and I am expecting that trend to continue through the first half of the year second half is too far out to speak of.
Okay I appreciate that color and then Kevin maybe just a bit.
Maybe some of the later, but just kind of curious.
I think you started to mentioned it a little bit just kind of I think you have pretty good free cash flow just kind of how you think about how you can kind of layer in acquisitions with that free cash flow without additional equity and then just like I'm just trying to think maybe what kind of what kind of base rate, we can get out of your for volumes.
Yeah. It will go into more detail as we lay out guidance for 2024, but the math, but we talk generally about and this is not guidance to be clear.
As you know if you think about $180 million a year of free cash flow.
Which we by the way.
Charge in our minds as we think about deploying that capital at about eight 5% cost to us.
It's not two or three.
And that you could leverage that call it 100 mill.
Million dollars round numbers, maybe a little bit more and so that would create around $300 million of acquisitions and then if we're selling $100 million of properties in a given year, so disposition proceeds enter into that equation.
That would take acquisition volumes around $400 million potential.
Potentially.
And a very leveraged neutral.
Light capital market footprint kind of way and so that's the way we would think about it I think generally but well like I said, we will.
Love to provide a little more detail on our thoughts on that next quarter.
Okay I appreciate that framework thanks, Kevin.
Thank you.
Our next question is coming from Ron Camden with Morgan Stanley. Your line is light.
Hey, just a couple quick ones for me just I saw the occupancy dip.
20 basis points quarter over quarter.
Maybe can you talk about that and loop and just how bad that is trending and what's baked into the guidance. Thanks.
Yes.
I wouldn't read too much into that as folks know we had three.
Bed Bath <unk> beyond that went dark on us as they have filed for bankruptcy rejected all the leases. So that's a chunk of that 20 basis points decline and the rest is a little bit of noise.
As it relates and add.
More broadly speaking.
We don't have any no I mean look we got a lot of concerns because we lease properties retailers. So we're perpetually worried but.
But yes in terms of our exposure.
And and how we're thinking about our results are.
Unknown Executive: Greetings, and welcome to the NN-Rise Incorporated 3rd Quarter 2023 earnings call. At this time, all participants are on a listen-only mode, and a question and answer session will follow the form of presentation. If anyone wants to require operator assistance during the conference, please press star zero on your telephone keypad. Please note that the conference is being recorded.
Not a reserve, but our guidance incorporates typically a 100 basis points of rent loss or things that might not go well and so.
This feels like at the moment it will be despite assuming a 100 basis points. This feels like it will be more of a normal year of call. It 40 to 50 basis points of kind of rent loss from a variety of things, which includes tenant bankruptcies and also in the weeds.
Unknown Executive: I will now turn to conference over to your host, Steve Horn, Chief Executive Officer. Sir, you may be getting it. Thanks, Alex.
It's the things that we do on a daily basis as were thinking about future renewals and dealing with those from maybe a defensive position and making sure.
Stephen Horn: Good morning, and welcome to NN-Rise 3rd Quarter 2023 earnings call.
Stephen Horn: Joining me on the call of Chief Financial Officer Kevin Habicht. As this morning's press release reflects, NN-Rise performance in 2023 continues to produce strong results, including high occupancy, solid acquisitions driven by a proprietary relationships, which is the NN-Mote to creating quality earnings. We are in position to continue the performance through the fourth quarter as our pipeline and capital R in place. Based on our year-to-date performance, we announced a further increase in our 2023 guidance for core FFO to a range of 319-323 per share. And we raised the mid-point of total acquisition by 250 million from 650 million.
To support our occupancy and consistent cash flow as you know.
At times, it makes sense to trim rent a bit to get lease extensions and so.
From time to time, we'll do a little bit of that so all of that's baked into that kind of rent loss number.
And but so far this year is playing out as a fairly typical year, which for US is 30 to 50 basis points of rent loss.
But as I said, we assume in our guidance that will we'll lose around 100 basis points.
Got it that's pretty conservative.
So just going back to the acquisition.
You know obviously over 200 million this quarter I think all your peers have talked about you know basically the activity slowing.
Stephen Horn: Before I get into the day-to-day operations and marketing conditions, I would like to discuss significant third quarter events for the company.
In this rate environment. So I guess I'm just trying to figure out is this an environment, where we're at and that is potentially better positioned because you're always trying to do 400 500 to 600 million.
Stephen Horn: First, I'm excited to welcome Mr. John Adams to the executive team ahead of portfolio operations. John joined NN-N in 2003 and has been a valuable contributor since day 1. Currently, he overseeing the asset management, leasing, underwriting, dispositions and development financing functions for the company. I'm confident we have the right person waking up every day thinking about the best way to extract value for the shareholders out of the already solid NN portfolio.
Or is the messaging that you.
You guys are seeing slowing as well and we should think about about acquisitions next year potentially being down and.
And so for us I am not asking for guidance for next year, obviously, just trying to get a sense of how that pipeline is building and if you guys are being impacted.
Just like your peers. Thanks.
Stephen Horn: In addition, on the capital markets front, we completed a 510 year unsecured bond offering with a 5.6 coupon. In traditional NN fashion, the execution and timing of the deal and today's market are looking pretty stellar. More importantly, the timely transaction has ended in terrific position to continue executing the strategy. NN's long-standing discipline of being selective while deploying capital in opportunistic raising capital over the decades has ended in great shape. In a time of prolonged uncertainty like today's macroeconomic conditions, NN's discipline of maintaining the solid balance sheet and reasonable acquisition volume does put NN in a place to execute for a mating deal flow for 2023, but more importantly, to execute 2024 with limited, if any needs to access the capital markets.
I think the opportunity set is still the same out there minus some M&A activity has definitely slowed down.
Our pipeline has never really been more robust, it's more <unk> NAND being disciplined when allocating capital to what acquisition opportunities are out there.
Yeah, I'll, let Kevin talk about 2024, but as far as the opportunities are that it should.
As good today as it was six months ago.
And cap rates are increasing new money going out the door is higher today than it was two weeks ago.
Yes.
As it relates to next year.
We'll give more detail around what we're thinking for the for that number.
Just heard on the prior question you know we think we have.
Stephen Horn: At the end of the quarter, we had nothing drawn on a 1.1 billion line of credit after completing over 550 million volume through the first nine months. Coupled the line of credit with NN's industry leading free cash flow as a percentage of acquisition volume, we are ready to execute when the right opportunity, to present themselves. Shifting to the highlights of the third quarter financial results, our portfolio of 3,511 free standing single-time properties continue to perform exceedingly well with 10.1 years of term, maintain high occupancy levels at 99.2, which remains above our long-term average of 98% plus or minus, and only 27 vacant assets.
In essence kind of capital on hand, if you will to do a decent amount of acquisitions, but.
It's all frankly, all dependent on kind of returns and so we're not.
We are not particularly focused on try.
On asset growth, we're trying to grow per share results at the end of the day, and that's a little bit or a lot of it.
Acquisitions.
The.
The returns that we can achieve and the accretion that we can achieve will drive kind of our thought process on acquisition volume.
Helpful. Thanks, So much that's it for me for me.
Thanks, Ron.
Stephen Horn: With regard to acquisitions during the quarter, we invested 212 million and 46 new properties at an initial cash cap rate. I can't stress enough, cash cap rate at 7.4, and with an average of least duration of 16.5. 18 of the 34 closings were under 5 million, which shows Edinins believed that the smaller deals still move the needle, and we believe smaller, fungible real estate is the best risk-adjusted investment. The first nine months, we invested roughly 550 million and 125 properties at a cash cap rate at 7.2, which is about 100 basis points higher than a comparable period in 2022.
Thank you. Our next question is coming from Eric Wolfe with Citi. Your line is life.
Hey, good morning.
I just wanted to clarify on the.
The guidance, you're still assuming a 100 bps credit loss versus a 40 to 50 basis points that youre sort of trending to and.
And then if you could just remind us in terms of defining that credit losses.
I would say like the vacant properties that you decide to sell and not being able to recoup the full.
NOI after that's meant or do you sort of think about that separately just trying understand what's included in the full credit loss yes.
Yes, that's fair, yes. So yes, we are assuming that for the fourth quarter of 100 basis points granted only a quarters worth of rent on a basis points and no to your second part of that question is that yes.
Stephen Horn: Currently, the industry continues in the price discovery mode, and that is resulting in the overall market volume down nearly 50%, but we do see the bid acts spread showing signs of tightening, so we will continue our thoughtful and disciplined underwriting approach. There has been an increase in cap rates for M&N as the year progresses, and we are seeing that trend continue. M&N has been listed on the New York Stock Exchange since 1994.
It would not assume reinvesting disposition proceeds of a vacant property.
In our minds, a little bit separate bucket and it's it's a little bit of a sunk cost of that vacant property.
It may have had.
Some rent a year ago, but of late.
Stephen Horn: It's one of the few net lease companies that it's operated with success in a high interest rate environment with a proven operating model and strategy over many decades. The model is about prudent capital allocations, creating predictable, consistent, high-quality cash flow by emphasizing acquisition volume through sale lease back transaction with our stable relationships, using the company's long-term triple net lease form, which is a lot more landlord-friendly than a 1031 market deal. During the quarter, we saw 13 properties, two were vacant, raised 49 million proceeds at a 6.0 cap rate and reinvested at a 7.4.
Rent, obviously at zero and so.
There is potential upside obviously from reinvesting in kind of those proceeds that.
No return for a period of time and so.
But yes, that's not included in our thoughts around 100 basis points.
Got it that's helpful and then I.
I guess just given the rise in rates that we've seen I mean would you expect that cap rates would say move over 8% and if you think about the cadence of your acquisitions. Obviously you mentioned the advantage you have in terms of free cash flow.
Being able to fund those.
Acquisitions without any incremental capital issuance, but would you rather hold a higher percentage of that cash now just how do you think.
Stephen Horn: Year-to-date, we have now raised approximately 90 million proceeds in the sale of 26 assets, which included 7 vacant at a 5.8 cap rate. The mission is always to release vacancies, but we'll continue the sale not performing assets if we do not see a clear path to generating rental income within a reasonable time frame. Our balance sheet is one of the strongest in the sector. Our credit facility has plenty of capacity. As I mentioned earlier, we have no outstanding balance. We have no material temperatures until mid-2024, and we have the industry best 12.6-year-weighted temperature. And an end is well positioned to fund our remaining 23 acquisition guidance on the out.
He came back you know cap rates are likely to move up in the future or just kind of keep the acquisitions.
Consistent quarter to quarter.
You know in our business there is not much consistency quarter to quarter, we like to look at kind of the entirety of kind of 12 months.
But yes, we are being prudent allocators of capital currently where we have passed on deals that were in the mid sevens that we feel should have a panel.
So we are holding a little cash on the side, because we believe cap rates in the first quarter.
Stephen Horn: With that, let me turn the color over to Kevin for more color in detail, and our quarterly numbers and updated guidance. Thanks, Steve.
We will be higher than they are today.
So when the right opportunity presents itself.
Kevin Habicht: And as usual, I'll start with the cautionary statement that we will make certain statements that may be considered before looking statement under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to these forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to different materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in this morning's press release.
It's a cap rate game right now.
You go back to the GSC when everybody shut down that was access to capital wasn't there.
But as I stated in my opening remarks, we've been doing this a long time management and a net.
So we know how to navigate.
The capital markets and the higher cap rate and the proven investment model. So yes, I expect cap rates, that's a long winded way of saying cap rates will be higher in the first quarter than they are today.
Tim and Eric I'll, just add a little bit to that because I don't want to dial the lens back kind of on that.
Kevin Habicht: Okay, but that headlines from this morning's press release report quarterly core FFO result of 81 cents per share for the third quarter of 2023. That is up to two cents or two and a half percent over a year ago results of 79 cents per share. First nine months 2023 results were $2.42 per share which represents an increase of 3% over a prior year results. AFFO for the first nine months was $2.44 per share and that represents a 1.2% increase over 2022 results.
Not the next quarter or two even the next year, but.
That is a piece of the rationale for us.
Probably not acquiring as much as we did two or three years ago.
We clearly were temporary acquisitions.
Volumes at a point in time when cap rates were at record lows, we werent buying five five cap rate deals, we just to us it didn't.
It didnt have appropriate returns.
At our mines for how we burden our capital and our and our minds are deploying that man. So well yeah. We appreciate the fundamental kind of where you're going.
Kevin Habicht: As we've disclosed since 2020 the last page of our press release provides details of the pandemic deferred rent repayments. As tenants fulfill their deferred rent obligations the repayment amounts as you can see are slowing from $14.25 million in 2022 to $3.1 million in 2023. And then at the bottom of that page 13 we've provided a performance per share amount excluding these repayments and built 2022 and 2023 to provide a look at the recurring fundamental per share performance.
We don't think about it too much on a month to month or quarter to quarter kind of basis, but longer term. We do think about those kinds of things when should we be accelerating acquisitions when should we be tempering acquisitions.
Or when should we be standing still and so but we think about those things going on on maybe a longer term basis.
I'll leave it there.
Got it that's helpful. Thank you.
Kevin Habicht: These adjusted results showed nine months per share growth of 3.9% for core FFO that's instead of the 3.0% headline number. And also shows 3.4% growth for AFFO and that's instead of the 1.2% headline number. So 90 basis points higher for core 220 basis points higher for AFFO versus the headline numbers. We think this just gives you a better picture of the core fundamental operating results of our business but overall a good quarter in line with our expectations.
Thank you. Our next question is coming from Spencer Alloway with Green Street. Your line is nice.
Thank you.
Can you just provide some color on what ASO growth would look like in 'twenty four absent any acquisitions.
Okay.
Yes, as far as far as acquisition volume for 2024, yes, we're going to hold off given any guidance until most likely the February call.
But as Kevin kind of stated at the beginning of the call. We can roughly do 400 $450 million without tapping the <unk>.
Kevin Habicht: Moving on our AFFO dividend payout ratio for the first nine months of 2023 was approximately 68%, which resulted in approximately $141 million of free cash flow for the first nine months after the payment of all expenses and dividends. And this equates to a $188 million annualized free cash flow rate. Occupancy was 99.2% of quarter end that's down 20 basis points from prior quarter and year end 2022. GNA expense was $10.2 million for the quarter representing 5.0% of revenues and 5.4% for the first nine months of 2023.
Capital markets and being leverage neutral.
Okay, and then just maybe on the re Kennedy inside and just given the economic backdrop has conversations become any more difficult just given the current environment.
Think about returning or.
Right.
So essentially this year year to date, we're actually have a recapture rate of about 87% of the prior rent.
That's not apples to apples to allow that numbers you hear as stated in our market because we don't like to give capital expense to tenants I mean, we could have just buy up the rent so that 87% recovery year to date is kind of a.
Kevin Habicht: But our midpoint guidance for this line item remains at $44 million for the full year of 2023, which would put it close to 5.3% of revenues for the year. We ended the quarter with $800.2 million of annual base rent in place for all leases as of September 30, 2023. As Steve mentioned today we increased our 2023 core FFO guidance increasing the bottom end by two cents and the top end by one penny to a range of $3.19 to $3.23 for share.
Is recovery rate.
But I will say it is surprising Spencer that we've had such great success. This year historically, we have about a 70% recovery rate.
We're not having any issues or attending any assets currently.
Kevin Habicht: A FFO guidance was increased by the same amount to a range of $3.22 to $3.26 for share. Share. This new guidance suggests two to two and a half percent growth and core FFOs for 2023 versus 2022 on the headline number. But again, if the deferred rent repayments are eliminated from both years, then core FFO growth would be in the three to three and a half percent range. Similarly, AFFO for share would go from around 1 percent growth at the midpoint for 2023 to around 3 percent growth if we exclude the deferred rent repayments.
Okay, and then just maybe one more if I may you spoke about passing on deals with in your mind have been mispriced do you have a sense of what percentage of the deals you've recently looked at that you ultimately passed on due to this dynamic.
So whenever you hear from our competitors as they've looked at we've looked at as well, we don't track that to be honest with you our selectivity, our closure rate and stuff like that but.
But what I have seen is deals that I really saw were priced well and then the movement of the market was so fast as far as the debt side.
We've pulled out of transactions because they became less price, but the bid ask is tightening up.
10, 31 deals to me are the most mispriced.
The sellers are still living back a year or two and they think they can still get that pricing. The sale leaseback market I find is moving a lot faster than call. It the investment grade market because they understand the true cost to get the deals done with the investment grade companies can still tap the market and get that.
Kevin Habicht: As we previously discussed, the more modest growth and per share results for 2023 reflects in part, the high-bar created by last years, 9.8 percent growth. The lack of tailwinds that were helpful in 2022 as well as the slowdown in the scheduled deferred rent repayments is noted on page 13. The 2023 guidance and the key supporting assumptions are on page 7 of today's press release with the only notable change as feet mention the $100 million increase in our 2023 acquisition buy and guidance now a range of $700 to $800 million.
Yes, it's a loan to value of close to 100% of the sale leaseback, but that's what we find the sale leaseback market is moving a little bit quicker.
Okay, great. Thank you for the color.
Thank you. Our next question is coming from Brad Heffern with RBC capital markets. Your line is nice.
Hey, good morning, everybody.
The the ABR this quarter. It didn't go up as much as I would have expected just given the amount of investment activity. You had was there something that fell out of ABR with someone moved to cash.
Kevin Habicht: Switching over to the balance sheet, we maintain a good leverage and liquidity profile with $1.2 billion of liquidity at quarter end. We funded approximately half of our year to date $550 million of acquisitions with free cash flow, disposition proceeds and a little bit of equity issued very early this year. In mid August, we opted to issue $500 million of 10 year unsecured debt with a 5.6% coupon and a 5.9% yield while we really had no pressing need to issue debt we just wanted to stay in front of the curve and what appears to be a growing supply of debt issuance from a variety of sources.
No. We didn't we didn't move anybody to cash a little bit of that is the.
And Thats.
It comes from the.
Split funded transactions, we do or we're funding.
The construction of.
Sale leaseback properties for us over time, and so that rent typically does not show up in our ABR until completion and so so.
That's why that's lagging a little bit but.
With time that will normalize if you will once projects get completed but as we discussed I think last quarter, you know that better activity, which typically 15% 20% of our investment activity is going to be closer to 40% of our investment activity. This year.
Kevin Habicht: But as I've said, we'll know in a couple of years the wisdom of issuing that debt so far it feels like a reasonable call and there is also very real value in maintaining our low balance sheet risk. Our weighted average debt maturity remains over 12 years which will help us slow the coming refinance headwind that all reads are facing. All of our debt is out of our debt outstanding is is unsecured and fixed rate.
We like at the margin to be honest.
But.
That's the piece of that puzzle I think thats, probably missing for you.
Okay got it and then can you just walk through the current watch list you mentioned the bed Bath and beyond the already but anything else, we're keeping an eye on.
Yes lots of stuff, but we are always worry about lots of stuff.
Kevin Habicht: A couple numbers net book to gross book assets was $4.9% and that debt to EBITDA was 5.4 times at September 30. Entrance coverage and fixed charge coverage was 4.6 times for the third quarter. We are happy to see more attention and discussion in the marketplace about capital allocation you know those of you who know as well have heard as hanging that drum. The last few years we believe it's one of the more fundamental issues for any read or frankly any company.
I would say.
Kind of at the top of the list if you will we've got.
Three big lots, so we're watching that we got to Joanne.
These are all very small exposures.
We've got some we're still watching our fishes restaurants' exposure, that's a bigger exposure just because it doesn't feel like they are totally got it down to the <unk>.
Covid fog, if you will yet but that's.
Kevin Habicht: Value in equity adequately whether that equity is produced by free cash flow disposition proceeds or new equity issuance is at the heart of growing per share results. In our opinion a low view of the return requirements, for Deploying Equity and Dept Capital, likely leads to self-optimal accretion when deploying that capital. Not valuing equity capital appropriately leads to asset growth over time that is in our minds not sufficiently accretive to per share results.
Fine and they're covering rents, but they just are a little slower in its.
Focus on a few stores within that.
That's part of our portfolio.
And then may be at home, but they've got liquidity in the near term, but I mean, those are the kinds of names.
We think about.
Having said all of that.
The first of the month on not running down the hall to asking rent came in.
It doesn't feel that dire if you will but.
It.
Kevin Habicht: So we're glad the topics getting more attention, unfortunately only now that the capital markets are rockier in the piting contest of recent years, is producing some indigestion in every corner of the investment world. Over the last few months, we've been talking with investors about what the world might look like and a no-new equity environment, which is why we're glad that our free cash flow from operations relative to our typical acquisition volumes will help us better navigate that rocky capital market environment.
We're just watching those and.
We feel like our air exposure generally is fine as it relates to tenant credit and B.
That shows up in our kind of rent loss, which like I say 100 basis points. We assume is in a normal year and we will.
Hit that kind of rent loss this year.
So thats a joke.
Things are going okay.
Okay got it.
Thank you.
Next question is coming from Rob Stevenson with Janney Your line is live.
Kevin Habicht: We will likely get more details in this regard on next quarter's call in connection with our 2024 guidance. So in closing, I think we're in relatively good position to navigate the elevated economic and capital market uncertainties and to continue to grow per share results, which we view as the primary measure of success. And we are mindful this is a long-term multi-year endeavor. Fundamentals of our business remain in good shape occupancy, releasing renewal, acquisition and disposition volumes and cap rates. So we feel good about where we are at the moment.
Good morning, guys, Steve can you sell more of your not non top tier assets and youre doing at similar cap rates I mean, a 6% cap rate is pretty good on the la fitness, United rental bikes and whatever else you sold during the quarter and it's well below the implied cap rate on the stock recently, so curious why not sell more to finance.
Mid Sevens acquisition, if you could do that reliably and on scale scale.
Hello.
Part of the exercise we go through we have the luxury of being in business for a long time 3500 assets. Approximately so we have a lot of diamonds in that portfolio over the years.
Unknown Executive: But that way we'll open it up to any questions. Thank you, sir. At this time, we will be conducting our question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue, and you may press star two if you would like to remove your question from the queue. And 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. Thank you.
But when we look at disposition I agree with you that 6% cap rate at five eight for the year is a phenomenal cap rate compared with what the industry is doing.
But we have the opportunity we're running the math, if we sell something at a six cap rate.
<unk> share price because we do view dispositions you have defensive.
So you are just improving the quality of the portfolio, but we also look at it is we're selling a piece of the company. So if we sell at a six cap is like issuing equity at a certain share price.
Stephen Horn: Our first question is coming from Josh Dennerline with Bank of America. Your line is in your line. Yeah, hey guys, I appreciate the time. Maybe we'll just start with a big picture question, just kind of thinking through the dynamic that we're seeing in the public markets. How should we kind of think about the response in the private markets for cap rates going forward? Hey, Josh, I appreciate the question, Steve. Yeah, the private market, we don't bump into them.
No it's definitely could be.
Higher disposition.
2024 potential.
Okay and in terms of what you sold has it been a high concentration of 10 31 buyers or has it been all over the place in terms of the the other side of the transaction on dispositions for you guys year to date.
Primarily its been the 10 31 market and then Theres been a couple of what we call owner.
Owner user user owners of the asset, but primarily we sell into the $2 31, Okay and then Kevin a couple of questions for you the three bed Bath and beyond that you talked about earlier and they've been sold or are being marketed for sale or are you trying to re tenant them and whats been the sort of tender on that recently you suddenly now plan a.
Stephen Horn: Especially in the last 18 months, we haven't seen them at all. However, the picture, as far as cap rates, we're seeing a trend up in cap rates for N&N's target market. And more, it's a result of N&N still being selected. If I had to do $1.3, $1.5 billion, my selectivity goes down, so therefore I have to win more deals. But our relationship of tenants who are sophisticated, understand with debt market pricing that cap rates have to go up.
For us is.
To try to re lease it and we've got active dialog on two of the three and so that.
That feels like it's actually going reasonably well and so in our rents there were I think $13 a square foot the expiring rent.
Stephen Horn: So what we're seeing, I pick up and you see it in the numbers, you know, 15, 20 basis points, a quarter. And I'm expecting that trend to continue to the first half of the year. Second half is too far out. Speaker.
Bed Bath and so.
A manageable kind of.
Rent situations.
Just a follow up yes, we're expecting 100% slightly better than that recapture on the yet bedfast with no capex.
Kevin Habicht: Okay, appreciate that color. I think Kevin, maybe just the, maybe some of the later, but just kind of curious, I think you started to mention it a little bit. Just kind of, I think you have pretty good free cash flow, just kind of how you think about how you can kind of wear in acquisitions with that free cash flow without additional equity and then just like, I'm just trying to think maybe what kind of, what kind of base rate we can get out of you for volumes.
So those are likely to be re tenanted, rather than being sold Bacon correct.
Okay, and then last one for you Kevin is the $500 million debt offering pre funding. The June 24, 350 maturity or is that incremental capital for you guys and you'll look to do something.
On the $3 50 next year as you get closer and closer yes.
I'll be try to be sufficiently elusive I mean, we don't have any capital market guidance.
Kevin Habicht: Yeah, and we'll go into more detail as we lay out guidance for 2024, but the math that we've talked generally about, and this is not guidance to be clear, is you know, if you think about $180 million a year of free cash flow, which we, by the way, charge in our minds as we think about the point in that capital, at about a eight and a half percent cost to us, it's not actually free. At that, you know, you could leverage that, you know, a color of $100 million round numbers, maybe a little bit more.
And so.
I viewed kind of money is somewhat fungible.
Okay.
Does clear off our bank line, which would allow us to effectively.
Take care.
The payoffs that maturing debt next June with our bank line or we could do another.
That offering to in that regard and so we try to be opportunistic on capital markets activities.
We'll just see how things play out in the coming.
Months as it relates to that.
Kevin Habicht: And so that would create around $300 million of acquisitions and then if we're selling $100 million of properties and the given years of disposition proceeds enter into that equation, you know, that would take acquisition volumes to around $400 million potentially, and a very leverage neutral, you know, light capital market footprint kind of way. And so that's the way we would think about it, I think, generally, but well, like I said, we'll love to provide a little more detail on our wealth on that next quarter. Okay, appreciate that framework. Thanks, Kevin.
But I will say doing that deal on August gives us more optionality, which is something we crave.
In terms of managing the balance sheet is never to get us in a position where we're we have to do one thing or another and so.
So it just creates more liquidity, but dollars are fungible, we'll see where they they all land eventually in the meantime, they're headed towards acquisitions.
Unknown Executive: Thank you.
And.
We will see a 24 holes.
How was the demand on that deal is it could you have materially upsize that at that pricing. If you wanted to and just elected not to or is that where the demand was at that point in time for that type of paper paper the demand for that deal was very good so.
Ronald Kamdem: Our next question is coming from Ron Kandem with Morgan Stanley. Your line is nice. Hey, just a couple of quick ones for me.
After we announced pricing of where that be able to price.
We had $2 $5 billion of orders at that price and so.
Stephen Horn: Just I saw the occupancy dip 20 basis point to order a quarter. Maybe you talk about that and and loop in just how bad that is trending and what's made into the guidance. Thanks. Yeah, I wouldn't meet too much into that. As Pete folks know, we have three bed bath and beyond that went bar on us as they filed for bankruptcy projected over the weases. So that's a chunk of that 20 basis points to climb in the rest is a little bit of noise.
It was four five times oversubscribed it was.
Solid execution.
We could have done more.
And maybe in hindsight, one day will think maybe we should however.
That is the largest.
That transaction, we've ever done so we did size it up if you will relative to where we've operated in the past.
And but yes. It was a it was a really solid execution at that time I am not sure that the market is as robust today as it was.
Stephen Horn: As it relates and yeah, more broadly speaking, you know, that we don't have any note. I mean, so we're perpetually worried. But yeah, in terms of our exposure and and how we're thinking about our reserve, but our guidance incorporates typically a hundred basis points of rent loss or things that might not go well. And so, you know, work this feels like at the moment, it will be a despite assuming a hundred basis points.
At that point in time, but but anyway, yes, we're really pleased with that outcome.
Okay. Thanks, guys I appreciate the time this morning.
Yes.
Thank you. Our next question is coming from Linda Tsai with Jefferies. Your line is live.
Yes, Hi can you talk about trends in the sale leaseback market what percentage of the volume this quarter was done with existing relationships and how that compares to last quarter.
Hey, Steve.
Stephen Horn: This feels like it'll be more of a normal year of college 40 to 50 basis points of rent loss from a variety of things, which includes pennant bankruptcies and also in the weeds, you know, it's the things that we do on a daily basis. It's worth thinking about, you know, future renewals and dealing with those from maybe a defensive position and making sure our this support our occupancy and consistent cash flow is, you know, at times it makes sense to trim rent a bit to get lease extensions and so from time to time, we'll do a little bit of that.
It's relatively the same kind of that three quarters worth of that sale leaseback and that's reflected in our 16 and a half.
Year.
Lease terms for the quarter, but the trend as far as percentage, it's the same and it pretty much over a 12 month period, it's pretty consistent our acquisition guys. They are always out there looking for new relationships to grow the company, but we do lean into our relationships.
75% level.
And then in terms of the acquisition cap rate being up about 100 bps year over year seven 4%. This quarter, how close is that to where you might've expected to land versus what.
Stephen Horn: So all that's based into that kind of rent loss number. And but so far this year, it's playing out as a fairly typical year, which for us is 30 to 50 basis points of rent loss. But as I said, we assume in our guidance that we'll lose around a hundred basis points. Got it, and that's pretty conservative.
What you were thinking at the beginning of the year.
At the beginning of the year were definitely up higher.
But as far as starting mid year.
Landing, where I'm expecting Amit I'm expecting it.
<unk> in the near term as well.
Stephen Horn: So just going back to the acquisition, you know, obviously over 200 million in this quarter, I think all your peers have talked about, you know, basically activity slowing in this rate environment. So I guess I'm just trying to figure out, is this an environment where, and then it's potentially better position because you're only trying to do 400, 500, 600 million, or the messaging that you guys are seeing slowing as well. And we should think about acquisition of next year, potentially being down, and so forth.
And then on the 20 <unk> quarter over quarter increase over the past few quarters is that like the same run rate for next quarter.
Hi, it's probably pretty close yes.
Far as new money going out the door absolutely.
Above that trend, but we had what we call. The split funded deals that were funding construction.
They are building the asset so you have a little bit of headwind because that money, we committed three months ago two months ago.
Stephen Horn: So I'm not asking for guidance for next year obviously, just trying to get a sense of how that pipeline is building. And if you guys are being impacted, just like your peers, thanks. I think the opportunity said it's still the same out there, minus, you know, some M&A activity that has definitely slowed down. As, you know, our pipeline has never really been more robust. It's more NNN being disciplined when allocating capital to what acquisition opportunities are out there.
They are a little older money.
Thanks.
Thank you once again, if you have any remaining questions or comments. Please press star one on your phone.
Our next question is coming from Josh <unk> with Bank of America Your line of sight.
Hi, this is on behalf of Josh.
I should just touching on the split funded developments you are just mentioning here.
Curious if you could give some color on the sort of retailers that fall into that bucket and any delivery timing and yields.
Stephen Horn: Y'all like Kevin, you know, talk about, you know, 2024, but as far as the opportunities out there, it's as good today as it was six months ago. And cap rates are increasing. New money going out the door is higher today than it was two weeks ago. Yeah, and as it relates to next year, you know, we'll give more detail around what we're thinking for that, for that number. I just heard on the prior question, you know, we think we have an essence kind of capital in hand, if you will, to do a decent amount of acquisitions.
You can touch on.
Primarily our split funded because we only do split funded deals with relationship tenants. So it's pretty much compromises.
Quarterly acquisition.
Pictures, so kind of automotive services, a little bit of a family entertainment primarily.
Now as far as timing, we deal with small box retailers. So by the time, we buy the ground, yes. It could be 120 days before it's delivered and they start paying rent.
So maybe one way to think about pricing on that is whatever our cap rates were last quarter, maybe that's where the split funded was priced in.
Stephen Horn: But, you know, it's all, it's frankly all dependent on kind of returns. I mean, and so we're not, we are not particularly focused on trying on asset growth. We're trying to quote per share results at the end of the day. And if that's a little bit or a lot of the acquisitions, the returns that we can achieve in the accretion that we can achieve will drive kind of our thought process on acquisition money. It's helpful. Thanks so much.
And.
We will play out over the next three to six months as the project is completed and so.
It is just a guide.
Okay. Thank you.
Thank you.
We currently have no further questions in queue at this time, so I'll hand, it back to Mr. Horn.
Any closing remarks.
Thank you for joining us on the call. This floor and we will see many of you I guess in a couple of weeks at NAREIT have a good day. Thanks.
Ronald Kamdem: That's it for me. Thanks, Ron. Thank you.
Thank you.
This concludes today's conference and you may disconnect your lines at this time and we.
Eric Wolfe: Our next question is coming from Eric Wolf with city. Your line is life. Hey, good morning. I just want to clarify on the guidance. You're still assuming 100 bits of credit loss versus the 40 to 50 basis points that you're trying to do. And then if you can just remind us in terms of defining that credit loss to include say like the big and properties that you decide to sell and not being able to recruit the full NLI after investment, or do you really think about that separately just trying to see what's included in the full credit loss.
Thank you for your participation.
Eric Wolfe: Yes, that's fair. Yes. So yes, we are assuming it for the fourth quarter, 100 basis points granted to only quarters worth of rent, 100 basis. Point. And note here, second part of that question is that, yeah, it would not assume, you know, reinvesting disposition proceeds of a vacant property, that's in our mind a little bit separate bucket. And it's a little bit of a sunk cost in that, you know, vacant property, you know, it may have had, you know, some rent a year ago, but of late, it had the rent obviously is zero.
Eric Wolfe: And so there's potential upside obviously from reinvesting kind of those proceeds that had no return for a period of time. And so, but yeah, that's not included in our thoughts around the 100 basis points. Got it, the trouble. And then, I guess it's given the rise and rates that we've seen. I mean, would you expect that coverage would say move over eight percent? And if you think about just the cadence of your acquisitions, obviously you mentioned the advantage you have in terms of free cash flow, being able to fund those acquisitions about incremental capital issuance.
Eric Wolfe: But would you rather hold a higher percentage of that cash now just thinking that, you know, cap rates are likely to move up in the future or just kind of keep the acquisitions consistent quarter to quarter? Now, you know, in our business, you know, there's not much consistency quarter to quarter. We like to look at kind of the entirety of kind of the 12 months. But yes, we are we are being prudent allocators at capital currently where we have passed on deals that, you know, we're in the mid-7s that we feel should have an eight on them.
Eric Wolfe: So, we are holding a little cash on the side because we believe cap rates in the first quarter will be higher than they are today. So when the right opportunity presents itself, it is it's a cap rate game right now. You know, you go back to the, you know, GFC, when everybody shut it down, that was access to capital wasn't there. But as I stated in my opening remarks, we've been doing this a long time management and NN.
Eric Wolfe: So we know how to navigate the, you know, the capital markets in the higher cap rate now in improvement and investment model. So yeah, I expect cap rates. It's a long winded way saying, cap rates will be higher in the first quarter than they are today. Yeah, and this, Kevin, Eric, I just add a little bit to that because I want to dial the lens back kind of not the next quarter or two even the next year.
Eric Wolfe: But, you know, that is a piece of the rationale for us probably not acquiring as much as we did two and three years ago. We clearly were tempering acquisitions at volumes at a point in time when cap rates were at record lows. And, you know, we weren't buying five and a half cap rate deals. We just, to us, it didn't it didn't have appropriate returns in our minds for how we burden our capital and our, in our minds for deploying them.
Eric Wolfe: And so, so yeah, we appreciate the sentiment of kind of where you're going. We don't think about that too much on a month-to-month or quarter or quarter kind of basis. But yeah, longer term, we do think about those kinds of things. When should we be accelerating acquisitions? When should we be tempering? and, uh, or when should we be standing still? And so, uh, but we think about those things on maybe a longer-term basis.
Unknown Executive: Anyway, I'll leave it there. Thank you.
Spenser Allaway: Our next question is coming from Spenser Allaway with Green Street. Your line is live. Thank you.
Stephen Horn: Um, can you guys just provide some color on what Afo growth would look like in 24 absent any acquisition? Yeah, we're as far as, you know, acquisition by for 2024. Yeah, we're going to hold off given any guidance until, you know, most likely the February call. Um, but as Kevin kind of stated in the beginning of the call, you know, we could roughly do 400, 450 million without tapping the capital markets and being leverage neutral. Okay.
Spenser Allaway: Um, and then just maybe on the reteniting side, um, just given the economic backdrop has conversations, uh, become any more difficult, uh, just given the current environment. I just, you know, think about reteniting or, you know, so it's interesting. This year, year to date, we are actually have a recapture rate, about 87% of the prior rent. But I really, that's not apples to apples to a lot of numbers you hear stated in our market because we don't like to give capital expense to tenants.
Spenser Allaway: I mean, we could just buy up the rent. So that 87% recovery year to date is kind of a as is recovery rate. Um, but that was so it is surprising Spencer that we've had such great success this year. Historically, we have everybody 70% recovery rate. Um, so no, we're not having any issues or attending any assets currently. Okay.
Stephen Horn: Um, and then just maybe one more. I may, you know, pass it on deals within your mind have been mispriced. Do you have a sense of what percentage of the deals you've recently looked at that you ultimately passed on due to the spread dynamics? So whatever you hear from our competitors that they've looked at, we've looked at as well. Yeah, we don't track that to be honest with you. You are selectivity or closure rate and stuff like that.
Stephen Horn: Um, but what I have seen is deals that I really thought were priced well. And then the movement at the market was so fast as far as the debt side. Um, that we pulled out of the transactions because they became mispriced. Uh, but the bid asked is tightening up. If the 1031 deals to me are the most mispriced because the sellers are still living back a year or two and they think they can still get that pricing.
Stephen Horn: The sale lease back market I find is moving a lot faster than you'll call the investment grade market because they understand the true cost to get the deals done with the investment grade companies can still tap the market and get that. Yeah, it's along the value of close to 100% of the sale lease back. Um, but that's what we find the sale lease back market is moving a little bit quick.
Spenser Allaway: Thank you for the caller. Thank you.
Bradley Heffern: Our next question is coming from Brad Heffern with RBC Capital Markets. Your line is nice.
Kevin Habicht: Hey, good morning, everybody. Kevin, the ABR this quarter didn't go up as much as I would have expected, just given the amount of investment activity you had. Was there something that fell out of ABR with someone moved to cash? No, we didn't we didn't move anybody to cash. A little bit of that is the and it comes from the split funded transactions we do where we're funding the construction of scale lease back properties for us over time.
Kevin Habicht: And so that rent typically does not show up in our ABR until completion. And so that's why that's lagging a little bit. But it would time that will normalize, if you will, once projects get completed. But as we discussed, I think last quarter, that activity which typically is 15-20% of our investment activity is going to be closer to 40% of our investment activity this year. Which we like at the margin, to be honest. But that's the piece of that puzzle I think that's probably missing for you. Okay, got it.
Kevin Habicht: And then can you just walk through the current watch list? You mentioned the bedbat in beyond already, but anything else you're keeping an eye on? Yeah, lots of stuff, but that we always worry about lots of stuff. I would say, you know, at the top of the list, if you will, you know, we've got three big lots. You know, so we're watching that. We've got two Joanne's. These are all very small exposures.
Kevin Habicht: We've got some, we're still watching our Frish's Restaurant's exposure. That's a bigger exposure, just because it doesn't feel like they've totally got it down to the COVID fog, if you will, yet. But I mean, they're fine and they're covering rents, but they just are a little slower and it's focused on a few stores within that part of our portfolio. And then maybe at home, but they've got liquidity in the near term.
Kevin Habicht: But yeah, I mean, those are the kinds of names that we think about. Having said all that, I'm at the first of the month, I'm not running down the hall and asking if the rent came in. It doesn't feel that dire, if you will, but we're just watching those. We feel like our A, our exposure generally is fine as it relates to credit and B. That shows up in our kind of rent loss, which like I say, 100 basis points, we assume is in a normal year and we won't hit that kind of rent loss this year. So that suggests things are going okay. Okay, got it.
Kevin Habicht: Thank you.
Stephen Horn: Our next question is coming from Rob Stevenson with Johnny. Your line is live. Good morning, guys. Steve, can you sell more of your non top tier assets than you're doing? It's similar cap rates. I mean, a 6% cap rates pretty good on the LA fitness United rental fights and whatever else you sold during the quarter. And it's well below the implied cap rate on the stock recently. So curious, why not sell more to finance mid sevens acquisition.
Stephen Horn: If you could do that reliably and on scale. No, absolutely, that's part of the exercise we go through. We have the luxury of being in business for a long time, 3,500 assets approximately, so we have a lot of diamonds in that portfolio over the years. But when we look at dispositions, I agree with you, that's 6% cap rate, 5.8% for the year is a phenomenal cap rate compared to what the industry is doing.
Stephen Horn: But now we have the opportunity, we're running the math. If we sell something at a 6 cap, we have what share price? Because we do view dispositions, you have defensive, so you're just improving the quality of the portfolio. But we also look at it, we're selling a piece of the company, so if we sell at a 6 cap, it's like an equity at certain share price.
Stephen Horn: So it definitely could be a higher disposition in 2024 potential. Okay, and in terms of what you've sold, is it been a high concentration of 1031 buyers or is it been all over the place in terms of the other side of the transaction on dispositions for you guys here today? Now primarily, it's been the 1031 market, and then there's been a couple of what we call owner users or user owners of the asset, but primarily we sell into the 1031.
Kevin Habicht: Okay, and then Kevin, a couple of questions for you. The three bad baths and beyonds that you talked about earlier, have they been sold or being marketed for sale, are you trying to retenit them and what's been the sort of tenor on that recently? And now plan A, for us, is try to release it, and we've got active dialogues on two of the three, and so that feels like it's actually going reasonably well.
Kevin Habicht: And our rents there were, I think, $13 a square foot, the expiring rent from bedbath, and so a manageable rent situation. So we're expecting you 100% slightly better than that recapture on the bedbaths with no cap ex. Okay, so those are likely to be retenited rather than being sold vacant. Correct. Okay, and then last one for you, Kevin, is the $500 million debt offering, pre-funding the June 24 350 maturity, or is that incremental capital for you guys, and you'll look to do something on the 350 next year as you get closer.
Kevin Habicht: Yeah, I mean, I'll try to be sufficiently elusive. I mean, we don't get any capital market guidance. And so, you know, if you kind of money is somewhat fundrable, you know, it does clear off our bank line, which would allow us to effectively pay off that maturing debt next June with our bank line, or we could do another debt offering. And that regard, and so we try to be opportunistic on capital markets activities, and we'll just see how things play out in the coming months as it relates to that.
Kevin Habicht: But I will say doing that debt deal in all this gives us more auctionality, which is something we crave in terms of managing the balance sheet is never to get us in a position where we have to do one thing or another. And so, it just creates more liquidity. The dollars are fundrable. We'll see where they all land eventually in the meantime. They're headed towards acquisitions. We'll see the 24 holes. How was the demand on that deal?
Kevin Habicht: Could you have materially upsize that at that pricing? If you wanted to and just elected not to or is that where the demand was at that point in time for that type of paper? The demand for that deal was very good. So after we announced pricing of where that deal would price, we had two and a half billion dollars of orders at that price. And so, you know, it was four or five times oversubscribed.
Kevin Habicht: It was a solid execution. We could have done more and maybe in hindsight one day we'll think maybe we should have, however, that is the largest debt transaction we've ever done. So we did find it up if you were relative to where we've operated in the past. But yeah, it was a really solid execution at that time. I'm not sure that the market is as robust today as it was at that point in time. But anyway, yeah, we really pleased with that outcome.
Unknown Executive: Okay, thanks guys. Appreciate the time this morning. Thank you.
Linda Tsai: Our next question is coming from Linda Sy with Jeffries. Your line is live. Hi, can you talk about trends in the sale lease back market and what percentage of the volume this quarter was done with existing relationships and how that compares to last quarter? Taylor, let me see. It's relatively the same. You know, it's kind of that three quarters worth of sale lease back. And, you know, that's reflected in our 16 and a half year lease term for the quarter.
Linda Tsai: But the trend as far as percentage is the same. And it pretty much over a 12 month period, it's pretty consistent. Our acquisition guys, you know, they are always out there looking for new relationships to grow the company. But we do lean into our relationships at that kind of 75% level. And then in terms of the acquisition cap rate being up about 100 bits year of year, 7.4% to quarter, how close is that to where you might have expected to land versus, you know, what you're thinking at the beginning of the year?
Linda Tsai: At the beginning of the year, we're definitely up higher. But as far as starting mid year, we're landing where I'm expecting, and I'm expecting it to increase, you know, in the near term as well. And then on the 25th quarter quarter increase over the past two quarters, is that like the same run rate for next quarter? It's probably pretty close, you know, as far as new money going out the door, absolutely.
Linda Tsai: It's above that trend. But we have the what we call the split funded deals that we're funding construction that are building the asset. So you have a little bit of a, you know, headwind because that money, we committed three months ago, two months ago. So, you know, kind of a little older money.
Stephen Horn: Thank you. Once again, if we have any remaining questions or comments, please press star one on your phone. Our next question is coming from Josh Dennerlein with Bank of America. Your line is life. Hi, this is Farrell Granath on behalf of Josh. I'm actually just touching on the split-funded development you were just mentioning. I was curious if you could give some color on the sort of retailers that fall into that bucket and any delivery timing and yields that you can touch on.
Stephen Horn: Primarily our split fund is because we only do split-funded deals with relationship tenants. So it pretty much compromises our quarterly acquisition. Pictures that kind of automotive services, the little bit of the family entertainment primarily. Now as far as timing, we deal with small box retailers. So by time we buy the ground, it could be 120 days before it's delivered and they start paying rent. So maybe one way to think about pricing on that is whatever our cap rates were last quarter, maybe last quarter the split fund was priced and we'll play out over the next three to six months as the project gets completed and it's just a guide.
Unknown Executive: Okay, thank you. Thank you. We currently have no further questions in queue at this time.
Stephen Horn: So we'll hand it back to Mr. Horn for any closing remarks. Thank you for joining us on the call this morning. And we'll see many of you I guess in a couple weeks at neary. Have a good day. Thanks. Thank you.
Unknown Executive: This concludes today's conference and you may disconnect your lines at this time and we thank you for your participation.