Q3 2024 NETSTREIT Corp Earnings Call
Greetings and welcome to net street cop third quarter 20 24 earnings conference call.
Speaker Change: At this time, all participants are in the lesson only mode.
A brief question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce you host, Ms. Amy An, in Mr. Lations. Thank you, Ms. Anne. You may begin.
Speaker Change: We thank you for joining us for next street's third quarter 2021 earnings conference call. In addition to the press release this year, the yesterday after Market Closed, we posted a supplemental package and an updated investor presentation. Both can be found in the investor relations section of the company's website at www.metstreet.com.
Speaker Change: Today's call, Managers remarks and answers to your questions may contain forward-looking statements, as defined in the private security's litigation reform act of 1995. 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 our Form 10-K for the year end of December 31, 2023, and our other SEC filings.
All forward-looking statements are made as of the date hereof, and NetStreet assumes no obligation to update any forward-looking statements in the future.
Speaker Change: In addition, certain financial information presented on this call includes non-GAAP financial measures. Please refer to 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.
Speaker Change: Today's conference call is hosted by NetStreet's Chief Executive Officer Mark Manheimer and Chief Financial Officer Dan Donlan. They will make some prepared remarks and then we will open the call for your questions. Now I'll turn the call over to Mark. Mark?
Mark Manheimer: Thank you, Amy, and thank you all for joining us this morning on our third quarter 2024 earnings call.
Mark: I first want to congratulate the team on an outstanding quarter as we completed $152 million of gross investments, our highest quarter on record, at a blended cash yield of 7.5% or 8% on a straight-line basis, which has been our average on a year-to-date basis.
Mark Manheimer: Similar to last quarter, a greater portion of our third quarter investments were sale-ease packs, as we have seen more attractive risk-adjusted returns emerge from our opportunity set within that marketplace.
Mark Manheimer: Additionally, by sourcing more volume from this channel, our quarterly acquisitions had a longer weighted average lease term at 12.5 years with more attractive rent growth profiles.
Mark Manheimer: While our percentage investments leased to investment grade and investment grade profile tenants was below our portfolio average this quarter.
Mark Manheimer: We have continued to adhere to our stringent underwriting standards.
Mark Manheimer: which require healthy tenant credit profiles, strong unit-level cash flow, generic single-tenant boxes, above-average foot traffic, and replaceable rents, among many other attributes.
Speaker Change: Included in this activity were four development projects totaling over $18 million that commenced rent in the quarter. As of today, our development pipeline consists of eight projects with a total estimated cost of $22 million, which includes estimated remaining funding of $7 million.
Speaker Change: Turning to the portfolio, we ended the quarter with investments in 671 properties that were 100% leased to 93 tenants operating in 26 industries across 45 states.
Speaker Change: From a credit perspective, over 75% of our total ABR is leased to investment-grade or investment-grade profile tenants.
Speaker Change: Our weighted average lease term remaining on the portfolio is nine and a half years with less than 3% of ABR expiring through 2026.
Speaker Change: In addition to a robust quarter of investments, we also saw continued progress on the asset management front.
Speaker Change: which is indicative of the strength of our industry relationships and the speed of which our team can move when asked to perform.
This was evidenced by our third quarter disposition activity as we executed on various strategic asset sales that reduced select tenant concentrations while accretively recycling the proceeds into investments with longer leases and better rent escalations.
Speaker Change: All told, we completed eight dispositions in the quarter for total proceeds of $24 million at a weighted cash yield of 7.3%.
Speaker Change: Turning to our industry concentrations, while the pharmacy and dollar store industries have garnered a number of less than positive headlines over the past few months, we remain eminently comfortable in the long-term productivity of our assets within these industries.
Speaker Change: Due to the in-depth analysis that we complete at underwriting coupled with consistent dialogue we have with these operators
Speaker Change: We do not currently foresee any discernible economic impact to our earnings stream from these industries, which represent just 50 basis points of total expiring ABR between now and 2028 year-end.
As it pertains to Walgreens, we continue to believe that their planned store closures, which are likely to focus on near-term lease expirations and unprofitable locations, should have minimal to no impact on our occupancy.
Speaker Change: Amongst many other factors, our conviction in this view is driven by the fact that more than two-thirds of our stores were purchased pursuant to blended and extended transactions, which is not only indicative of Walgreens' long-term commitment to our sites, but also supports our view that our rents are more replaceable versus market.
Speaker Change: However, we felt it prudent to demonstrate that we can quickly and meaningfully reduce tenant concentrations.
Speaker Change: even those that are perceived to have challenges, while simultaneously reinvesting the proceeds at an accretive level.
Speaker Change: As outlined in the supplemental, we have reduced our Walgreens concentration from 5.9% at second quarter end to its current concentration of 4.8%.
Speaker Change: While we endeavor to have all tenant concentrations below 5% longer term, our Walgreens concentration should decline further in coming quarters.
Speaker Change: Our weighted average lease term with Walgreens is approximately 10 years with just one lease expiring before 2030, which we believe has virtually zero renewal risk given its exceptionally high front-end sales and its 99th percentile national ranking on place order for foot traffic.
Speaker Change: Lastly,
Speaker Change: While there is nothing to report on this front as of today, we have received a fair amount of inbound interest in our Walgreens locations.
Speaker Change: largely from large format convenience store operators who are currently willing to pay high rents for high quality locations similar to the properties that we own.
Speaker Change: We are also nearing a highly positive outcome as it relates to our big lots, which currently stands at 80 basis points of total ABR.
Speaker Change: As a reminder, prior to 2024, we decreased our Big Lots concentration from 11 stores to 8 stores in order to protect our cash flow in the event a financial restructuring occurred, which indeed happened this September.
Speaker Change: Of the eight locations, one was assigned to Ali's Bargain Outlet, an existing investment grade profile tenant of ours. Another site is being marketed for lease in Bowie, Maryland, where we have received a number of attractive LOIs from major retailers and grocers. And the remaining six locations have all been assumed by Big Lots.
Speaker Change: As part of the negotiation, we extended the lease term to an average of 7 1⁄2 years, albeit we did agree to provide some short-term rent relief during the bankruptcy process, which we expect to conclude sometime in December.
Speaker Change: Looking out to 2025, we should experience little to no loss in our rental stream from the eight assets while gaining longer lease terms from better credit profiles at Proven Rents.
Speaker Change: While we prefer not to have any noise around the health of our tenants' credit, we believe it is important to demonstrate that our underwriting of assets proved to be sound and resulted in minimal disruption to our cash flows.
Speaker Change: As a reminder, we view corporate credit, unit level cash flow production, and the fungibility of our real estate as modes of protection around our rental streams.
Speaker Change: We are not simply buying high credit quality assets and hoping for the best. Our strong underwriting and asset management capabilities have, and we believe, will continue to help us generate extraordinarily consistent portfolio cash flow for our shareholders.
Speaker Change: Lastly, before I hand the call over to Dan, I'm pleased to share that effective October 1st, Lori Whitman was appointed the Chair of the Board of Directors.
Speaker Change: Lori has been a valued member of our board going back before our IPO and she has consistently demonstrated a deep understanding of our business and a commitment to our success.
Speaker Change: Her continued service will be instrumental as we execute on our strategic vision and long-term growth. With that, I'll hand the call to Dan to go over our third quarter financials and then open up the call for your questions.
Dan Donlan: Thank you, Mark.
Dan Donlan: Looking at our third quarter earnings, we reported a net loss of $5.3 million, or $0.07 per diluted share.
Dan Donlan: Core FFO for the quarter was $24.9 million, or $0.32 per diluted share, and AFFO was $24.8 million, or $0.32 per diluted share, which was an over 3% increase versus last year.
Dan Donlan: Turning to the expense front, total recurring G&A declined 16% year over year to $4.3 million, while recurring cash G&A declined 24% year over year to $2.9 million.
Dan Donlan: In addition, with our total recurring GNA representing 10% of total revenues in the quarter versus 15% of total revenues in the prior year quarter, our GNA continues to steadily rationalize relative to our revenue base.
Dan Donlan: Turn to the balance sheet. Our total adjusted net debt, which includes the impact of all forward equity as of quarter end, was $569 million. Our weighted average debt maturity was 3.3 years and our weighted average interest rate was 4.46 percent.
Speaker Change: Including extension options, which can be exercised at our discretion, we have no debt maturing until January 2027.
Speaker Change: At quarter end, our liquidity was $464 million, which consisted of $29 million of cash on hand, $250 million available on a revolving credit facility, and $185 million of unsettled forward equity.
Dan Donlan: Turning to leverage, our adjusted net debt to annualized adjusted EBITDA RE was 4.0 times that quarter end, which remains well below our targeted leverage range of 4.5 to 5.5 times.
Dan Donlan: Moving on to guidance, we are maintaining our 2024 AFO for sure guidance midpoint and updating the range to $1.26 to $1.27 from our prior range of $1.25 to $1.28.
Speaker Change: The dividend will be payable on December 13th to shareholders of record as of December 2nd. Based on the dividend amount, our AFFO payout ratio for the third quarter was 66%.
Speaker Change: With that operator, we will now open the line for questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handsets before pressing the start keys. As a reminder, please restrict yourself to one question and none follow-up. One moment please while we poll for questions.
Speaker Change: The first question comes from the line of Wes Colarty with Baird. Please go ahead.
Wes Colarty: Hey, good morning guys. As you're looking to the fourth quarter and maybe the first quarter of next year as you're shedding some of your non-core assets, do you still expect to main in a creative acquisition spread versus your disposition?
Speaker Change: We do, Wes. I think just looking forward to the fourth quarter and maybe early in the first quarter where we have some visibility, we expect cap rates to stay pretty close to where they are right now, maybe slightly below where we've been for the first three quarters. But the dispositions that we're looking at currently are at lower cap rates than what we achieved in the third quarter.
Wes Colarty: Okay, and then how do you see your dollar general exposure progressing over the next year or so? And then can you comment on the quality of your locations? You gave a nice little analysis about your Walgreens being blended extends and high foot traffic, but can you maybe unpack the dollar general exposure?
Speaker Change: Yeah, yeah, sure. So yeah, the dollar general portfolio that we have I think is a little bit unique
Speaker Change: in that we were able to partner with the tenant and get most of our leases extended and then really the ones that weren't extended, we've gone out and sold the vast majority of those. So we're left with just under 15 years' weighted average lease term with an average of 1% annual increases.
Speaker Change: in the leases. So a little bit unique when you compare our dollar store portfolio, you know, to others.
Speaker Change: But yeah, I mean, you know, there are a number of loans in there, so I think those will get paid off here in the next year or so, so that really kind of brings the concentration down below 10% just with that. And then we are looking at a handful of dispositions just to try to get that concentration down a little bit, which I think will, you know, certainly be well below 10% here in the next couple of quarters.
Speaker Change: Okay, thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. Next question comes from the line of Hendel Stengers with Mizuho. Please go ahead.
Speaker Change: Hi, good morning. This is Robbie Vade in the line for Hundel. I hope you guys are doing well. So the drugstore and pharmacy exposure decreased 160 deaths sequentially. Can you offer some comments on the disposition market and maybe also the element of seller financing when addressing the Walgreens dispositions? This is something we should be expecting going forward. Thank you.
Speaker Change: Yeah, thanks, Robbie. Yeah, I mean, I'd say, you know, the dispositions market has gotten a little bit better, as I think a lot of you are aware, the 1031 market really did kind of dry up over the past year, but is, you know, starting to come back a bit. So we're seeing more interest.
Speaker Change: In our assets, and as you mentioned, the success that we've had in pretty quickly reducing our exposure in the pharmacy sector, we did use seller financing on a couple of the transactions in the third quarter.
Speaker Change: And, you know, kind of really the thinking there was we were able to get an interest rate slightly higher than the cap rate that we sold the assets at, so it kind of maintained, you know, a healthy yield. But those were assets that we felt like the...
Speaker Change: The rent was a little bit above market, so reduced our exposure by more than the error that we felt like was in the rent.
Speaker Change: We do not think that we're going to be using seller financing much more in the future, but it is a tool that we reserve the right to use in the event that it gets us to a better outcome. Specifically around those Walgreens, we sold in the third quarter. The average cap rate was about a 7.2, and the interest rate was slightly higher than that, so I think 7.2 and change. It certainly felt like that was a pretty good outcome. But in the fourth quarter, we've been able to sell some assets without using seller financing and think that's likely going to be the path that we go on a forward basis.
Speaker Change: Got it. That's helpful. Helpful color there. Just one more here. What would you say is a steady acquisition run rate for the next five, six quarters on a longer term basis, particularly given the fact that outstanding equity has decreased and the current WAC is a bit elevated?
Speaker Change: Yeah, look, I mean, I think if, you know, given where our cost of capital is today, you know, we're not, we're not able to achieve sufficiently accretive spreads.
Speaker Change: to acquire at the pace that we're acquiring at today. So I think it just remains to be seen.
Speaker Change: You know what our run rate would look like. I think the team is certainly built to do anywhere from You know net investment activity of a hundred to certainly a hundred and fifty million Right now though, you know, we we do have plenty of capacity continuing to invest and I think As we see our cost of capital season of the next couple quarters We'll think about how that impacts our ability to to grow on a go-forward basis
Speaker Change: Thank you.
Speaker Change: Thank you. Next question comes from the line of Smriti Rose with Citi. Please go ahead.
Speaker Change: Thanks, it's Nick Joseph here with Smead's. Sorry if I missed it, but just on the big lots, understand the additional term there, but you know from a cash rent perspective, what's the rent difference going forward versus what was in the previous leases?
Speaker Change: Yeah, so we've got the one Location that is is being marketed for sale. We do think that there's it's likely wasn't for lease. Yeah Yeah for yeah for at least sorry And that likely not selling that so, you know, yeah up for lease We're talking to a number of different retailers and grocers We do think that the the rent is likely to be, you know at or even a little bit higher So when it's all said and done we think the rent is going to be, you know Equivalent to where we are today or where we were going into the bankruptcy
Speaker Change: Thanks for the existing leases that will continue with Big Lots.
Speaker Change: Yeah, there is a small amount of rent decrease there, including, you know, we're not collecting rent here during the bankruptcy period, but I think that the increase in the rent that we're likely to get at the Bowie site will likely offset that.
Speaker Change: Got it. Thank you. And then just on the acquisitions, obviously the proportion of IG came down in the quarter. You mentioned on the sale lease back, what are the expectations for that percentage going forward? As in, would you expect to see more IG?
Speaker Change: acquisitions kind of in the future quarters, and if so, you know, how are you thinking about cap rates there that would make them more attractive versus what you saw this previous quarter?
Speaker Change: Yeah Nick, and that's exactly what was really kind of driving our decisions around what we were acquiring in the second and third quarter. We just saw much more attractive risk-adjusted returns on the, you know, larger operators that might not have an investment grade rating. Certainly not going out and doing a lot of the small deals with four or five unit operators but, you know, still larger operators that, you know, that we're comfortable with where we're getting really strong unit level economics and replaceable rents and so that has been an area where we've been, you know, pretty successful with. I would expect the fourth quarter to see that investment grade, you know, kick up a little bit, you know, higher than it's been in the second and third quarter.
Speaker Change: Thank you very much.
Speaker Change: Thank you. Next question comes from the line of Kibin Kim with Swiss Securities. Please go ahead.
Kibin Kim: Thank you. Good morning.
Kibin Kim: Just going back to the Walgreens and Family Dollar topic, can you just maybe provide a high-level view on what you think the remaining asset sales, what those cap rates could be, and is your ultimate goal, I guess, what is your ultimate goal, like how much to lower the percentage ABR from those type of tenors?
Speaker Change: Yeah, thanks, Stephen. So yeah, I mean, as it relates to family dollar, as you're aware, we've been we've been selling down that exposure over the past couple of years.
Speaker Change: really starting with the assets that we felt like were either not profitable or not very profitable. And so we're really currently left with a portfolio of family dollars that generate positive cash flow. We think they're good stores. That being said, we're likely to continue to sell that exposure down over the next year or so. And so that's down to a little bit more than 1% of ABR. And then as it relates to Walgreens, as I mentioned in the prepared remarks, we've gone from 5.9 to 4.8 in a pretty quick, pretty quickly.
Speaker Change: I would expect to see us continue to sell that down, you know, maybe not quite as quickly as we did in the third quarter, but I think, you know, kind of a target of getting that below 3% is achievable here in the next, you know, six or seven quarters.
Speaker Change: And on pricing, if you can provide some parameters, please.
Speaker Change: Yeah, sure. So, I mean, we were able to sell the Walgreens in the third quarter at a lower cap rate than our, you know, disposition cap rate.
Speaker Change: And so that is encouraging. We just know that we're going to have to take our time to find the right buyers, understand that these are stores that are unlikely to be closed, and we feel like we can continue to see pricing certainly inside an 8.
Speaker Change: Okay, thank you.
Speaker Change: Thanks, Eva.
Speaker Change: Thank you. Next question comes from the line of Catherine Graves with UBS. Please go ahead.
Catherine Graves: Hi, good morning. Thank you for taking my question.
Catherine Graves: So, acquisitions obviously accelerated in the quarter. I was wondering if you could speak a little bit on how you're characterizing the current transaction environment, especially compared to the first half of 2024, both as far as maybe increasing opportunities, but then on the flip side, maybe increased competition for deals.
Speaker Change: Yeah, sure. So we've certainly seen the opportunities that
Speaker Change: pick up quite a bit from earlier in the year. The competition, we were expecting that to kick up, but really haven't been running into much competition when we're out looking for locations. Really, the competition for us has really been seller expectations for the past year plus.
Speaker Change: and that continues to be the case. But we're seeing great opportunities on the investment-grade side, Satellite Expect side, Millennium Xtend side, the development side, so we're pretty excited about what we're seeing out there. It's just going to be a matter of where our cost of capital is.
Speaker Change: Got it. That makes sense. And then my second question, you mentioned in the prepared remarks about sort of getting ahead of big lots prior to 2024. I'm wondering if you can speak to any current consumer trends or other components of proactive portfolio management that you're monitoring right now?
Speaker Change: Yeah, sure. So I mean, certainly the lower income consumers have been under pressure. That's kind of really creeped up into the middle income consumer. Even job growth is has slowed. So you know, we're being pretty cautious around the consumer and making sure
Speaker Change: that not only are we investing in businesses that we think have a mode of protection around what's going on with the consumer, but then also making sure that the companies have balance sheets that can withstand some disruption and unit-level economics where we've got a pretty solid cushion there. But yeah, I mean, I think it continues to just be maybe slightly worse than it was.
Speaker Change: a quarter ago with really kind of the same issues.
Speaker Change: Got it. Thanks so much.
Speaker Change: Thank you. Next question comes from the line of Upal Rana with KeyBank Capital Markets. Please go ahead.
Upal Rana: Great, thanks for taking my question. Mark, you talked about the relative strength on your remaining Walgreens. How does that differentiate from the two assets you did sell in the quarter?
Mark Manheimer: Yeah, sure. I mean, the assets that we sold, we think are good assets, you know, maybe a little bit shorter in lease term. And so we know that not only will there likely be a focus on the total ABR that we have with Walgreens, but then also what does the lease expiration schedule look like? And so, you know, really kind of pushing out as we mentioned, you know, we don't have any leases.
Mark Manheimer: expiring until 2030 other than one that, you know, generates, you know, phenomenal sales on the front end and, you know, has phenomenal foot traffic where we think it's, you know, extraordinarily unlikely that they would, that they would close that door. So really continue to strengthen, you know, that portfolio push out, you know, you know, have
Mark Manheimer: Longer-weighted average lease term we went from nine to ten years
Speaker Change: during the quarter as well. So, you know, I think upgrading the quality, you know, is important. Walgreens continues to face pressures on, you know, reimbursement rates on the drugs that they provide. And so, you know, we're keeping an eye on that. There's, you know, we want to be prepared for the event that things get worse. We don't know if they're going to get worse or better, but, you know, we feel like we're pretty well positioned in the event that things get a little bit worse.
Speaker Change: Okay, great. That was helpful. And then, yeah, how would you describe sellers at this point in the cycle, you know, given we've had a 50 basis point rate cut already, and there's a likelihood of another 25 basis point cut this week. And then we've all seen the 10-year sort of climb higher by over 60 basis points. So, you know, I want to get your sense on where sellers are at this point.
Speaker Change: Yeah, I think the move back up on the 10-year has really, you know, calmed down some of the sellers that and really a lot of brokers that were thinking that, you know, it was the last call for, you know, the cap rates that you know, that you could get before. They're all about to fall and obviously that just really isn't happening with the increase in the 10-year. So, if anything, I think it's become a little bit easier to find sellers willing to transact.
Speaker Change: Thank you for watching!
Speaker Change: Okay, great. Thank you.
Speaker Change: Thank you. Next question comes from the line of Greg McGinnis with Scotiabank. Please go ahead.
Greg McGinnis: Hey, good afternoon. Are you able to give us maybe a few more details around the non-investment grade acquisitions that you completed this quarter, whether that's the names, the tenants, or some of the deal terms, just so we can better understand what you guys were doing with those? Yeah.
Speaker Change: Yeah, sure. I mean, you saw that, you know, the weighted average lease term, maybe a little bit longer, you know, a little bit in the CESAR space.
Speaker Change: a handful of retailers that are kind of double B or double B plus so, you know, I guess potential that they could get upgraded.
Speaker Change: Yeah, one day. But, you know, one of the big focuses that we've had over the past really, you know, couple of years
Speaker Change: has been to increase the internal growth of the portfolio. I think we started out the IPO at 65, 70 basis points, something like that, and we're now over 1% of internal rent growth. So I think that's certainly been a focus, and this past quarter's acquisitions certainly help with that.
Speaker Change: Okay, and just a couple clarifying points one on the big lots rent relief So that the full 80 basis points just not paying for what this this month last month and then expected to start paying in December How should we think about that?
Speaker Change: We expect them to start paying again in January.
Speaker Change: January, okay.
Speaker Change: There's already been a lot of focus on Walgreens on the call, but CVS is closing stores as well. Have you heard anything from them regarding potential store closures, or how do you feel about those assets in the portfolio?
Speaker Change: Yeah, I mean we feel very strongly that we've got a great relationship with CBS a lot of the CBSes that we
Speaker Change: that we acquired were Blend and Extend transactions as well, and we've got a pretty good understanding as to how they're doing within the four walls of the assets that we own and feel like we've got an exceptionally strong...
Speaker Change: CBS portfolio, and I think the stores that they announced that they were closing, I think, you know, was really about two and a half years ago, where they said they're going to close 900 stores over the next three years, so that should really be winding down here in 2024.
Speaker Change: Okay, thank you
Speaker Change: Thanks, Ray.
Speaker Change: Thank you. Next question comes from the line of Josh Denneleen with Bank of America. Please go ahead.
Speaker Change: Hi, good afternoon. This is Farrell Granath on behalf of Josh. I was curious, in terms of bad debt, kind of considering your previous levels that you've been assuming, would you ever consider maybe even next year increasing assumptions of bad debt, just given headlines and current risk associated with pharmacies and retail in general?
Speaker Change: Hey Pharrell, it's Dan. The answer is no. And I would note that, you know, we didn't necessarily have credit losses this quarter or this year. We simply had a temporary rent relief.
Speaker Change: So, as you think about kind of our expectations coming out of 2024 for the core portfolio, the prior model would assume that credit losses would have stayed in perpetuity, when in fact they're only temporary in nature. So, as we think about the core portfolio coming out of 2024, it's actually in a better position than what we envisioned when we set guidance in January.
Speaker Change: Great, thank you. And also one more about...
Speaker Change: Also, given...
Speaker Change: current headlines. I know you went through a lot of the underwriting parameters that you set, but I was curious is there anything that you're being more scrutinous about or either requiring more P&L reports among tenants kind of just going forward in your underwriting?
Speaker Change: I think we've had a pretty good understanding as to how the tenants are doing within the four walls of the boxes that we own, and I think we were very careful about what we put into the portfolio. I think if there is maybe a lesson learned, it would be just having some higher concentrations with publicly traded companies where there's just a lot of news and noise.
Speaker Change: potential noise around their performance on a quarterly basis can then turn around and impact us and so Yeah, we certainly feel very strongly that the assets that we put in the portfolio We're going to continue to pay rent and are going to be good performers for the company
Speaker Change: Okay, thank you very much.
Speaker Change: Thank you.
Speaker Change: Thank you. A reminder to all the participants that you may press star and 1 to ask a question. Next question comes from the line of Kevin Kim with True Securities. Please go ahead.
Kevin Kim: Hey, thanks. Just a quick follow-up on the health and performance of those Walgreens compared... I mean, I guess you can't really compare it to the entire chain because it's different locations, but how would you describe the quality of the Walgreens or Family Dollar stores that you have remaining?
Speaker Change: Yeah, I think that we've got locations that are going to stay open and continue paying rent and that are profitable locations for each of the tenants and so, you know, we, you know, we get, you know, some information from that from the tenant that's required on lease, and then we've got a very strong relationship with both of those tenants. So we have pretty open conversations about what they're thinking about doing within the with with the stores that we own. And so that's allowed us to get out ahead of some potential closures and some potential risk.
Speaker Change: which is, I think, really imperative. It's not only, you know, when you acquire the asset having those conversations, but an ongoing basis with our Asset Management Department with the tenants. And so that's really what gives us so much confidence that we've got locations that are going to continue to perform well.
Speaker Change: And I'm not sure if the front-end sales is the primary driver versus pharmacy sales. I'm just curious about that.
Speaker Change: Do you have a view on the four-wall probability of those locations?
Speaker Change: Yeah, I mean we certainly are very confident that the locations that we own are profitable.
Speaker Change: When you think about the, you know, what's...
Speaker Change: you know, where the profitability is coming from.
Speaker Change: Their issues really are more related to the pharmacy side of the house and the reimbursement rates that they're getting have decreased.
Speaker Change: Some due to Medicare Part D and some just from insurance companies. And so that's been not only timing, but also the rates that they're at, that they're getting reimbursed have been.
Speaker Change: have been more difficult on pharmacies. So not only are you seeing, you know, Rite Aid gone from, what, 2,400 to 1,200 stores to cut in half.
Speaker Change: Yeah, we mentioned earlier CBS closing, you know, 900 stores, you know, you know, looking at where Walgreens was, you know, a few years ago to wherever they are now, all told you're talking about the
Speaker Change: three largest chains closing 4,000 stores.
Speaker Change: And then there's also it's an even worse situation for the independent pharmacies Which you know are likely to see about a more than a third of their stores closed so
Speaker Change: You know, I think, you know, it's really been driven by the reimbursement rates, you know, mostly from the government, but also insurance companies. And the front end, you know, that's only 25% of the revenue is really coming from, a quarter of the revenue is coming from the front end of the store. That's under pressure, but that's not what drives the profitability of pharmacies.
Speaker Change: Okay, thank you very much.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, we have reached the end of question and answer session. I would now like to turn the floor over to Mark Manheimer for closing comments.
Mark Manheimer: Thanks everybody for joining today. We certainly appreciate everybody's interest in the company and look forward to seeing many of you at the upcoming conference season.
Speaker Change: Thank you. This concludes our today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: Similarly,renowned on Fox News, Andrew Norton, and even John Constantine were discouraged by the whole thing!