Q4 2024 Broadstone Net Lease Inc Earnings Call
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Emily: Hello and welcome to Broadstone Net Lease's fourth quarter 2024 earnings conference call. My name is Emily and I'll be your operator today.
Speaker Change: Please note that today's call is being recorded. I will now turn the call over to Brent Maedl, Director of Corporate Finance and Investor Relations at Broadstone. Please go ahead.
Speaker Change: Thank you, everyone, for joining us today for Broadstone Net Lease's fourth quarter 2024 earnings call. On today's call, you will hear prepared remarks from Chief Executive Officer John Moragne, President and Chief Operating Officer Ryan Albano, and Chief Financial Officer Kevin Fennell.
Speaker Change: All three will be available for the Q&A portion of this call.
Speaker Change: As a reminder, the following discussion and answers to your questions contain forward-looking statements which are subject to risks and uncertainties that can cause actual results to differ materially due to a variety of factors.
Speaker Change: We caution you not to place under-reliance on these forward-looking statements and refer you to our SEC filings, including our Form 10-K for the year, ended December 31, 2024, for a more detailed discussion of the risk factors that may cause such differences.
Speaker Change: Any forward-looking statements provided during this call are only made as of date of this call. With that, I'll turn the call over to John.
Thank you, Brent, and good afternoon, everyone.
Speaker Change: I am extremely proud of our 2024 results, achieving $1.43 of AFFO per share at the top end of our guidance range, with a portfolio that is more than 99% leased and with more than 99% rent collection, and executing on over $400 million in total investments, while substantially completing our clinical healthcare portfolio simplification strategy.
Speaker Change: But before I dive further into our 2024 results and plans for 2025, I want to take a moment to thank Shekhar Narasimhan and Denise Brooks-Williams for their dedicated service to B&L during their respective tenures on our Board of Directors. As we announced on Tuesday, they will not be standing for re-election to the Board at our annual meeting in May.
Speaker Change: Shachar has been a member of the board since the company's inception in October of 2007 and Denise has been a member of the board since May of 2021.
Speaker Change: We are incredibly grateful for their years of service to the company and their contributions to our success, particularly in the last several years post-IPO as we have worked to reposition B&L and put this company on its current path to generating consistent and attractive long-term shareholder value.
Speaker Change: Rick's extensive experience managing investments in REITs and alternative asset strategies at Uniplan Investment Council, as well as his previous service as a director for multiple publicly traded REITs, will provide invaluable insight to the board.
Speaker Change: Further, the board will benefit greatly from the insights and experience Joe acquired during his accomplished tenure as the Chief Executive Officer of Life Storage.
Speaker Change: Rick's and Joe's appointments represent the next step in the evolution of B&L's board as we continue to implement our differentiated investment strategy built upon our core building blocks of growth.
Speaker Change: Turning to our 2024 results, we had a solid year all the way around, including generating $1.43 of AFFO per share, representing 1.4% increase compared to 2023.
which I believe is a fantastic achievement.
Speaker Change: considering the substantial portfolio repositioning we undertook last year to our clinical health care portfolio simplification strategy.
Speaker Change: which could have resulted in negative to neutral AFFO per share growth as is the case with most portfolio repositioning efforts. When considered in that light, 1.4% growth is a home run.
Speaker Change: As of December 31st, we have substantially completed our simplification strategy, reducing our clinical and surgical assets to 3.2% of our ABR from 9.7% at the end of 2023.
Speaker Change: As a result, we updated our core property types to industrial, retail, including restaurants and medtail assets, and other to realign our portfolio reporting and emphasize our core growth property types.
Speaker Change: With the success we achieved on this front in 2024, we are now turning our focus towards our long-term growth strategy. I do not intend to emphasize our continued efforts with respect to our remaining clinical assets, some of which could find a more permanent home in our portfolio if we do not believe proper value can be achieved in the dispositions market.
Speaker Change: Turning to our 2025 plans and strategy for growth. We have ambitious goals for the year and intend to meet or exceed them. Positioning B&L for even better growth in 2026 and beyond.
Speaker Change: As a reminder, our differentiated strategy as an industrial-focused, diversified net lease rate is driven by our four core building blocks. First, solid in-place portfolio performance anchored by 2% weighted average annual rent escalations.
Speaker Change: Second, revenue generating CapEx with our existing tenants, which helps our tenants grow their businesses and improve the quality of our portfolio, while providing better than market returns.
Speaker Change: Third, and arguably most importantly, a laddered pipeline of committed build-to-suit development projects constructing high-quality new buildings for creditworthy tenants that provide attractive yields and de-risked future AFFO per share growth. And fourth, regular way acquisitions, that is sale leasebacks and lease assumptions.
Speaker Change: particularly those that are directly sourced and relationship-based that supplement and enhance our built-in growth profile.
Speaker Change: We are well set up for growth in 2025 and beyond through these differentiated core building blocks, including a strong pipeline of new investments with 103.5 million of acquisitions under control.
Speaker Change: 5.4 million of commitments to fund revenue generating CapEx with existing tenants.
Speaker Change: and $227.3 million of high-quality build-to-suit developments scheduled to reach stabilization during 2025 and 2026.
Speaker Change: adding approximately $17.6 million of incremental ABR, with more than $700 million of Build-to-Suit development in active discussions that would be scheduled for stabilization in 2026 and 2027.
Speaker Change: As we saw in 2024, when we reached stabilization on our UNFI Build-A-Suit development, which we funded at an initial cash yield of 7.2%, that when coupled with a 15-year lease term and 2.5% annual rent escalations,
Speaker Change: results in a straight-line yield of 8.6%. Our build-to-suit development strategy is an incredibly powerful tool for driving long-term, accretive, de-risked growth in ways unique to the net lease space.
Speaker Change: While the traditional net lease model relies on inorganic growth from a regular way transaction market that can, at times, experience unexpected shifts in volatility in volumes, cap rates, and asset quality.
Speaker Change: We are seeking to drive B&L's growth through this differentiated and long-term focus build-to-suit development strategy.
Speaker Change: With above average tenant credit quality, brand new construction, mission critical facilities and real estate, and attractive economics with straight line yields in the mid to high 8% range or better, there is a lot to love here.
Speaker Change: Added to that, with our industrial focus, we have consistent access to build-to-suit transactions of considerable size that move the needle for our growth based on our attractive denominator.
Speaker Change: And with a valuation increase we can capture of 75 to 100 basis points or more once our developments reach stabilization, we are also generating a consistent pool of assets that we can use to fund our growth plans without needing to rely on the equity capital markets.
Speaker Change: At a time when our share price is not where we believe it should be, unless there is a material and significant re-rating of our multiple, we have no plans to raise any equity in 2025 or for the foreseeable future and will manage our equity capital needs and cost of capital through accretive dispositions as needed.
Speaker Change: We have large goals for our Build to Suit development strategy and are looking forward to making some exciting announcements in the next few months.
Speaker Change: Our goal for this year is to add at least $500 million in additional build-to-suit developments to our committed schedule for projects that would stabilize and begin paying rent in 2026 and 2027, further strengthening our laddered build-to-suit approach.
Speaker Change: For 2025, we are initiating our AFFO guidance range at $1.45 to $1.49 per share, or approximately 3% growth at the midpoint.
Speaker Change: As the year progresses, we expect to revisit our guidance range as well as the underlying assumptions.
Speaker Change: which Kevin will review with you in a moment. Later this year, we also hope to be able to provide you with a preview of our forecasted run rate growth for 2026 and 2027 based on the contributions we expect to receive from our core building blocks and our execution in 2025.
Speaker Change: During 2024, we made decisions that we believe are in the best interest of BNL and its investors for the long term, and are confident that those decisions will lead to attractive and sustainable AFO per share growth in BNL's future.
We established a differentiated strategy.
Speaker Change: through our high-quality portfolio of diversified properties with strong operating metrics, pruned tenant credit risk and lease rollover risk through targeted dispositions, and maintained a fortified investment-grade balance sheet with low pro forma leverage at 4.9 times, and ample liquidity to capitalize on additional investment opportunities.
Speaker Change: Most importantly, we put a stake in the ground as to who we are as a company and what our differentiated growth strategy will be for the future.
Speaker Change: We are proud of our accomplishments in 2024 and excited for what's to come in 2025.
Speaker Change: With that, I'll turn the call over to Ryan, who will provide additional updates on our Build-to-Suit and Acquisitions Pipeline, as well as Portfolio Matters.
Ryan Albano: Thanks John, and thank you all for joining us today. As John mentioned, we have continued laying the necessary groundwork for sustained success in our laddered and long-term Build to Suit strategy.
Ryan Albano: We currently have $227.3 million in built-to-suit developments with attractive initial cash yields in the mid-to-high 7% range and straight-line yields in the mid-8% to mid-9% range.
Ryan Albano: These build-to-sue projects are all for identified tenants with structures in place to mitigate the traditional development risk associated with construction delays and cost overruns.
Ryan Albano: Best of all, we are leveraging existing and direct relationships to build this pipeline and further deepening relationships that should provide ample opportunity for more projects in the near term.
Ryan Albano: Our development partners need someone that brings surety of execution, deep experience and expertise, and a willingness to be creative and help them secure projects and grow their businesses. They have found that in B&L.
Ryan Albano: On top of our announced and committed pipeline of build-to-suit developments, we are hard at work on more than $700 million of additional projects in active discussions that we hope to provide updates on in the coming months.
Ryan Albano: We are also in the process of expanding our pool of developer relationships and expect to have some exciting news to share on that front in the near future.
Ryan Albano: These transactions take more work and have longer lead times than traditional, regular-way acquisitions.
Ryan Albano: We believe the corresponding benefits of higher returns, stronger tenant credit, higher quality buildings, and better real estate fundamentals, along with the ability to de-risk our long-term growth profile, more than outweigh the additional effort.
Ryan Albano: These projects will drive attractive, de-risked future AFFO per-share growth and reduce our reliance on the regular way transaction market where we continue to be cautious as we have consistently observed a disconnect between pricing expectations and the quality of opportunities.
Ryan Albano: Turning to our investment activity for 2024, we invested $404.8 million, including $234.3 million in new property acquisitions, $115.3 million in built-to-suit developments,
Ryan Albano: $52.2 million in transitional capital and $3 million in revenue generating capex.
Ryan Albano: The completed acquisitions and revenue-generating CapEx had a weighted average initial cash cap rate of 7.3%, weighted average lease term of 10.8 years.
Ryan Albano: weighted average annual rent increase of 2.4% and a weighted average straight-line yield of 8.1%. Our total investments were weighted approximately 70% to industrial properties and 30% to retail.
Ryan Albano: Subsequent to year-end, we invested $22.3 million in build-to-suit developments, including obtaining control of the land and initial funding for one previously announced project.
Ryan Albano: We have a total of $200.7 million remaining to be funded for our Committed Build to Suit development projects.
Ryan Albano: We also have an additional $103.5 million of acquisitions under control and $5.4 million of commitments to fund revenue generating CapEx with existing tenants.
Ryan Albano: During 2024, we sold 58 properties for gross proceeds of $364 million at a weighted average cash cap rate of 7.8% on tenanted properties.
substantially completing our Clinical Health Care Portfolio Simplification Strategy.
Ryan Albano: We expect our dispositions for 2025 to be more muted, returning to historical averages in the $50 to $100 million range, except to the extent we choose to opportunistically sell additional assets to fund our growth, as John mentioned earlier.
Now, shifting to our in-place portfolio.
Ryan Albano: For 2024, we executed on seven lease rollovers, addressing near-term lease expirations for 1.6% of our ABR, and were able to achieve a 112% weighted average recapture rate in an average new lease term of over nine years.
Ryan Albano: With only 1.2% of our ABR set to roll in 2025 and 3% in 2026, we have minimal near-term rollover concerns and are actively engaged with our tenants on those leases.
Ryan Albano: While our overall operating results remain strong and we are executing on our growth initiatives, we continue to see incremental pockets of credit risk. As the duration of the higher interest rate environment lengthens, we see further strain being placed on consumer-centric industries and entities with less flexible capital structures.
Ryan Albano: We remain vigilant in our tenant monitoring efforts and maintain great confidence in our portfolio due to its diversified construction, which limits the impact of any potential individual credit event, and our proven ability to manage through any such situation that may arise.
Ryan Albano: Broadly speaking the home furnishing space continues to be in focus for us as well, specifically including our tenant at home which we have highlighted for multiple quarters and represents approximately 1% of ABR.
Ryan Albano: We are also navigating the recently announced ZIPS car wash bankruptcy.
Ryan Albano: We own 10 of their car wash sites under three separate master leases, which account for 62 basis points of our full-year ABR. We received rent for January, expect to receive rent throughout the bankruptcy process, and are currently negotiating terms of our sites.
Ryan Albano: Although the initial rejection list includes seven of our sites, we expect the final result to be more favorable due to the strength of our mass release structure.
Ryan Albano: For any sites that may eventually be rejected, we are in active discussions with multiple other interested parties for potential sales or new leases.
Ryan Albano: We are also acutely focused on managing downside risks associated with our vacant properties.
Ryan Albano: which come with higher property operating expenses than our lease portfolio. We are working towards swift resolutions, whether sale or lease, for these assets to reduce these carrying costs.
Ryan Albano: Thank you, Ryan. During the quarter, we generated adjusted funds from operation of $70.5 million, or $0.36 per share, a flat per share result year over year.
Ryan Albano: For the year, we generated $282 million, or $1.43 per share, a result that benefited from timely transaction activity early in the year with respect to redeploying the first portion of our healthcare disposition proceeds.
Ryan Albano: Additional positive contributions for the year came from lower G&A and interest expenses, with core G&A totaling $7.5 million for the quarter and $29.3 million for the year, reflecting our continued focus on controllable expenses as well as savings from personnel departures and reduced D&O insurance premiums.
Ryan Albano: Bad debt of 67 basis points and just under 3 million dollars of carrying costs associated with vacant properties partially offset some of those gains.
Ryan Albano: With respect to the balance sheet, we maintained our strong and flexible financial position with pro forma leverage of 4.9 times net debt and more than $900 million available on our revolving credit facility, providing us ample capacity as we evaluate incremental investment opportunities.
Ryan Albano: Regarding our dividend, our Board of Directors maintained our $0.29 dividend for common share and OP unit, payable to holders of record, as of March 31, 2025, on or before April 15, 2025.
Ryan Albano: Our dividend remains well covered and continues to represent an attractive dividend yield relative to many of our peers.
Ryan Albano: Finally, details of our 2025 Guidance and Key Assumptions were included in our Earnings Release last night, and include
Ryan Albano: adjusted funds from operations of $1.45 to $1.49 per diluted share, investment volume between $400 and $600 million, disposition volume between $50 and $100 million, and finally core G&A between $30 and $31 million.
Ryan Albano: Given the front-end incidence of tenant events with ZIPS and STANIS laws, we are including 125 basis points of bad debt within our 2025 guidance and will revisit this assumption throughout the year.
Ryan Albano: It's also worth noting that our per share results for the year are particularly sensitive to the timing, amount, and mix of investment and disposition activity, as well as capital market activities that may occur during the year.
Ryan Albano: Please reference last night's earnings release for additional details and with that we will now open the call up for questions.
Thanks for watching!
Ryan Albano: Thank you. We will now begin the question and answer session.
Speaker Change: If you would like to ask a question today, please do so now by pressing star followed by the number 1 on your telephone keypad. If you change your mind or you feel like your question has already been answered, you can press star and then 2 to withdraw yourself from the queue.
Thanks for watching!
Speaker Change: The first question today comes from Anthony Paolone with J.P. Morgan. Please go ahead.
Anthony Paolone: Great, thank you. I guess first question. I just want to clarify and make sure I understand your 400 to 600 million dollars of investment guidance is is that money out the door or is that You know deals that actually contribute your net rents
Speaker Change: Yeah, that's money out the door. So it'll be a mix of both regular way deals that'll contribute net rent today, as well as investments that we're making in our Delta C program.
Speaker Change: Okay, so how much of that should we think about is actually, you know, kind of contributing to earnings during the year versus, because it sounds like a lot of this is based on a growing build-to-suit pipeline where we won't actually see the income until, you know, the out years.
Speaker Change: Yeah so it'll be a balance and we'll need to see what happens with the deal flow that we got in front of us but
Speaker Change: This is always an and equation for us, not an or, as evidenced by the $103.5 million of regular way deals that we have under control that should close by the end of the first quarter or soon after the end of the first quarter. So we're going to have...
Speaker Change: a decent amount deployed into current earning assets fairly quickly into the year. And there's a handful of other things that we're currently contemplating and underwriting. So it'll be a mix, but we'll do as much as we can to make sure you all are able to model out what's going to be rent paying this year versus stuff that will come online later in the year.
Anthony Paolone: Okay, remind me, for instance, the four field pursuits and the supplemental, the $200-some-odd million dollars, do you earn anything while you're extending the capital during this process or is that just...
Speaker Change: You know, it's on you and you have to carry that.
Yeah, there's a capitalized interest component to that.
Speaker Change: It's added to the basis, so it's part of the equation that we use for determining rent at the back end of this. And then we get the benefit over time, and we capitalize that interest, basically. If there's a revolver balance, we use the revolver rate, and then the extent it exceeds the revolver balance, we use our weighted average cost of that.
Thanks for watching!
Speaker Change: okay but there's not so there's not a like a current pay by the future tenant to kind of like fund
The financial, okay.
And then just one last question on the...
Speaker Change: You mentioned 125 basis points in guidance for the year. If I look at page 9 of the supplemental and just look at sort of the uncollectible, that kind of averaged for 2024 about 100, 125.
Speaker Change: basis points as well. So it's am I looking at that right that there's not a whole heck of a lot of difference there in terms of how you're thinking about 25 versus 24 and you know is that kind of the right way to think about what we should take off of your 2% to think about long-term organic growth?
Speaker Change: Hey Tony and Kevin. I think if you're looking at 24, the guide last year was 75 basis points for the year but was excluding what we already were expecting in the form of Green Valley. So that total number for 24 includes that hospital for last year. So 125 this year will be an incremental 50 versus last year.
Thanks for watching!
Okay. Okay, thanks.
Thank you for watching!
Speaker Change: The next question comes from Eric Borden with BMO. Please go ahead Eric.
Eric Borden: Hey, good afternoon. Just going back to the development. I was hoping you could talk about that a little bit about the funding side. So you have about 200Million dollars of.
Eric Borden: current funding obligations for this year. You have about $50 to $100 million of dispositions and you don't plan to issue equity, so the remainder, do we assume that's just put on the revolver?
Thank you for watching!
Eric Borden: Yeah so the 227 we've got there's a bunch of that's going to get funded in 2026 as well so it's not all for this year.
Eric Borden: and we'll schedule it out but you can see it if you look at our schedule in terms of when the stabilization dates are as well as in terms of overall project commitments so we've got a handful of those that'll be 2026 stabilization so they'll be continued to fund throughout the first half of 2026
Eric Borden: But generally speaking, our goal will be funding these things on the revolver and then with incremental disposition proceeds.
Thanks for watching!
Eric Borden: Okay, that's helpful. And same goes for the incremental $500 million that you're currently evaluating.
Eric Borden: We'll continue to fund that and controlling it in our own way, so whether it's revolver balance, retained earnings, or accretive dispositions, that's the focus. We're not intending on raising any equity capital this year or for the foreseeable future until that stock price changes.
Thank you for watching!
Eric Borden: Okay, that's helpful. And then just how are you thinking about leverage, just given the lag effect between the timing of the NOI coming online and the use of Revolver, you know, how high are you willing to let leverage, you know, creep today in order to get that benefit down the road?
Speaker Change: Yes, I mean we introduced the pro forma leverage component last year after getting the rating agencies comfortable with it
Eric Borden: Future cash flows associated with our Build-a-Zoo programs are ones that are very much credit-worthy, and so it's something that we can take into account in how we think about long-term leverage. We'll ladder this out and look at where it takes us on an absolute basis.
Eric Borden: as well as Proforma. There's also the consideration there in terms of whether Revolve or Utilization lands that we have to keep in mind.
Thank you.
Eric Borden: You've heard Kevin say this for a long time, you know, we've got religion on staying inside six times on a sustained basis.
Eric Borden: on an absolute basis, we could exceed that for a period of time with a clear view to coming back inside of it.
Eric Borden: Our efficient spot is really at five and a half times.
Eric Borden: But we'll play around with that. We've got some chunkier things that we're evaluating that would come online in 26 and 27 that would provide some substantial relief from that standpoint But you have to balance out the longer-term view with a revolver utilization and then we'll make up the difference with some accretive dispositions
Speaker Change: Okay, that's helpful. And just one last one for me. Just on the acquisitions, the $100 million of assets under control, you know, just curious, what has changed over the last 90 days since we last spoke? You know, just given that, you know,
Speaker Change: if I remember correctly, 3Q, you didn't like the product that was on the market or just didn't fit, you know, what B&L was looking for, so I'm just curious to as what has changed over the last 90 days and, you know, what's currently, in terms of asset mix, you know, under control today?
Thank you.
Ryan Albano: It's still heavily weighted towards industrial, as Ryan said, it's about 70-30 and that's been consistent for us for at least five or six years at this point.
Ryan Albano: So that's probably a pretty good barometer for what we're going to be doing going forward. Some of this stuff, there's actually one deal, a fairly chunky deal as a part of it, that we were looking at over the summer. And it was just a spot where we weren't able to get to the right gap rate in terms of where we thought it should price versus where the seller was. And we eventually got to the right spot. It just took a long time to get there.
Ryan Albano: So our view in terms of taking a fairly disciplined, prudent approach to how we're evaluating this market, because we still continue to be very cautious, as you heard Ryan say during his prepared remarks, hasn't changed. We are excited to have $103.5 million to kick off the year. We're looking for more opportunities, but it's incredibly competitive out there right now.
So you're quite inclined for every deal you can get.
Speaker Change: The next question comes from Opal Rana with KeyBank Capital Markets.
Please come ahead.
Thanks for watching!
Speaker Change: Great, thank you for taking my question. I just want to return to the ZIPS car watch bankruptcy, you know, could you give us a sense of what you expect to occur here as it relates to timing or possible outcomes here?
Speaker Change: Yeah, so Brian talked about this during his remarks. We've got 10 assets.
Speaker Change: About 62 basis points tied up in them. These are assets that we bought back in like 2017, 2018, so we've had them for a long time.
Speaker Change: The initial list rejected seven of them, but kind of completely ignored our master lease structure. So we took a pretty strong stance going back into the bankruptcy that that was not something we were going to stand for.
Speaker Change: We're having active discussions with them right now. It's hard to know exactly where it'll go, just because bankruptcies always are a little bit of a wild card, but we feel pretty confident that we're going to end up in a decent position on the other side of this.
Speaker Change: Bankruptcies always can go sideways at some point, so we're working hard to make sure that we preserve as much value as possible on our sites, and we'll be sure to keep everyone updated.
Speaker Change: Okay, great. And then is there a possibility that you'd be interested in selling those as a smash release?
Yeah, so one of the great things about.
Speaker Change: Bankruptcy is hitting the news as you get a whole lot of inbounds. We've had a lot of folks reach out to us that are interested in buying these assets, buying some of the assets, leasing these assets.
Speaker Change: So, in terms of the opportunity set that's in front of us, that's part of the reason why we have as much confidence as we do. If we can find a good resolution to this with ZIPS themselves and come out the other side feeling good about what that resolution is, then that's great. But if not, we've got a pretty good backstop in our ability to sell these assets or release to somebody else if that's the way that we need to go.
Thanks for watching!
Speaker Change: Okay, great. That was helpful. And then, you know, given the lighter investment activity in 4Q,
Speaker Change: Yeah, was that kind of resulted in the company finishing at the low end of the year 24 investment guidance? Was that timing related or was that related to something else?
Speaker Change: It's just more of a competitive environment, you know, we have.
Speaker Change: over the last couple of years, sort of post the Biden contest of 21 and 22, have really made sure to take a disciplined approach to this and we're not just going out and doing deals for the sake of doing deals.
Speaker Change: And if that means that you put up a bogey for the fourth quarter of the year, then that's okay. We're not afraid of doing that. We want to make sure that we're making the right decisions for the right reasons when we're investing capital. As I mentioned, some of it was timing. A deal that we looked at this summer didn't come together, but it came together now. So it's under control and we're looking forward to closing it.
Thank you. Thank you.
Thanks for watching!
Okay, great. Thank you.
Thanks for watching!
Speaker Change: The next question comes from Jay Cornridge with Wedbush Securities. Please go ahead.
Thanks for watching!
All right, thanks much
Speaker Change: Going back to the $700 million of built-to-suit developments and conversation, which seems like you're experiencing enhanced interest from prospective tenants to work with you despite some uncertainty with interest rates and just the economy. I'm just curious if you can comment further as to what's driving up that interest from these potential built-to-suit development tenants and if you're experiencing any changes to cap rates or lease terms in the negotiations versus last year.
Thanks for watching!
Speaker Change: Yes, I'll take the returns first. We're continuing to see sort of upfront cap rates in that mid-seven cap zone but on these longer...
Speaker Change: larger industrial build suits. You know, we're talking 12, 15, 20 year lease terms, you know, two and a half to three and a half percent rent pump. So our straight line yields on these are solidly.
Speaker Change: mid-8s to high-8s, sometimes low-9s. So really, really attractive places for us to be allocating capital. In terms of the interest here, it's part of an overall, you would hope, is a renaissance of American manufacturing where you've got people nearshoring, onshoring.
Speaker Change: Folks are looking at this as a long-term investment. JLL actually came out with a report this week that talked about how the Build-to-Suit pipeline as a portion of the overall development pipeline has returned to pre-pandemic levels where it now is a full 30% of development that's occurring.
Ryan Albano: So, we're very excited to continue to participate in it. You heard Ryan, we are also expanding our relationships, and so that's part of the reason why we're starting to see as many additional deals as we are.
Ryan Albano: It's not just individual deals with individual developers. There are a handful of things that we're seeing right now where on individual deals, multiple developers are presenting it to us. So our name's getting out there. We're finding a lot of people to work with, and we're really excited to see this start laddering out into the future years.
Anthony Paolone: I appreciate that. And then just one more. Within the $75 million at the midpoint of disposition to outlining guidance, how much of that is part of the final trench of the healthcare dispositions versus just additional pruning of the overall portfolio?
Anthony Paolone: It's a little above. There's absolutely some additional clinical assets that are part of what we're expecting to be in that guidance range.
Anthony Paolone: and there's also some general pruning that we'll do. The wildcard there in terms of what might change from a guidance standpoint was if we opportunistically choose to sell an asset on an accretive basis to fund growth.
Okay, understood. Thanks so much.
Anthony Paolone: The next question comes from Michael Gorman with BTIG. Please go ahead.
Thank you.
Michael Gorman: Yeah thanks, good morning. Just a couple of quick ones, or good afternoon actually. On the ZIPS car wash, are you able to share what the coverage is under the master lease for all 10 sites?
Michael Gorman: Yeah, it was close to two, I want to say, right before bankruptcy.
Okay, great. And then.
Speaker Change: John, maybe on the build-to-suit pipeline, as you think about the opportunity set there and the competitive nature there,
Speaker Change: I understand you're getting more inbounds, which is great. Are you seeing any change on the competitive side here? We've been hearing in other sectors that financing for development is...
Speaker Change: still really tough. So I'm curious if you're experiencing a different close rate as you think about underwriting these projects, or how much more competition you're seeing on the build-to-suit side of things.
Thanks for watching!
Yes, so the conversion time is long on these.
Speaker Change: getting a site fully entitled and ready to go, getting the design build stuff done, working through the economics, and then, you know, working through sometimes the dog and pony show in terms of being selected either individually for funding or as a partner to the developer and the developer being selected. It's a long process. The competition is
Speaker Change: difficult at times on certain assets. It's not as difficult as we would say if we were to compare the bill to see process would say mid-market down the middle of the fairway industrial deal right now.
Speaker Change: And in both cases, what we're seeing is a big increase in the amount of private buyers that are participating in it. I think it's a little bit more frothy in terms of the competition on regular way deals.
Speaker Change: where we're seeing 15 to 20 or more offers and people participating in late round bids on some of these deals. So it's getting incredibly competitive on regular rate deals.
Speaker Change: less so on the Build-A-Suit, but certainly more than it was in the past. Now, the nice thing is because of our industrial focus, the size of the Build-A-Suit that we're looking at is so large.
Speaker Change: There's only a handful or more of folks out there that are going to be looking at something like that. You know, for others that are doing Build-A-Suits in the retail restaurant space, where it's in that $2 to $5 million range.
Speaker Change: You know, they're not looking at biting off $100 million or more, and we're able to do that on a pretty consistent basis. So, the pool of folks there is a little bit smaller, but it's still competitive.
That's helpful. And is there any kind of...
Speaker Change: Rule of thumb or general sense for how much maybe plant and equipment That the tenants are putting into these facilities on top of the investment that you're making I'm just trying to get a sense for kind of the the tenants financial commitment once these facilities are open and operating
Speaker Change: Yeah, it depends on the facility, so it's a little hard one to answer if you think about
Speaker Change: Just a regular box for a distribution logistics facility where there isn't much in there besides racking, you know, relative to the cost of the build. It may be relatively immaterial, but if you think about something like our UNFI build in Sarasota.
Speaker Change: They were putting in tens of millions of dollars of additional investment, so it's a significant amount of investment from the tenant in addition to what we're doing.
Speaker Change: Okay, great. And then just last one from me, and I'm sorry if I miss this, when you think about 25 and going forward.
Speaker Change: Any additional appetite for transitional capital here, just given some of the disjointed nature of the transaction markets right now, an opportunity set there and also appetite from your side to put more money to work on in that type of investment?
Speaker Change: Yeah, we're certainly always open to it. I think the place where we would be most open to it is on a direct relationship basis where we're helping someone that we have an existing relationship with grow their business and solve a problem.
Speaker Change: On a new basis, if we've got alternative areas to allocate capital, whether it's regular way deals or in build-to-suits that don't come with the complexity that transitional capital comes from, we likely would allocate it somewhere else. But if one of our tried and true long-term partners came to us and said, hey, we need help here, we'll be more than willing to entertain it.
Thanks for watching!
Great, thanks for the time.
The next question comes from Michael Goldsmith with UBS.
Please go ahead.
Michael Goldsmith: Good afternoon. Thanks a lot for taking my question. Clearly, the portfolio has been evolving, so historical bad debt expectations may not be fully comparable. So is the 125-day points of reserve this year indicative of what you should expect in a normal year going forward, or is it elevated based on the visibility into those incremental pockets of credit risk that you talked about earlier in the conference?
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Michael Goldsmith: Yeah, I'd say, you know, our hope certainly is that it's not indicative of what it's going to be in the future. We have a lot of faith in this portfolio we've spent.
Michael Goldsmith: Huge amount of time and effort building it up, and we feel good about it. But I think you answered it yourself with there's this couple of incremental pockets of credit risk that we know about early in the year. You know, obviously there's a big difference. If something hits late in the year, it doesn't have that huge of an impact. Uh, we saw that last year where there was definitely some things that we knew were going to come, but they didn't hit until the late third and fourth quarter. And so the impact of 2024 was fairly minimized.
Michael Goldsmith: But with Zips and a couple of other things including Stanislaus being on the front end of the year You know, it certainly hits a little bit harder because of the length and duration of it So that's really the main driver behind 125 this year We'll have to evaluate where we are at the end of the year But our hope is that that would be something less next year, but wait and see
Speaker Change: Yeah, and then as a follow-up, following the reclassification of the different property types, retail has jumped quite a bit, so just kind of curious about, you know, where the focus
Thank you.
Yeah, I think.
Speaker Change: The main driver behind the sort of reclassification of our asset types into primarily industrial and then retail, with retail including restaurants and medtail assets, is just to give a very clear picture to folks of who we are and where we're headed. We are an industrial-focused diversified net lease REIT. You should expect to see us probably in that 70-30 range in terms of industrial and retail. That's what we've been doing for the last five or six years.
Speaker Change: the particular sort of subcategories or asset types will change over time. If you look at industrial, an area that we've spent a lot of time on and a lot of investment in the last few years has been food production-related distribution. We've got a bunch of that in the hopper right now as well.
Speaker Change: That's been something that we've been leaning into a lot more heavily, but I think that 70-30 break is where you should expect to see us fairly consistently into the future.
Thank you very much. Good luck in 2025.
Thank you.
Thank you for watching!
The next question comes from Spencer Alway with Green Street.
Please go ahead, Spencer.
Spencer Alway: Thank you. As it relates to the disposition guidance, can you just remind us what's in the bucket currently and how you would describe the composition and depth of the buyer pool just based on what you're looking to divest today?
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Spencer Alway: Yeah, so within the guidance it's still a little bit of the clinical health care stuff but some of the stragglers there.
Spencer Alway: There's a handful of other things that we'd be looking at, certainly we'd be open to pruning the office portfolio to the extent that we're able to and then, you know, a handful of things over the year that we may pursue on an opportunistic, accretive basis.
Spencer Alway: The pool of buyers depends on the asset. Some of the larger stuff, you're going to need bigger pockets of capital. It's not necessarily a good fit for the 1031 market. Smaller assets, maybe more on the 1031 market. That still needs to rebound a bit from where it was before.
Spencer Alway: So I don't expect there to be any large portfolio transactions similar to what you've seen from us last year.
Thank you for watching!
Speaker Change: Okay, and then as it relates to re-tenanting vacant spaces, can you just remind us on your stance on providing CapEx or TIs as it relates to that re-tenanting efforts, or are you inclined to provide that, or do you tend to avoid that?
Speaker Change: We're open to it, it totally depends on the economics of the deal and what we're talking about in terms of lease length, what's the return, the tenant, you name it.
It's not something that we avoid.
Speaker Change: We're real estate managers at heart. This is what we do. So part of that is managing real estate and finding the right outcome for each of our individual assets. And sometimes that means selling it. Sometimes it means putting a little extra money in it, get somebody in the door.
Speaker Change: and sometimes you get lucky and you don't have to do either of those things and you can get a new tenant that comes right in. So we'll take each one in turn and if it means that we've got to roll our sleeves and get in there a little bit, we're okay doing that.
Speaker Change: That makes sense. And then one more just on tenant health, if I can. So I appreciate the color you provided on the watch list and the bad debt expectations for 25. But Hope, you just talked about rent coverage in general. So any notable changes across industries or segments of the portfolio and
Can you just remind us what the portfolio average is?
Speaker Change: So we only disclosed it related to our restaurants. It's been pretty consistent quarter over quarter. We're still sitting at 3.3 times on a run coverage basis.
Speaker Change: We evaluated on other asset types within the portfolio and it's been pretty consistent. The stuff that we've been concerned with watch list wise, you know, some of the handful of things in home furnishing, some of the stuff in clinical, the individual ones that we've mentioned by name, you know, hasn't really changed. It's been pretty consistent quarter over quarter for a little bit here.
That's really helpful. Thank you so much.
Thank you for watching!
Speaker Change: The next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead Caitlin.
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Speaker Change: Hi there. Maybe just starting on the build-to-suit side, I was wondering if you could talk a little bit about the sourcing. It seems like in the past they had kind of been one-off deals that came together for kind of one reason or another, which works. I was wondering if there's any change to how you're sourcing deals today and how that's evolving.
Yeah, so...
Speaker Change: A couple of things there. One, as we've done more of these, our name's gotten out there, so there's a little bit of organic marketing that's happening that we're getting the benefit of.
Speaker Change: Two, we're getting some referrals. Developers that we've worked with are very happy to refer us on to their friends when they've got capital needs. And the third is we've expanded our team. So Will Garner who ended up and Sam DeLamos who we brought on at the end of the year.
Speaker Change: both have pretty deep relationships throughout the development community from their years operating in this space. And so all three of those things together have put us in a great spot to start seeing a lot more of the active pipeline that's out there.
Speaker Change: Got it. And then I think you mentioned that like, there could be an announcement about development. I forget exactly how you phrased it. So I was wondering if that might be like a partnership or something else that ends up evolving that sourcing further or any comments on that.
Speaker Change: Yeah, it's both new development opportunities and new relationships, both of which are exciting for us.
Speaker Change: We've got a policy in place to make sure folks are aware of what's happening in this pipeline, particularly because of the long nature of it and the way that we're laddering it, getting you all an updated schedule. So we have a policy where as soon as we close on the land and execute docks, we issue a press release.
Speaker Change: So we're hopeful that if a couple of these things go our way the way that we expect them to in the next couple of months, we'll have some new press releases out there in between earnings.
Speaker Change: Got it. And then maybe just back to funding and I guess the dividend, could you go through how much of your 25 investments you think will be funded with retained cash? And then like, how does the dividend compare to taxable income? And I'm wondering if there's any room for reduction there in order to retain more cash.
Thank you for watching!
Speaker Change: So first part question, we retain round number 60 million and as you think about that in relation to build the suits.
Speaker Change: The longer these get, the more that starts to multiply itself, so that's definitely a funding component as we think about these projects. And then second on the dividend, I would not set any expectation towards a reduction. It's well covered.
Speaker Change: Certainly is a little bit of an outlier in terms of the yield, but our intention is to make that temporary, but our dividend well covered and not on the table for reduction.
Got it. Thanks.
Thanks for watching!
Speaker Change: The next question comes from Ronald Camden with Morgan Stanley. Please go ahead.
Speaker Change: Hey, just two quick ones. So I'm on the build to suit pipeline, which is really helpful in the supplement, and it sounds like you have another 500 million.
Beyond that, if I understand that correctly, just...
Speaker Change: Did you talk about the economics of that $500 million? Is it similar to what I'm seeing here in the supplement? Is it industrial? Is the yield the same? Is the rent escalator the same? Just trying to get a sense of that $500 million economics. Thanks.
Speaker Change: Yes, the $500 million is our goal for the year. That's the goal that we're stating publicly and working on internally.
Speaker Change: in terms of what we want to add in terms of new, additional, committed build-to-suits. We've got about $700 million in active discussions, of course, with a long conversion timeline and the world taking weird turns every now and again. There's no guarantee that all of those are going to hit.
Speaker Change: or hitting the way that we're expecting them to. So these are goals that we've set. You know, we've got the $227 million in hand right now. We want to see another $500 million on top of that this year. And so big goals for the year.
Speaker Change: the things that we're looking at within that sort of active discussion pipeline.
Speaker Change: are all pretty consistent with what you've seen from us so far. You know, upfront cash yields in the mid-7s, straight-line yields in the mid-8s to mid-9s, rent bumps in that 2.5% to 3.5% bump. It's primarily industrial, a handful of fairly large facilities that we're working on.
Speaker Change: but all in the same vein of really attractive economics, solid tenant credit, really attractive.
Speaker Change: new builds in good locations, so real estate fundamentals hold up strong in addition to the credit. So, as I said in my remarks, there's a lot to love in this strategy, and the way that we're building it out, I think, is going to be very attractive for investors as they start to see the benefit of that long-term de-risk laddered.
of Build-A-Suite Program.
Speaker Change: Great and then my second one was just on the you know the other other assets right which includes some of the office and some of the health care just obviously not a forest seller but you know curious if the markets aren't a look interesting to start putting some of those on the market
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Speaker Change: Yeah, so office, we'll take it bit by bit. A lot of those we'll probably end up holding through the end of the term and collecting rent. Good tenants, good credits, so we don't have any real concerns there. Certainly not a spot that we're intending to invest more in on a standalone basis.
Speaker Change: with the clinical and surgical assets. There's a handful of those that we will actively look to dispose of in 2025 and 2026 and there's also a couple of them that will probably have a long-term home in this portfolio.
Speaker Change: If we can't get the right value for those assets, despite it not being core to where we will invest in the future, we're not going to light that value on fire by just selling it at any price. We'll hold it and continue to reap the benefit of the rent.
Thanks for watching!
Thanks for watching!
Great, that's it for me. Thank you.
Thanks for watching!
Speaker Change: Thank you. We have no further questions and so I'll hand the call back to the management team for any closing comments.
Speaker Change: Great, well thank you very much. We appreciate the dialogue today and we're getting into the busy conference season so we look forward to seeing many of you in person in the coming months. Have a good rest of your day. Thanks all.
Thank you for watching!
Speaker Change: Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.
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