Q1 2025 Broadstone Net Lease Inc Earnings Call
Hello, and welcome to support store net leases first quarter at 2025 earnings Conference call.
My name is Emily and I'll be your operator today.
Please note that today's call is being recorded.
I will now turn the call over to Brent Major director of corporate Finance and Investor Relations Outboard Stein. Please go ahead.
Speaker Change: Thank you everyone for joining us today for broad stone that leases first quarter 2025 earnings call on today's call you'll hear prepared remarks from CEO, Jon Marino, President and COO, Ryan O'donnell, and CFO Kevin final.
Speaker Change: All three will be available for the Q&A portion of this call 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: Caution you not to place undue 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 and note that such risk factors may be updated in our quarterly SEC filings.
Speaker Change: Any forward looking statements provided during this conference call are only made as of the date of this call with that I'll turn the call over to John.
John: Thank you Brent and good morning, everyone.
Speaker Change: I am pleased to report strong first quarter results demonstrated continued disciplined execution and the unique benefits of our strategy.
Speaker Change: We remain focused on driving long term shareholder value and believe our differentiated business model consisting of our four core building blocks, along with an investment grade balance sheet positions us well in the current environment to drive attractive growth for our shareholders.
Speaker Change: We continue to find success growing our build to suit pipeline through both existing and new relationships, providing visibility to embedded revenue growth through 2026 and into 2027.
Speaker Change: A distinct advantage in the triple net lease landscape.
Speaker Change: Particularly amid ongoing market uncertainty.
Speaker Change: Year to date, we have invested $103 9 million in new property acquisitions build to suit developments and revenue generating capex we.
Speaker Change: We have approximately $305 9 million of committed build to suit developments with $255 8 million in remaining estimated investments to be funded through the third quarter of 2026.
Speaker Change: With initial cash cap rates in the sevens and straight line yield in the mid eights to midnight and we have $132 9 million of acquisitions under control and $4 5 million of commitments to fund revenue generating capex with existing tenants.
Speaker Change: Shortly and I want to emphasize these points.
Speaker Change: $305 9 million pipeline of in process build to suit developments is fully signed up and committed we now own or control. The land construction is underway and on time and we have locked in approximately $22 6 million of incremental ABR today that will come online later this year and during 2026.
Speaker Change: Representing approximately five 6% growth in our current ABR.
Speaker Change: He's committed build to suit developments represent long term high quality de risked and value creating growth that is unique in this triple net lease space.
Speaker Change: We continue to be incredibly excited about this differentiated strategy and very much look forward to making additional project announcements in the months ahead.
Speaker Change: In that vein.
Speaker Change: Last week, we announced the addition of a new $78 2 million project to our pipeline of build to suit development commitments.
Speaker Change: With this project we are excited to be partnering with a development team at Prologis, marking another significant milestone in our growing pipeline and our expanding network of development partners, Brian will have more details on that new project in relationship in a few moments.
As we've been emphasizing over the last year, we believe our differentiated strategy provides a unique and compelling opportunity for growth in net lease with top tier in place portfolio performance.
Speaker Change: A willingness to invest in our relationships and improve the quality of our portfolio through revenue generating capex with existing tenants.
Speaker Change: Robust resilient in latter pipeline of development projects, providing attractive long term and derisked growth opportunities.
Speaker Change: And our proven ability to also grow through regular way acquisitions. We believe brought stone net lease holds the promise of a brighter tomorrow and that our best days and shareholder returns are ahead of us.
Speaker Change: We are making incredible progress on our strategy and remain focused on differentiated and disciplined growth, but it's important for us to also recognize the risks presented by the current macroeconomic environment.
Speaker Change: We are paying close attention to the impacts from actual or potential tariffs the conditions in the overall economy and the capital markets.
Speaker Change: And the health of the consumer and spending trends.
Speaker Change: There are certainly pockets of incremental focus, but nothing that we can't handle.
Speaker Change: Although the headlines may be different today, we have dealt with more than our fair share of uncertainty in our history and know how to manage it.
Speaker Change: Rostow net lease was formed in October 2007, and is coming up on its 18th anniversary as a net lease REIT later this year.
Speaker Change: And with the management team, averaging a decade's time with the company. This isn't our first rodeo.
Speaker Change: Starting with prudent and disciplined underwriting continuing with proactive and aggressive portfolio management and.
Speaker Change: And bringing a laser focus to maintaining a fortified and flexible balance sheet.
Speaker Change: We are ready and equipped to manage through this period as well as anyone.
Speaker Change: For the high quality portfolio with strong operating metrics 204 different commercial tenants no single tenant accounting for more than 4% of our ABR.
Speaker Change: 99, 1% occupancy and 99, 1% rent collection for the first quarter.
Speaker Change: This is a resilient and diversified portfolio designed to weather and navigate any environment.
Speaker Change: As you saw in our earnings release last night, and you will hear more from Kevin in a bit we.
Speaker Change: We are maintaining our 2025 <unk> guidance range at $1 45 to $1 49 per share or approximately 3% growth at the midpoint.
Speaker Change: Given several positive developments, we've experienced so far this year, including the building momentum in our investment strategy satisfactory resolutions of certain tenant matters, including Zips as you will hear about from Brian in a few moments and.
Speaker Change: And incrementally lower operating expenses, we considered raising the bottom end of our guidance range this quarter.
Speaker Change: With a high level of macroeconomic uncertainty. However, we felt it would be prudent to maintain guidance this quarter and revisit our range as well as the underlying assumptions as the year progresses.
Speaker Change: Later this year, we also hope to be able to provide you with a preview of our forecasted base case growth for 2026 based on the contributions we expect to receive from our core building blocks and our execution in 2025.
Speaker Change: During our fourth quarter earnings call I told you that we have ambitious goals for the year and that we intended to meet or exceed them positioning <unk> for even better growth in 2026 and beyond.
Speaker Change: None of that has changed.
Speaker Change: That includes our goal of adding at least $500 million in additional build to suit developments to our committed schedule of projects that would stabilize and begin paying rent in 2026 and 2027.
Speaker Change: Further strengthening our build to suit ladder.
Speaker Change: With our recently announced $78 $2 million project, we've made a strong first step towards that goal with more on the way.
Speaker Change: As you can readily see from this quarter's results and committed pipeline, we are well set up for growth in 2025 and beyond through our core building blocks and look forward to delivering on the promise that this differentiated strategy portfolio and team provide.
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 O'donnell: Thanks, John and thank you all for joining us today.
Ryan O'donnell: With six in process build to suit development projects under construction totaling an estimated investment of $305 9 million and an exciting.
Ryan O'donnell: Getting new developer partnership just announced we are advancing steadily on our path to creating a robust and resilient pipeline of development opportunities that will drive attractive growth in 2025 2026 and beyond.
Ryan O'donnell: Our in process build to suit pipeline is a strong weighted average initial yield of seven 4% and a fantastic weighted average yield of eight 9% driven by weighted average lease term and rent increases of approximately 13, two years and two 9% respectively.
Ryan O'donnell: And as you have heard us say repeatedly these projects come with stronger tenant credit higher quality buildings, and better real estate fundamentals, which provide us with a high degree of confidence in the long term value that these assets represent.
Ryan O'donnell: In addition to the attractive earnings growth provided by this strategy, we are targeting a minimum spread between our development yield and stabilized value of 100 basis points.
Ryan O'donnell: Representing an additional layer of value creation, a rarity in that lease world.
Ryan O'donnell: We expect to recognize either in the form of any of the accretion or through positive capital recycling upon a sale of the asset.
Ryan O'donnell: Our recently announced project with Corelogic is for a new state of the art distribution facility for FCA U S. LLC, an existing tenant of ours and the U S subsidiary of the investment grade rated top five multinational automotive company still anticipate that is expected to deliver.
Ryan O'donnell: <unk> in the third quarter of 2026.
Ryan O'donnell: The facility is strategically located along the I 75 in the Atlanta, MSA, providing access to population centers throughout the southeast which continues to benefit from strong demographic trends that support long term demand for industrial space.
Ryan O'donnell: Our completion <unk> will own a new class a industrial asset equipped with 36 foot clear heights full HVAC heavy power and additional trailer parking.
Ryan O'donnell: <unk> to a wide variety of logistics operators.
Ryan O'donnell: We are excited and proud to be partnering on this project with a customer led development team at Prologis as.
Ryan O'donnell: As you can see from this latest development project.
Ryan O'donnell: We are leveraging new and existing relationships to build our pipeline further deepening relationships that should provide ample opportunity for more projects in the near term.
Ryan O'donnell: As with all of our build to suit projects, we have structures in place to mitigate the traditional development risk associated with construction delays and cost overruns, including those associated with the recently announced tariffs.
Ryan O'donnell: Whether it's through general budget contingencies, and allowances built into our overall construction cost estimates for each of our projects GMP or lump sum construction contracts, which set forth a maximum price for certain construction costs and shift inflation risk to the general contractors change order processes.
Ryan O'donnell: Mike.
Mike: Our well positioned to deal with any unanticipated cost issues that may arise.
This is one more example of our proven ability to structure, our development projects to mitigate risk, while helping our customers and developer partners secure projects and grow their respective businesses.
Mike: As I said on our fourth quarter call.
Mike: We are also in the process of expanding our pool of developer relationships beyond those currently announced Corelogic is the first of many new relationships, we plan to add as we expand and deepen our development program. Our growing set of developer partners have recognized the value we bring to the table and we expect to have some additional news to.
Sam: Sure Sam.
Sam: Turning to our investment activity. So far in 2025, we have invested $103 $9 million in new property acquisitions build to suit developments and revenue generating capex.
Sam: Completed acquisitions and revenue generating Capex had a weighted average initial cash cap rate lease term and annual rent increase of seven 2% 13, eight years, and two 5%, respectively and had an attractive weighted average straight line yield of eight 3%.
Sam: Our total investments were weighted approximately 80% to industrial properties and 20% to retail as we head into the second quarter. We also have $132 9 million of acquisitions under control and $4 5 million of commitments to fund revenue generating capex with existing tenants.
Sam: Now shifting to our in place portfolio.
Sam: We have already addressed a number of 2025 rollovers and only 1% of our ABR remains to be addressed for 2025.
Sam: With only 3% of our ABR rolling in 2026, we have minimal near term rollover concerns and are actively engaged with our tenants on those leases.
Sam: Given the overall macroeconomic uncertainty we continue to see incremental pockets of credit risk, we see further strain being placed on consumer centric industries and <unk>.
Sam: Entities with less flexible capital structures stemming from the lengthening duration of the higher interest rate environment broader.
Sam: Broader market conditions impacting business operations and potential tariff induced inflation pressures impacting inventory sourcing and cost structures, which in turn may influence consumer spending.
Sam: 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.
Sam: Our watch list has remained fairly consistent and consumer centric tenants as well as some of our remaining clinically oriented health care properties, including our tenant Stanislas surgical remain in focus.
Sam: Broadly speaking the home furnishing space continues to be in focus for us as well, specifically, including our exposure to at home.
Sam: Given the potential impact of tariffs on its inventory sourcing and cost structure. We are also paying close attention to claris as.
Sam: As we announced last quarter, we owned 10 Zips car wash sides under three separate master leases, which account for 62 basis points of our full year ABR. We have received rent through April expect to receive rent throughout the remaining portion of the bankruptcy process and are finalizing negotiations on our sites.
Sam: It is our current expectation that we will remain our tenant at nine of the properties and that we will dispose re tenant or redevelop the one remaining property.
Sam: Upon execution of new Master leases.
Sam: <unk> ziff's emergence from bankruptcy.
Sam: We expect to recover approximately 80% of the ABR previously generated by <unk> and only incur approximately nine or 10 basis points of bad debt from <unk> in 2025.
Sam: We are pleased with this outcome and believe this result is a further testament to an evidence of the strength of our underwriting and ability to patiently and prudently address tenant credit matters.
Kevin Final: With that I'll turn the call over to Kevin.
Kevin Final: Thank you Brian during the quarter, we generated adjusted funds from operations of $71 8 million or <unk> 36 per share.
Kevin Final: Results benefited from recent investments and lower vacant asset and re leasing related operating expenses, which served to offset rent loss from dispositions that occurred in Q4.
Kevin Final: Core G&A totaled $7 4 million for the quarter, reflecting our continued focus on controllable expenses and bad debt totaled 86 basis points substantially driven by nonpayment from Stanislas one of our remaining clinical health care tenants.
Kevin Final: During the quarter, we amended our $1 billion revolving credit facility.
Kevin Final: Among other changes the amendment extended the initial maturity date to March of 2029, and reduce the all in borrowing rate by 10 basis points.
Additionally, we refinanced our $400 million term loan that was set to mature in February of 2026.
Kevin Final: New term loan has an initial maturity date in March of 2028 includes two one year extension options and includes a $100 million delayed draw option that is available to us through late may.
Kevin Final: This $1 $5 billion transaction reflects the depth and strength of our banking relationships and we very much appreciate their continued supportive and investment in our business.
Kevin Final: We ended the quarter with pro forma leverage of 5.0 times net debt $38 $1 million of unsettled forward equity and approximately $826 million available on our revolving credit facility.
Kevin Final: Our strong and flexible financial position provides us ample capacity as we pursue incremental investment opportunities.
Kevin Final: Regarding our dividend our board of directors elected to maintain our 29 dividend per share payable to holders of record as of June 32025 on or before July 15 2025.
Kevin Final: Finally, as John mentioned, we are maintaining our 2025 per share guidance and key assumptions that we provided on our last call.
Kevin Final: It's worth reminding everyone 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 any capital markets activity that may occur during the year.
Kevin Final: Please reference last night's earnings release for additional details and we will now open the call up for questions.
Kevin Final: Thank you we will now begin the question and answer session. If you would like to ask a question today. Please do so now by pressing star followed by the number one on your telephone keypad.
Kevin Final: If you change your mind or you feel like your question has already been said you.
Kevin Final: You can press star followed by Jay with Julia So from Nikkei.
Anthony: The first question comes from Anthony <unk> with J P. Morgan.
Speaker Change: Please go ahead.
Speaker Change: Great. Thanks.
Speaker Change: First question is looking at your industrial exposure and.
Speaker Change: Just curious how youre going about just watching credit given the impact of tariffs, particularly.
Speaker Change: On the 17, 5% of ABR, that's for manufacturing activity and just.
Speaker Change: Wondering how youre going about that and approaching it. Thanks.
Speaker Change: Yeah. Thanks, Toni So we took.
Speaker Change: Both the top down and bottom approach here, we looked at individual tenants to see where we thought there might be some softness or some concern around the tariffs. We also looked at it from a top down approach in terms of what industries, we think might be at in a different way and as you highlighted was 70% manufacturing that was certainly an area was done some time, although I want to make sure. We emphasize here that manufacturing is not a <unk>.
Speaker Change: If they all don't do the same thing in the same way just as like distribution space for food processing or whatever else you have to sort of get into the weeds and understand what our tenants are doing and how so.
Speaker Change: So even within that manufacturing bucket or any of the other buckets within our industrial there is pockets, there where theres incremental concern and we've had some good calls with folks and trying to understand.
Speaker Change: How are you approaching the tenants tariffs how what are your concerns how are you going to navigate it do you have the ability to pass those costs onto their end users do you have minimum volume requirements in your contracts all the things that you would want to know and understand and of course first and foremost where you're getting your inputs, where do you get your inventory from what are the different countries are you subject to just the baseline 10% tariff or do you have.
Speaker Change: Any of that coming from China.
Speaker Change: And we also have some tenants and our industrial sleeve as well as other cities, where they actually are positioned really well to benefit from the current environment either from having a highly U S. Domestic focused production line sourcing system, they've made changes over time.
Speaker Change: Adjusted for this in anticipation of it.
Speaker Change: And we've actually even heard from some of our customers and tenants that this isn't the first time they've had to deal with US there was a raft of tariffs back in 2018 in 2019 and so this isn't the first time they've dealt with it and we'll manage through it just fine. So theres a couple of spots, where we're paying more attention and you heard Ryan talk about loaded from a watch list standpoint, but overall, we feel very pleased with.
Speaker Change: Where our portfolio sits.
Speaker Change: Okay. Thanks, and then just follow up.
Speaker Change: Can you remind us or give us some context around how much bad debt is in the guidance for the year and maybe how much. You think is has kind of spoken for with some of the things you already talked about versus like where you have some cushion for the rest of the year.
Speaker Change: So we started the year at 125, we've maintained that through to today, we think with the overall environment, it's prudent to sort of hold firm to where we started the year.
Speaker Change: Talked about with our first quarter call for Q4 there.
Speaker Change: Part of it was informed by known issues that we're dealing with in the portfolio of the Zips bankruptcy.
Speaker Change: Which late breaking news they emerge. This morning. So our leases are now in effect and we feel really proud about that adjustment. So zips was north of 60 basis points of total exposure, our bad debt relative to zipped as you heard from Brian for the year is going to be about nine or 10 basis points.
Speaker Change: New leases in place for nine of our tenant assets. So we feel very pleased there. We're also navigating standard force working to resolve that fairly quickly.
Speaker Change: Messaging, there hasnt changed standards losses.
Speaker Change: One tenant of ours that is a part of a much larger healthcare sort of work around workout situation, but we're not planning on sticking through because it could take a long time so.
Speaker Change: Looking to sell that fairly quickly. So we started with 125 basis points.
Speaker Change: There certainly are areas, where including zips that we've done a lot better than we potentially could have at the beginning of the year. So there's a little bit of extra room, that's built into it but we're going to hold 125 for now and we'll reassess that after Q2 and into Q3.
Speaker Change: Okay. Thank you.
Caitlin Burrows: Thank you. The next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.
Caitlin Burrows: Hi, good morning.
Caitlin Burrows: Just in the prepared remarks, you mentioned that clearances at tenant that youre watching.
Caitlin Burrows: Which they've been in the news so far so.
Caitlin Burrows: Noted.
Speaker Change: Was just wondering if you could go through what your exposure is there.
Caitlin Burrows: Is it a distribution center or what is it.
Caitlin Burrows: We own their primary or actually their sole distribution facility here in the United States.
Caitlin Burrows: And we know the asset well, we actually own an industrial asset across the street from it it's about 78 basis points of exposure forward. Its their corporate headquarters 4000 square foot distribution warehouse, often say its illinois.
Caitlin Burrows: We had some good conversations with them as a result of the tariffs announcement of course, a lot of their product comes from China and other places. They are viewing this very much a long term thing in terms of how they think about.
Caitlin Burrows: Realigning their logistics chain in their inventory process. They are also in the middle of working on up tearing their footprint by.
Caitlin Burrows: At the end of the year Theyre looking to get out of their nonproductive stores. They've got shorter lease terms are looking to move into upper tier higher end malls to try to drive better traffic better average tickets as people are cashing out the stores and things like that so from a real estate standpoint, it's in a good location. It's a good asset if they are not there we certainly could think about some readers.
Caitlin Burrows: <unk> or retooling that for a new tenant, but assuming claire's is able to continue to perform and navigate their way through a difficult environment, particularly one where the tariff issues there theyre going to be at our asset and continued paying rent so.
Caitlin Burrows: Got it.
Speaker Change: And then maybe on the build to suit side I think last quarter. You mentioned that you had the goal of $500 million, you've announced a 78 point too I think at the time, you had $700 million if im not mistaken.
Speaker Change: Point of discussion so now taking out what's already been announced I guess can you go through like an update of that pipeline have deals moved out or has anyone that was previously there is still there and being considered just movement in that category.
Speaker Change: So the pipeline continues to be pretty robust there. We've got a lot of opportunities. We're kicking around the tariffs announcement has had an impact on how we think about costs and Ryan talked about that in prepared remarks in the way that we've been able to navigate through the cost considerations there.
Speaker Change: The broader macroeconomic uncertainty does add a little bit more of an impact on a handful of opportunities where people they still want to be able to move forward, but they want to hit the pause.
Speaker Change: He said our pipeline is as robust as it was in the first quarter when we talked about it.
Speaker Change: Goal Hasnt changed as you've heard me say in my prepared remarks, we're still looking to do $500 million. This year and we think that's doable.
Speaker Change: The biggest change for us over the course of the year is going to be as we continue to add more developer partners through the roster.
Speaker Change: One that we announced the $78 $2 million deal with prolonged just was really important we're very happy with that relationship and looking to try to do more with them over time.
Speaker Change: But theres others other developer partners that we are in contact with in discussions with right now that we're expecting to make some announcements in the next few months and as we add more to the roster just opens up the funnel a little bit more and find more deals. So.
Speaker Change: Even though there are some broader shakeup that could be happening in terms of people pulling back from a macro economic standpoint, as we increase our funnel and sort of the aperture of deals we're able to see through the developer partner relationships, we have absolute confidence in our goals for the year.
Speaker Change: Thanks.
Speaker Change: Thanks.
John Kim: Next question comes from John Kim with BMO capital markets.
Speaker Change: John Please go ahead.
Speaker Change: Thank you on your.
Speaker Change: Development.
Speaker Change: And the funding for it just wanted to confirm that you plan to spend.
Speaker Change: The remaining spend of $119 million will be sourced from the line or would there be other sources of capital and what are the what is the plan or the timing as far as obtaining permanent financing on those assets or if we have capacity on the credit facility.
Speaker Change: So right now we've got ample capacity on the facility as you heard pro forma leverage of five times, we've got north of $100 million remaining on the revolver. We've got $100 million term loan that we can take down by the end of the month, we've got $38 million sitting in the ATM. So we're flushed with capital we don't need any right now longer term plans, we don't intend to.
Speaker Change: I'm, putting permanent financing on any of the deals that we're doing it's not to say that we wouldnt consider in the future if it made sense.
Speaker Change: Overall, we continue to want to control our own destiny and if we're in a spot where equity capital markets are constructive to investing for us and we will absolutely take a look at it if not we will control the destiny by selling assets that are in the portfolio.
Speaker Change: Either on existing basis or as we ladder ended the build to suit portfolio you heard Ryan in his prepared remarks talk about the opportunity for us to capture some additional value we're sourcing build to suit deals.
Speaker Change: With a view that there is a minimum of at least 75% to 100 basis points of accretion that we can get on a stabilized basis that we can either try to capture through any of the accretion or by selling the assets. So as we continue to add to that ladder will look for ways that we can finance it ourselves.
Speaker Change: Through our portfolio through the build to suit process, rather than having to go to the market and make decisions that we may not be there half ago.
Speaker Change: On your development.
Speaker Change: With prolonged just obviously, it's a very.
Speaker Change: Very strong well capitalized partner can you just provide some color on how you source that transaction. If you think there will be further opportunities to partner with them.
And maybe provide some color as to why.
Speaker Change: They decided not to keep that asset either on balance sheet or something.
Speaker Change: Have you settled on one of their funds.
Speaker Change: So the first part is we have a really really well connected.
Speaker Change: Team here within the development space.
Speaker Change: We have a lot of relationships throughout developer space overall with the brokers that are in that space for the developers themselves with the tenants with the contractors you name. It. So this is a deal that was sourced through our relationships. It was a direct one that came in.
Speaker Change: And we were able to find a way to make the deal work that is I think one of the key things that we've been highlighting with investors is that the competitive world and our build to suit development pipeline is very different from regular way deals, we're not going up against 20 or 25 people in first rounds and sort of working your way down on a price basis to the best and finals. These are first and foremost relation.
Speaker Change: Chip based deals where developers are coming to you and saying I have this opportunity and I would like to partner with you on it can we make this work is there a way to pencil out the budget in a way that works for both of US. So you start from there and first and foremost relationship based and the relationships that our team brings brought this one to us to take the second part of your question why would pull.
Speaker Change: I'll just do this so they have of course their core business, where they are building spec large scale industrial.
Speaker Change: In core markets primary markets you had you name it. They also do what they call their consumer led our customer led development process, which is specialized build to suit deals. Hence the one that we're working on with them here.
Speaker Change: And they want to be able to capture the revenue and the fees associated with deals like this but they're not necessarily deals that they would want to keep on balance sheet in the same way that they would their core business, which actually ends up making for a really nice symbiotic relationship between us because these are the absolutely the types of deals that we want to hold long term and keep on our balance sheet Theyre looking to service the <unk>.
Speaker Change: Clients, bringing that revenue and make sure that they are continuing to build a diversified set of revenue streams for their business.
Speaker Change: But they don't necessarily want to hold it. So this was one of them that fit perfectly inside of that sort of venn diagram, where it's one that we wanted and one that they wanted to be able to build and then we can hold it long term.
Speaker Change: Is there anything special about it.
Speaker Change: Particularly.
Speaker Change: Okay. That's helpful.
Speaker Change: Sorry could you repeat that.
Speaker Change: Is there anything special either different or maybe atypical.
Speaker Change: Their product.
Speaker Change: With this.
Speaker Change: Project.
Speaker Change: Okay.
Speaker Change: So this asset no no I mean in terms of geographic location and it's a little bit outside of word prologuize would traditionally be but the build itself is fairly standard the relationship that they have with clients. It's an FCA is fairly large and they are doing other projects with them around the world. So this was just one that they decided they wanted to run through the consumer led development team and partner with us.
Speaker Change: That's great. Thank you.
Speaker Change: Thank you. The next question comes from <unk> <unk> with Keybanc capital markets. Please go ahead.
Speaker Change: Great. Thank you.
Speaker Change: Just going back to the new build to suit.
Speaker Change: Six 9% cap rate seems relatively low compared to the remainder of your pipeline could you give us some color on the yields there.
Speaker Change: Is this something we should be expecting more of a range going forward.
Speaker Change: So it's a tick lower than where we are obviously on a weighted average basis. We're still very pleased seven 4% on the upfront cap rate of eight 9% on a straight line basis, I mean, thats really fantastic returns across the strategy here at $6 nine on the upfront cap rate I think that's really just reflective of the fact that this is an investment grade tenant not just investment grade.
Speaker Change: At the top five auto company in the entire world. So it's a fairly large credit in addition to being a credit rated one and then the geography.
Speaker Change: Atlanta MSA. So you add those three things together and it sort of had a slight tick down from where you see the rest of our build to suit pipeline.
Speaker Change: Okay, Great and then could you remind us on some of the pace of your of your plan to fund your existing build to suit pipeline this year and going into 'twenty six.
Speaker Change: So the goal of course as I said was $500 million. We've got the 390 <unk> under control today, we expect to fund about $217 million of that in.
Speaker Change: <unk> 2025, the remainder of that would be in 2026 and that all adds up to as I said, the $22 $6 million in incremental ABR grown our rent base by five 6%.
Speaker Change: Okay, Great and then last one for me was.
Speaker Change: We saw that your exposure to dollar general in the quarter increased and what was the decision behind.
Speaker Change: A handful of those assets up and considering some of your peers have been taking steps to reduce exposure to that tenant.
Speaker Change: So we added four that was a direct relationship with the developer of the properties. We've got 14 year leases on those we're going to be more than one times out on our money by the end of the lease term.
Speaker Change: And some people might want to be reducing their exposure, but their exposures are far larger than where we sit today, so adding incremental for us isn't isn't necessarily pushing the bounds of where we would want to take it dollar general continues to be a great place, we think to allocate capital. We got those in the mid seven cap range and getting one times out on your money within the 14 year period from a tenant that is going to pay every.
Speaker Change: Rent all the way through the end of that term feels really good.
Speaker Change: Okay, great. Thank you.
Speaker Change: Thank you. Our next question comes from Brian Caveat with Green Street Advisors. Please go ahead.
Brian Caveat: Good morning, Thanks for taking my question.
Brian Caveat: I know this is more likely a mid to long term variable, but could you talk on how the impact of onshoring is expected to affect your industrial portfolio.
Speaker Change: Some of them that we're pretty bullish on as you can imagine we are heavily weighted towards industrial just as a starting matter for where our portfolio sits in the way that we're leaning into the build to suit strategy fits perfectly into.
Speaker Change: Conversations we've been having with developers as well as our tenants and other partners about the view that people are interested in bringing more of their production and distribution capabilities onshore into the United States. So we think we're incredibly well positioned to take advantage that what we think is going to be a longer term trend in the industry to help people build those facilities out, particularly as youre seeing the ship.
Speaker Change: And overall development projects get back to a place where build to suits. The specialized build outs are taking up a larger share of overall development volume in the states versus spec. So we think we're really well positioned and are looking forward to seeing more of it.
Speaker Change: Awesome and then in the transaction market in general for industrial properties that will benefit from the onshoring are you seeing an uptick in competition at all our other Reits or private buyers getting interested in these properties.
Speaker Change: There's been a lot of competition in industrial in the last couple of years.
Speaker Change: Spot, where we've actually seen more even than we have on the retail, particularly as sort of the 10 31 buyer.
Speaker Change: Slowed a little bit in the last couple of years in the retail space. The biggest spot where are we seeing the most competition and cap rate compression is on the larger deals whether it's individual deals of substantial size on an individual property basis or even more so on the portfolio deals that's where we're seeing huge amounts of competition the private buyers in the space have.
Speaker Change: Big mandates in terms of what they have to go out and spend and deploy this year and so their ability to or their desire to be able to do that and bigger chunkier things means that they are pushing pricing on those deals, which makes us feel better about our specialized focus on the build to suit nature and then also the relationship based.
Speaker Change: Individual regular way deals that we've been focused on this year and last year.
Speaker Change: Okay. That's it for me thanks for the color.
Speaker Change: Thank you. The next question comes from Michael Goldsmith with UBS.
Speaker Change: Please go ahead Michael.
Michael Goldsmith: Good morning, Thanks, a lot for taking my question you got rid of some of the health care facilities in the quarter, but your health care services exposure with steady are there separate puts and takes into these two subtypes of health care assets that factor into your disposition strategy and maybe what's the outlook for your healthcare exposure going forward.
Speaker Change: Thanks.
Speaker Change: So anything with that.
Speaker Change: The other buckets so for us that's the remaining 3% thats in their clinical surgical assets, we have a long term view of reducing that to zero subject to theres a larger asset in there that we may hold long term really high performing.
Speaker Change: Orthopedic practice in Arkansas that we may hold for a long time.
Speaker Change: Otherwise the clinical surgical bucket, we would love to see it go to zero over time, but we'll deal with those on a one off basis as we did in the first quarter with those couple of sales that you saw that we accomplished.
Speaker Change: Health care services anything that falls more into that medical retail type bucket, we intend to hold long term and we're open to further investment in those assets or acquiring other ones. If the risk adjusted returns mcgough rates and things makes sense.
Speaker Change: Thanks for that and some of your top tenants are in the food processing and warehousing space.
Speaker Change: As we've seen with some of the cold storage operators lately.
Speaker Change: And that space has been a little bit volatile. So I guess are you.
Speaker Change: Seeing any impact.
Speaker Change: Health of these tenants are.
Speaker Change: The tariff swing on that.
Speaker Change: Shipments being getting canceled just any concern around that space overall.
Speaker Change: Food processing gold storage all of those things.
Speaker Change: Back to my comments earlier on the tariffs in terms of the way that we've been evaluating those some of those tenants.
Speaker Change: Incremental concerns with and will have conversations with otherwise there's others that are in there excuse me that we think are actually going to benefit really.
Speaker Change: Well from this environment, but in terms of comparing it to other sort of cold storage operators and things like that as a key differentiator here is that we have essentially boxes and boxes the product thats inside these facilities or is the product thats owned by our tenants. These are not third party logistical sites were worried about other overall utilization and <unk>.
Speaker Change: <unk> inventories and things of that they're using in occupying the space on a 100% basis.
Speaker Change: Thank you very much good luck in the second quarter.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question comes from keeping Kim with Cubist. Please go ahead.
Speaker Change: Thank you good morning going back to the development business can.
Speaker Change: Can you just talk a little bit more about how where is it in the value chain.
Speaker Change: That you are bringing value is it mostly on the capital.
Speaker Change: Availability side of it or.
Speaker Change: How often is that the case, you're bringing the deal coming from that tenant and finding a developer.
Speaker Change: But primarily it's on the capital side are.
Speaker Change: Our developers are looking for surety of execution, they want someone they've done a deal with before they want someone they know is coming to the table with the money they need to get the deal done.
Speaker Change: As I've talked about a handful of times doing it in a way that's differentiated from the traditional development model, where theyre, having to chase three different pockets of capital for mortgage financing to their limited partners for the construction period and to take out by or at the end being a one stop shop and some of that they have done repeat deals with is really attractive to developers because what they want to be.
Speaker Change: To do is get in their build these projects collector fees and move on to the excellent. So as we partner with them, they're more likely to come back to you for the next one because they know that the performed in your perform again.
Speaker Change: As we have grown our sophistication in this business and we started to have further conversations within internally and with our tenants. We absolutely are looking for opportunities, where we can bring deals to our developer partners and make this a two way street. So that's something we hope to do more of in the future. We are starting to have some success in it now.
Speaker Change: But it's one that it's still a little bit Nathan and will be growing over time.
Speaker Change: And for.
Speaker Change: For example, like a PFS prologue of steel do you do you see that as a repeat business.
Speaker Change: In the foreseeable future or are these deals like more one off.
Speaker Change: <unk> business for sure not a one off we've already had multiple conversations with for largest about other potential deals within their pipeline that we might be able to partner on I Wouldnt put a timeline on it. These things have a really long conversion timeframe associated with them and deals can get delayed or accelerated for a whole host of reasons. So I wouldn't put a timely.
Speaker Change: On it but that's absolutely part of the excitement that we have about this relationship and if that theres, a repeat opportunity theres, a really deep pipeline associated with Corelogic and it's one where as we performed well as we did here.
Speaker Change: To have opportunities to hopefully do more with them.
Speaker Change: And if I could add a third one on this topic.
Speaker Change: Where have you or or intend to add more personnel for it as a business.
Speaker Change: In terms of in terms of like what.
Speaker Change: Ralph.
Speaker Change: Yes, it's Bob we've been spending a bunch of time on lately is in the ongoing management. These are.
Speaker Change: I'd like to joke that once we close on the land we signed the lease all we got to do is cut checks until we start collecting rent and that is a gross over simplification of the amount of work that goes into managing a build to suit while the construction is happening.
Speaker Change: That's the area, where we think there is some incremental hires so it's not necessarily on the sourcing it's not necessarily at a higher level, we really need to be thinking about how are we adding additional capacity to manage these projects. Once they have been added to our build to suit schedule in terms of evaluated the construction progress the draw requests managing that so.
Speaker Change: So thats the area, where we've been spending a little bit more time thinking about personnel.
Speaker Change: Okay. Thank you.
Speaker Change: Okay.
Speaker Change: Thank you. Our next question comes from Ronald Camden with Morgan Stanley.
Speaker Change: Please go ahead for node.
Great I had two quick ones and going back to the pro largest sort of dealer relationship I had sort of a similar question.
Speaker Change: To understand sort of the nature of the relationship and how big.
Speaker Change: This could go just to get it sounds like there is other deals in the pipeline, but as this is the fifth annual cadence just any color on like size as well right like ours. Some of these deals larger smaller.
Speaker Change: And also.
Speaker Change: I think you said it before but I didn't really understand it but just the value add.
Speaker Change: You guys Ed versus pro largest going at it alone.
Speaker Change: Would be helpful.
Speaker Change: Sure.
Speaker Change: Hope is that it is not just an annual thing we'd love to see more opportunities hit during the year because of the <unk> deal size with them is sort of just by nature of their business going to be a little bit larger than we might see with some of the other developers that are in our roster.
Speaker Change: In terms of what value, we bring to them. They have multiple revenue streams that they are focused on in terms of their core business and our international business whatever else. The consumer customer led development team is one where they are focused on being a fee developer not a long term owner. So the projects that they have in here and they have a team that's dedicated to this.
Speaker Change: Of work.
Speaker Change: They are not looking to do this on balance sheet and then hold this asset for the long term. So they are looking for people like us that are going to step in and help them and the relationships that we have in this space through our team brought this initial one to us. So now we're in a spot where we have closed on the initial deal we have docks in place we understand each other really well in terms of what each of us needs in terms of.
Speaker Change: Making a deal work can be mutually beneficial and so now it is going to make it incrementally easier for us to partner with them on hopefully deals in the future.
Speaker Change: Helpful and then on the construction side.
Speaker Change: <unk> been asked different ways, but I just curious if theres any quick.
Speaker Change: Pricing changes that you've seen steel whatever just what's a quick read is since April socket.
Speaker Change: <unk> is moving maybe to the good or to the bad right.
Speaker Change: On any sort of commodities or are parts that you guys need would be helpful. Thanks.
Speaker Change: Certainly some moving parts in terms of pricing here in terms of the inputs, whether it's steel or concrete electrical switch gears you name. It there's been changes in the pricing where we've been focused on is as we've been evaluating new deals.
Speaker Change: How are you sourcing the inputs and the materials that you need for this project does it makes sense for you to go and buy them today, even though it might be slightly incrementally higher than what it might be in the future. If the tariffs were to go away, let's have surety of execution to bring them on board if theres a change over the period of time as Ryan talked about we've got lots of ways to be able to deal with that whether it's working it within the <unk>.
Speaker Change: Construction of the budget for the general contractor, adding a contingency or an allowance to adjust for it using a change order process, putting that additional expense on the tenant to be able to move forward. There's lots of ways that we've been able to structure those to ensure that these projects can manage whatever cost volatility that we might experience in the near to long term and still make them work.
Speaker Change: Okay. That's it for me thanks, so much.
Speaker Change: Thank you at this time, we have no further questions. So I will turn the call back to the management teams any closing remarks.
Speaker Change: Thanks, Emily and thanks, all for joining us today looking forward to seeing everyone. The next couple of weeks, we're going to be on the road a bunch on if not next couple of weeks, we'll see you at NAREIT in June during the rest of your day.
Speaker Change: Thank you everyone for joining us today. This concludes your call and you may now disconnect your lines.
Speaker Change: [music].
Speaker Change: Okay.