Q2 2025 NETSTREIT Corp Earnings Call
and,
Operator: Greetings and welcome to the NetStreetCorp second quarter 2025 earnings call. At this time, all participants are in a listen-only mode.
Operator: A brief question and answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
Greetings and welcome to the net Street. Corp second quarter 2025 earnings call. At this time. All participants are in a listen-only mode.
Amy An: It is now my pleasure to introduce your host, Amy An, Investor Relations. Thank you. You may begin.
A brief question and answer session will follow the formal presentation. Should anyone require operator? Assistance? During the conference? Please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Amy on investor relations. Thank you. You may begin.
Amy An: We thank you for joining us for NetStreet's second quarter 2025 earnings conference call. In addition to the press release distributed yesterday after market closed, we posted a supplemental package and an updated investor presentation. Both can be found in the investor relations section of the company's website at www.netstreet.com.
Amy An: On today's call, management's remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risk and uncertainties that may cause actual results to differ from those discussed today. For more information about these risk factors, we encourage you to review our Form 10-K for the year ended December 31, 2024, and our other SEC filings. All forward-looking statements are made as of the date hereof, and Netstreit assumes no obligation to update any forward-looking statements in the future.
We thank you for joining us for net Street. Second quarter 2025 earnings conference. Call in addition to the press release distributed yesterday. After market closed, we posted a supplemental package and an updated investor presentation. Both can be found in the investor relations session of the company's website at www.net street.com.
On today's call Management's remarks and answers to your questions. May contain forward-looking statements as defined in the private Securities. Litigation Reform, Act of 1995 forward-looking statements. Address matters are subject to risk and uncertainties that may cause actual results to differ from those discussed today,
For more information about these risk factors, we encourage you to review our form 10K for the year. Ended, December 31st 2024 and our other SEC filings
Amy An: In addition, certain financial information presented on this call includes non-GAAP financial measures. Please refer to our earnings release and supplemental package for definitions of our non-GAAP measures, reconciliations to the most comparable GAAP measure, and an explanation of why we believe such non-GAAP financial measures are useful to investors.
Amy An: Today's conference call is hosted by Netstreit's Chief Executive Officer, Mark Mannheimer, and Chief Financial Officer, Dan Donlon. They will make some prepared remarks, and then we will open the call for your questions.
All 4 looking statements are made as of the date hereof and net Street assumes. No obligation to update any 4 looking statements in the future. In addition, certain financial information presented on this call includes non-gaap Financial measures. Please refer to our earnings release and supplemental package for definitions of our non-gaap measures. Reconciliations to the most comparable gaap measure and an explanation of why we believe such non-gaap Financial measures are useful to investors.
Mark Manheimer: Now, I'll turn the call over to Mark. Mark? Thank you, Amy. And thank you all for joining us this morning to discuss our second quarter 2025 results. Similar to past quarters, we continue to improve our tenant diversification via thoughtful and accretive dispositions, and we are now slightly ahead of pace as it relates to our year-end goals. On the external growth front, our team is actively sourcing attractive investments across a broad spectrum of tenants and individuals. And we remain confident in our ability to find off-the-run opportunities that fit our underwriting standards. From a portfolio perspective, our tenants remain incredibly healthy and our heavy concentration within the necessity discounts and service industries adds further stability to our cash flow.
Speaker Change: Today's conference call is hosted by net Street's chief executive officer, Mark, mannheimer, and Chief Financial Officer Dan donlin. They will make some prepared remarks and then we will open the call for your questions. Now, I'll turn the call over to Mark Mark.
Mark Mannheimer: Thank you, Amy, and thank you all for joining us.
Speaker Change: This morning to discuss our second quarter 2025 results.
Speaker Change: Ation by a thoughtful and a creative dispositions. And we are now slightly ahead of pace as it relates to our year end goals.
Speaker Change: On the external growth front, our team is actively sourcing attractive Investments across a broad spectrum of tenants and industries, and we remain confident in our ability to find off-the-run opportunities that fit our underwriting standards.
Mark Manheimer: In addition, we provided new disclosure during the second quarter to illustrate our de minimis credit losses since inception and better demonstrate the overall strength of our portfolio, which I will discuss later. We believe this enhanced disclosure, continued diversification efforts, and disciplined approach to capital deployment have all contributed to the improvement in our cost of capital. While there is still plenty of room for improvement on this front, we did take advantage of our favorable investment spreads to raise over $46 million via the ATM this quarter. With all these positives in mind, we are increasing our AFFO per share guidance midpoint by a penny to a new range of $1.29 to $1.31, and we are increasing our net investment guidance by $50 million at the midpoint to a new range of $125 to $175 million.
Speaker Change: From a portfolio perspective, our tenants remain incredibly healthy, and our heavy concentration within the necessity discounts and service Industries at further stability to our cash flows.
Speaker Change: In addition, we provided new disclosure during the second quarter to illustrate our Dominus, credit losses, since Inception and better demonstrate the overall strength of our portfolio, which I will discuss later.
Speaker Change: We believe this enhanced disclosure continued diversification efforts and disciplined approach to Capital deployment. Have all contributed to the improvement in our cost of capital.
Speaker Change: While there is still plenty of room for improvement on this front, we did take advantage of our favorable investment spreads to raise over 46 million via the ATM this quarter
Speaker Change: With all these positives in line, we are increasing our afo for share guidance, midpoint by a penny, to a new range of 1.29 to 1.31 and we are increasing our net investment guidance by million dollars at the midpoint, to a new range of 125 to 175 million.
Mark Manheimer: Turning back to external growth, we completed $117.1 million of gross investments at a blended cash yield of 7.8% during the quarter. While we are thrilled to achieve our highest quarterly cash yield on record in the second quarter, we do not expect this to repeat in the back half of the year, as the opportunities that have the best risk-adjusted returns are currently blending to a 7.4% to a 7.5% cash yield. The weighted average lease term for our second quarter investments was 15.7 years with investment grade and investment grade profile tenants representing more than a quarter of these equities.
Speaker Change: Turning back to external growth. We completed 117.1 million of gross Investments at a blended cash yield of 7.8% during the quarter.
Speaker Change: What we are thrilled to achieve. Our highest quarterly cash yield on record in the second quarter we do not expect this to repeat in the back half of the year as the opportunities that have the best risk. Adjusted returns are currently blending to a 7.4% to a 7.5% cash yield.
Mark Manheimer: Additionally, more than half of our investment activity this quarter was accretively funded with a disposition process. which totaled $60.4 million across 20 properties at a 6.5% blended cash yield. As we look out to the third quarter and beyond, we are currently seeing great investment opportunities across a variety of tenants and industries, including farm supplies, grocery, quick service restaurants, auto service, and convenience stores, to name a few. Turning to the portfolio, we ended the quarter with investments in 705 properties that were leased to 106 tenants operating in 27 industries across 45 states. From a credit perspective, 68.7% of our total ABR is leased to investment grade or investment grade profile tenants.
Speaker Change: The weighted average lease term for our second. Quarter Investments was 15.7 years with investment grade and investment grade profile. Tenants representing, more than more than a quarter of these acquisitions.
Speaker Change: Additionally, more than half of our investment activity. This quarter was a creatively funded with a disposition proceeds.
Speaker Change: Which told of 60.4 million across 20 properties at a 6.5% Blended cash Shield.
Speaker Change: As we look out to the third quarter and Beyond, we are currently seeing great investment opportunities across a variety of tenants and industries, including Farm Supplies. Grocery Quick Service restaurants, Auto Service and convenience stores to name a few
Speaker Change: Turning to the portfolio. We ended the quarter with investments in 705 properties that were leased to 106 tenants operating in 27 Industries across 45 States.
Mark Manheimer: Our weighted average lease term remaining for the portfolio was 9.8 years, with just 1.2% of ABR expiring through 2026. As mentioned earlier, we have updated our disclosure to better demonstrate the individual property risk within our portfolio, as well as provide more details around our best-in-class track record as it relates to credit loss. Moreover, we believe this disclosure serves to better illustrate the underwriting discipline that we have maintained since inception. which, as we've said before, goes well beyond just understanding the corporate credit. We also emphasize unit-level performance in locations where we believe the rent is replaceable, which helps us to carefully manage lease expiration.
Speaker Change: From a credit perspective, 68.7% of our total abbr is Le to investment grade or investment grade profile. Tenants
Speaker Change: Our weighted average. Lease term remaining for the portfolio was 9.8 years with just 1.2% of ABR expiring through 2026.
Speaker Change: As mentioned earlier, we have updated our disclosure to better demonstrate the individual property risk within our portfolio.
Speaker Change: As well as provide more details around, how our best-in-class track record as it relates to credit loss.
Speaker Change: Moreover, we believe this disclosure serves to better illustrate, the underwriting discipline that we have maintained since Inception.
Mark Manheimer: We also focus on larger and more established operators that we believe are more capable of adapting to market. As you can see from our investor presentation, our portfolio-wide unit-level rent coverage ticked up to 3.9 times from 3.8 times when we initially provided the disclosure less than two months ago. To reiterate, we believe this disclosure provides excellent visibility into our best-in-class default and credit loss statistics while providing the necessary context around future risks within our portfolio. We believe this insight, which is not uniformly disclosed across the net lease industry, should provide investors with greater comfort in the future cash flow production of our portfolio, both on an absolute basis and relative to our net lease period.
Speaker Change: Which, as we've said before goes well beyond, just understanding the corporate credit. We also have to emphasize unit level, performance, and locations, where we believe the rent is replaceable, which helps us to carefully manage lease expirations
Speaker Change: We also focus on larger and more established operators that we believe are more capable of adapting to Market changes.
Speaker Change: As you can see from our investor presentation, our portfolio wide unit level of rent coverage, ticked up to 3.9 times from 3.8 times. When we initially provided the disclosure of less than 2 months ago.
Speaker Change: To reiterate. We believe this disclosure provides excellent visibility into our best-in-class default. And credit loss, statistics while providing the necessary context around future risks within our portfolio.
Mark Manheimer: Before handing the call over to Dan, I wanted to reiterate a message that we have consistently provided in the past. We will not sacrifice our balance sheet for growth, nor will we grow for the sake of asset growth without an appropriate level of per share earnings. However, with our cost of capital having meaningfully improved throughout the year, we can now afford to be more acquisitive, which is a welcome development for the NetStreet team. We very much appreciate the support of our shareholders, and we remain confident that our growth from a small base narrative can gain additional traction as we execute our strategy.
Speaker Change: We believe this Insight which is not uniformly, disclosed, the net lease industry should provide investors with greater comfort in the future. Cash flow production of our portfolio. Both on an absolute basis and relative to our net lease peers.
Speaker Change: Before handing the call over to Dan, I wanted to reiterate a message that we have consistently provided in the past.
Speaker Change: We will not sacrifice our balance sheet for growth. Nor will we grow for the sake of asset growth without an appropriate level of per share, earnings growth.
Dan Donlon: With that, I'll hand the call to Dan to go over second quarter financials and then open up the call for your questions. Thank you, Mark. Looking at our second quarter earnings, we reported a net income of $3.3 million, or $0.04 per deleted share. Core FFO for the quarter was $25.6 million, or $0.31 per deleted share, and AFFO was $27.5 million, or $0.33 per deleted share, which is a 3.1% increase over last year.
Dan Donlin: However, with our cost of capital having meaningfully improved throughout the year, we can now afford to be more inquisitive, which is a welcome development for the net street team. We very much appreciate the support of our shareholders, and we remain confident that our growth from a small base narrative can gain additional tracking as we execute our strategy.
Dan Donlin: With that, I'll hand the call to Dan to go over a second quarter financials and then open up the call for your questions.
Dan Donlin: Thank you, Mark.
Dan Donlin: Looking at our second quarter earnings, we reported a net income of 3.3 million or 4 cents per deleted. Share
Dan Donlon: Turning to the expense front, our total recurring G&A in the quarter increased year-over-year to $5.4 million, which was mostly the result of our staffing levels normalizing after we restructured various roles last year. That said, with our total recurring G&A representing 11% of total revenues this quarter versus 12% in the prior quarter, our G&A continues to rationalize relative to our revenue.
Dan Donlin: Which is a 3.1% increase over last year.
Dan Donlin: Turning to the expense front. Our total recurring GNA in the quarter increased year-over-year to 5.4 million which was mostly result of our staffing levels normalizing. As we restructured various roles last year,
Dan Donlon: Turning to capital markets activity in the second quarter, we sold 2.8 million shares via our ATM program, generating over $46.1 million of net proceeds. Additionally, we settled 1.1 million shares during the quarter.
Dan Donlin: that said with our total recurring GNA representing 11% of total revenues, this quarter versus 12%. In the prior quarter, our GNA continues to rationalize relative to our Revenue base.
Dan Donlin: turning to Capital markets activity in the second quarter we sold 2.8 million shares via ATM programs generating over 46.1 million of net proceeds,
Dan Donlon: Turning to the balance sheet, our adjusted net debt, which includes the impact of all forward equity, was $713.8 million. Our weighted average debt maturity was 3.8 years, and our weighted average interest rate was 4.58%. including the extension options, which can be exercised at our discretion. We have no material debt maturing until February 2028.
Dan Donlin: Additionally, we settled 1.1 million shares during the quarter.
Dan Donlin: Turn to the balance sheet, our adjusted net debt, which includes the impact of all Ford Equity was 713.8 Million. Our weighted average debt maturity is 3.8 years. And our weighted average interest rate was 4.58%.
Dan Donlon: In addition, our total liquidity was $594 million at quarter end, which consisted of $20 million of cash on hand, $373 million available on a revolving credit facility, and $202 million of unsettled forward equity. From a leverage perspective, our adjusted net debt to annualized adjusted EBITDA RE was 4.6 times at quarter end, which was down from 4.7 times last quarter and remains well within our targeted leverage range of 4.5 to 5.5%.
Dan Donlin: Including extension options, which can be exercised at our discretion. We have no material debt maturing until February 2028.
Dan Donlin: In addition, our total liquidity was 594 million at quarter end, which consisted of 20 million dollars of cash on hand 373 million available on a revolving credit facility and 202 million of unsettled Ford equity.
Dan Donlon: Moving on to guidance for 2025. We are increasing our AFFO per share guidance range to $1.29 to $1.31 from the prior range of $1.28 to $1.30. And we are increasing our net investment activity guidance range to $125 million to $175 million from the prior range of $75 million to $125 million.
Dan Donlin: From a leverage perspective are just a net debt to annualize adjusted ebit. Re was 4.6 times at quarter end, which was down from 4.7 times last quarter and remains, well, within our targeted, leverage range of 4 and a half, to 5 and a half times.
Dan Donlin: Moving on to guidance for 2025.
Dan Donlin: We are increasing our, our afo per share. Guidance range to 1.29 to 1.31 from the prior range of 1.28 to 1.30 and
Dan Donlon: Additionally, we now see recurring cash G&A ranging between $15 to $15.5 million for 2025. From a rent loss perspective, our guidance now assumes roughly 25 basis points of unknown rent loss at the midpoint of our range. Lastly, due to our outstanding forward equity, our midpoint is assumed slightly less than a penny of dilution resulting from the Treasury stock method.
Dan Donlin: We increase in our net investment activity, guidance range to 125 million, to 175 million from the prior range of 75 to 125 million.
Dan Donlin: Additionally, we now see recurring cash GNA ranging between 15 to 15 and 1.5 million for 2025.
Dan Donlin: For rent Los perspective, our guidance now assumes roughly 25 basis points of unknown. Rent loss at the midpoint of our range.
Dan Donlin: Lastly, due to the outs due to our outstanding Ford Equity. Our midpoint is assumed slightly less than a penny of dilution resulting from the treasury stock method.
Dan Donlon: Lastly, on July 21st, the board declared a quarterly cash dividend of 21.5 cents per share, which represents a 2.4% increase over the prior quarter dividend. The dividend will be payable on September 15th to shareholders of record as of September 2nd.
Lastly, on July 21st, the board declared a quarterly cash dividend of 21 and a half cents per share which represents a 2.4% increase over the prior quarter dividend.
Operator: With that, Operator, we will now open the line for questions. Thank you.
Dan Donlin: The dividend will be payable on September 15th to shareholders of record as of September 2nd.
Dan Donlin: With that operator, we will now open the line for questions.
Operator: We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. Information tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad,
Information tone. Will indicate your line is in the question. You may press star 2. If you would like to remove your question from the queue.
Speaker Change: So pin using speaker equipment and maybe necessary to pick up your handset, before pressing the star Keys 1 moment, please while we pull for questions.
Haendel Juste: The first question is from Haendel St.
Haendel Juste: Juste from Mizuho Securities. Please go ahead. Hey, guys. Good morning. Great quarter. I wanted to ask you a question. I guess, Mark, a big-picture one, and it kind of dovetails on your prepared remarks. The stock is up, you know, 30 percent. Your WAC and investment spreads have improved pretty dramatically.
Speaker Change: The first question is from handle St. Just from mizuho Securities. Please go ahead.
Mark Manheimer: So, I guess, can you talk a bit more about how this improved WAC impacts the range of capital deployment alternatives available to you now and how much and where you can deploy capital? Your initial guide, obviously, was pretty conservative. And even the updated acquisition guide sits below where you've been in some other quarters recently. So, just curious on some thoughts on that front. Thanks. Yeah, sure.
Speaker Change: Hey guys. Uh, good morning, great quarter. Um, wanted to ask you a question. I I guess Mark a big picture 1 um and it's kind of a dub tales on your your, your your prepared remarks. Um, the stock is up, you know, 30% your whack in investment spreads have improved, um, pretty dramatically. So I guess, can you talk a bit more about how this improved whack impacts the range of capital deployment Alternatives available to you now and
Speaker Change: how much and where you can deploy Capital uh your your initial guide obviously was pretty conservative. Uh and even the updated acquisition guide sits uh below where you've been in some other quarters recently. So I was just curious on some thoughts on on that front, thanks.
Mark Manheimer: So, thanks, Haendel. Yeah, it's going to be, it's going to continue to be pretty fluid as we continue to monitor our cost of capital. I think as it relates to our ability to deploy capital in and around the cap rates we've been, maybe not this quarter, which I think was maybe a little bit of an outlier at 7.8, I think kind of more normal for us in this environment, probably 7.4, 7.5, something like that. But for us to be able to deploy net $150, $200 million would be pretty easy. It's just going to come down to our cost of capital and hopefully we can continue to see improvement there.
Speaker Change: Yeah sure. So thanks andelle. Um yeah, it it's going to be it's going to continue to be pretty fluid. Uh as we continue to monitor our cost of capital uh I think as it relates to our ability to deploy Capital uh in and around the cap rates, we've been maybe not this quarter, which I think was maybe a little bit of an outlier, uh, at 78. I think kind of more normal for us, uh, in this environment. It's probably 7475 something like that. Uh, but for us to be able to deploy net 150200 million would be would be pretty easy. It's just going to come down to, you know, our cost of capital and and hopefully we can, you know, continue to see Improvement there.
Mark Manheimer: Got it. And it sounds like a bit more IG will be part of the mix and part of why we expect yields to come down in the next couple quarters. Yeah, I think this quarter, you know, we had a couple of unique opportunities with some C-store operators where we have relationships where they were doing some add-on acquisitions of some from some smaller operators. We were able to get attractive leases, add these properties into existing master leases, extend the term out at four times rent coverage, so at pretty attractive cap rates. So anytime we see those types of opportunities, we're going to jump all over them.
Speaker Change: Got it. It sounds like um a bit more uh IG will be part of the mix and part of why we expect uh the yields to to come down in in the next couple quarters.
Mark Manheimer: We just don't expect to see that, you know, every quarter. We just, you know, really felt like this was a great opportunity for us this quarter, which is why you see that 7-8. It's a larger operator, doesn't quite qualify for an investment grade profile, doesn't have a credit rating, but has no debt for all of those operators. So, you know, an operator we're very comfortable with, and of course, at four times rent coverage and a master lease, you're pretty well protected. Great, great.
Speaker Change: Right? So anytime we get, we see those types of opportunities. We're going to jump all over them. Uh, we just don't expect to see that, you know, every quarter. Uh, we just, you know, really felt like this was a great opportunity for us this quarter, uh, which is why you see that 78 that it's a larger operator, doesn't quite qualify for investment grade profile. Uh, it doesn't have a credit rating but has no debt, uh, for all of those operators. So, you know, an operator, we're very comfortable with and, and of course, at 4 times, our in coverage, and a Master Lease, uh, you're pretty well protected.
Mark Manheimer: And the second question is on the Walgreens, the dollar store, dispositions, things seem to be proceeding pretty well.
Mark Manheimer: There may be some color on, if you could compare and contrast the demand for the assets and the cap rates, you're getting the private market on those fronts, and then maybe some color on where we'd expect you to maybe add more exposure or deploy some of that capital. Yeah, yeah, sure. So, yeah, and I'd say as it relates to dispositions, you know, kind of similar to our acquisitions this quarter, the cap rate was a little bit better than what we've seen in the past. We did execute a number of pretty attractive dispositions, you know, sold off some advanced autos, kind of in the low six cap rate range, you know, got that concentration really where we're more comfortable.
Great, great. And, uh, second question is on the wall. Greens Dollar Store, dispositions things seem to be proceeding, uh, pretty. Well, there may be some color on if you could compare and contrast the demand for the assets and the cap rate to getting the private Market on those fronts and then maybe some color where we'd expect you to maybe add more um exposure or deploy some of that Capital, thanks.
Mark Manheimer: You know, sold a CBS, you know, outside of Nashville at a five and a half cap. So, so, you know, really had a couple of, you know, cap rates to kind of drug that down a little bit. And we're about done with what we need to sell with Walgreens, we may need to sell another one, one or maybe two for the rest of the year to kind of get us below that three, you know, 3% concentration that we outlined a couple of quarters ago. So feel pretty good about that.
Yeah, yeah sure. So um, yeah. And I'd say as early as the dispositions, you know, kind of similar to our Acquisitions this quarter. Uh, the cap rate was a little bit better, uh, than what we've seen in the past. Uh, we did, uh, execute a number of pretty attractive dispositions, you know, sold off some Advanced Autos, kind of in the low 6 cap rate range, you know, got that concentration really where, where we're more comfortable, uh, you know, sold a CBS, you know, outside of Nashville at a 5 and a half cap. So uh, so you know really had a couple of, you know, cap rates to kind of drug that down a little bit and we're about done with what we need to sell with Walgreens. So we may need to sell another 1. Uh 1 or maybe 2 uh for the rest of the year to kind of get us below that 3, you know, 3%.
Mark Manheimer: But the the demand for dollar stores, which, you know, well, you know, I think that's really we still have a little bit of wood to chop. There's just a ton of demand from both 1031 buyers as well as institutional investors at pretty attractive cap rates. So every quarter since, you know, since inception, we've been able to accretively recycle capital. And I don't think that's going to be any different in the third and fourth quarter. I just don't think it's going to be quite as dramatic as it was.
Speaker Change: Concentration that we outlined a couple of quarters ago so I feel pretty good about that. Uh, but the the demand for dollar stores which you know, well, you know, I think that's really we we still have a little bit of wood chop. There's just a ton of demand from both 1031 buyers as well as institutional investors at pretty attractive. Cap rates. So uh every quarter since, you know, since Inception, we've been able to creatively uh, recycle capital, and I don't think that's going to be any different than the third and fourth quarter. I just don't think it's going to be quite as dramatic. As it was this quarter.
Haendel Juste: Great. Thank you and best of luck. Thanks, Haendel.
Speaker Change: Great. Uh thank you and best of luck.
Speaker Change: Thanks Andel.
John Kilichowski: The next question is from John Kilichowski from Wells Fargo. Please go ahead. Thank you. Good morning.
Speaker Change: The next question is from John kilichowski from Wells Fargo, please go ahead.
John Kilichowski: Kind of a follow-up to the first question, Mark, you answered this a little bit, and I'm not sure if you can give any more color here, but just as we think about, you know, in the second half of the year, you said IGE percentage is going to increase, and cap rates are going to tighten a little bit, and your increased investment guidance How much of your new investment guide has some sort of conservatism for the uncertainty about your access to equity capital? And maybe if the opportunity arises here in the near future for you to lock in more equity capital, where do you think that investment guide could go to?
John Kilichowski: Thank you, good morning. Um, just kind of a follow up to the the first question mark, you answered this a little bit and I'm not sure if you can give any more color here. But just as we think about
John Kilichowski: Um you know in the second half of the year you said IG percentage is going to increase and cap rates are going to tighten a little bit and your increase investment guidance.
Mark Manheimer: Or what do you think the opportunity set is for you all? Yeah, I mean, I think the opportunity set is pretty massive right now. You know, we're, the team is very excited to be able to start to really access the acquisitions market a little bit more than we have more recently. And yeah, I mean, I think right now with the team we have in place, the market as it sits today, deploying $150, $200 million, you know, net acquisitions each quarter, and around the cap rates that we've been at with a similar mix of product is certainly doable.
John Kilichowski: How much of your new investment guide has some sort of conservatism for the uncertainty about your access to equity capital and maybe if the opportunity arises here in the near future for you to lock in more Equity Capital where, where do you think that investment guide could go to? Or what do you think the opportunity set is for you all?
John Kilichowski: But we're going to continue to be mindful about where our equity is trading and our cost of capital. Got it.
Yeah, I mean I I think the opportunity set is pretty massive right now. Uh, you know, we're the team is very excited to be able to start to, you know, really assess the the Acquisitions Market, a little bit more than than we have uh more recently. And yeah, I mean I I think right now with the team we have in place, uh, the market as it sits today, deploying 150, 200 million dollars. You know net Acquisitions each quarter in and around the cap rates that we've been at with a similar mix of product is certainly doable. Uh, but we're going to continue to be mindful about where where our Equity is trading and our cost of capital.
John Kilichowski: And then maybe just on the debt line equation, I know we've discussed the potential for a ratings upgrade.
Dan Donlon: I'm curious if you've had any conversations with the rating agencies and what do you think the impact would be on your WAC and if that's considered at all in your guide? Yeah.
Got it and then maybe just on the uh on the death line of the equation. I know we discussed potential for a ratings upgrade. Um, curious if you've had any conversations with the rating agencies, and what do you think the impact, uh, would be on your whack? And if that's considered at all in your guide?
Dan Donlon: Hey, John, it's Dan. We don't have anything penciled into our guidance for this year if we were to receive a rating. We don't have a current rating, so there's nothing to upgrade. But certainly, if we were to get an investment-grade credit rating, that would allow us to then utilize a leverage toggle, which would then look to reduce, bring down our term loan debt by 20 basis points. And then we'd also get the credit service adjustment. That's another 10 basis points. So basically, all of our debt would come down by about 30 basis points.
John Kilichowski: As far as our conversations, we're going to start having those come later in the third quarter. And we're optimistic that we can reach a favorable outcome, but that's just where we are today. Yeah, very helpful. Thank you.
Dan Donlin: Yeah. Um, hey John, it's Dan. Uh, we don't have anything, you know, um, pencil into our guidance. Um, you know, for this year, if, if we were to receive a rating, we don't have a current rating. So there's nothing to to upgrade. But certainly, if we were to get an investment grade credit rating, um, that would allow us to then, um, utilize a leverage toggle, which would then, you know, look to reduce uh, what you know, bring down our term loan debt, by 20 basis points and then we'd also get the, the Credit Service adjustment. Um, that's another 10 basis points. So basically all of our debt would come down, um, by about 30 basis points. Um, as far as our conversations that we, we
Dan Donlin: We've uh we're going to start having those um come the later in the third quarter. And you know, we're optimistic that we can reach a favorable outcome but um you know that's just where we are today.
Speaker Change: Yeah, very helpful. Thank you.
Wes Golladay: The next question is from Wes Golladay from Baird, please go ahead. Hey, good morning, guys. Just looking at the balance sheet, you have about 58 million held for sale. Will this be all done, disposed of this year? And will this be the last of the heavy dispositions? Yeah, I mean, I think the we, you know, have a decent amount that we're still still doing. So I mean, the last few quarters have been pretty heavy. I think the third quarter will be pretty heavy. Again, we'll start to moderate a little bit in the fourth quarter, we can never guarantee that anybody that we're trying to sell a property to is actually going to close.
Speaker Change: The next question is from West gal from beard, please go ahead.
Mark Manheimer: So can't make any guarantees that that'll all be gone. But I'd say the lion's share of that should be gone.
Mark Manheimer: And then when you look towards next year, I would expect us our disposition pace to moderate, you know, more closely to what it was maybe two, three years Okay, when you look at the investment pipeline, is there a lot of loans in that? There are some, but it's really about enough to replace what's getting paid off. So it's not a massive amount.
Speaker Change: Yeah. I mean I I think the we you know have a decent amount of that, you know, that we're still uh still doing so I mean the last few quarters have been pretty heavy, I think the third quarter will be pretty heavy. Again, we'll start to moderate a little bit in the fourth quarter. Uh we can never guarantee that anybody that we're trying to sell a property to is actually going to close. So uh can't make it guarantees that that'll all be gone. Uh, but I'd say the line share of that of that should should be gone. And then when you look towards next year, I would expect a a disposition Pace to to moderate, you know, more closely to what it was maybe 2 3 years ago.
okay, when you look at the uh the investment pipeline is there a lot of loans in that
Wes Golladay: Okay, just one more Big Lots question. I know you love these. Do you have an update on the vacant lease? Yeah, I mean, we've progressed pretty far along, we're negotiating, you know, really with two, but there are three LOIs where we're still kind of going back and forth with the two of the two more likely operators are national tenants, investment grade tenants, they're both willing to pay more rent than than what big lots was. So they need to get through their investment committee, and kind of get through their their process of what they need to actually do to the to the box to make it ready for them to move in.
Speaker Change: Uh, there there are some uh, but it's really, you know about enough to replace what's getting paid off. So it's not not a massive amount.
Speaker Change: Okay. And yeah just 1 more Big Lots question, I know you love these. Um do you have an update on the vacant lease?
Mark Manheimer: So I do, I would expect us to have an LOI signed this quarter, before the next earnings call. But then, by the time that they come in and start paying rent will likely be early next year.
Speaker Change: Yeah, I mean, we we we've progressed pretty far along. We're negotiating, you know, really with 2, but there are 3, uh, Louis where we're still kind of going back and forth with uh, those 2 of the, the 2 more likely, uh, operators or national tenants investment grade, uh, tenants. They're both willing to pay more rent than than what Big Lots was. So, uh, they need to get through their investment committee, uh, and kind of get through their, their process of what they need to actually do to the, to the box to make it ready for them to, to move in. Um, so I do, I would expect us to have an Loi signed, uh, this quarter, uh, before the next earnings call. Um, but then
Wes Golladay: Okay thanks for the time everyone. Thanks Wes.
Uh, by the time that they come in and start paying rent, will likely be early next year.
Speaker Change: Okay, thanks for the time, everyone.
Speaker Change: Thanks Wes.
Speaker Change: Thanks Wes.
Greg Mcginniss: The next question is from Greg McGinniss from Scotiabank. Please go ahead.
Speaker Change: The next question is from Greg. McInnis from Scotia Bank. Please go ahead.
Elmer Chang: Hi, this is Elmer Chang. I'm with DREG. You mentioned seeing made 7% cap rates for national security. Risk-Adjusted Returns. Are you just facing pricing power challenges, given investment grade sellers may have been aware that your high cost of equity at the start of the year was restricting maybe healthier investment spreads? Or are there any other trends driving the ad rates? and Nate Shelton, for seven.
Hi, this is Elmer Jane. I'm with Greg, uh, you mentioned seeing
Speaker Change: Uh, made 7% cap rate for Investments with the best risk adjusted returns are you just facing pricing power challenges, given investment rates, sellers may have been aware that your your high cost of equity at the start of the year was restricting. Uh, maybe healthier investment, spreads or are there many other Trends uh, trying to access for investment grade? 10 about that. That need some level.
Mark Manheimer: You know, Elmer, I mean, I would say, unfortunately, we don't control what the market bears and what we can really buy properties for. We can negotiate our end, but we need to have a willing seller. And really, what we've seen on the investment grade side is unless you're willing to, you know, take on, you know, co-tenancy and other types of risks that we're not willing to really put into the portfolio, the cap rates just haven't moved up enough for us to really feel like we're getting paid a strong enough risk-adjusted return on most investment-grade opportunities, which is why you've seen other opportunities get through our filter, you know, where we've got, you know, larger operators, very good credits, and very strong unit-level coverage, whereas the investment-grade side, you know, we're just not going to go out and pay, you know, like, you know, like I mentioned, we sold a CVS at a five-and-a-half cap.
Yeah, Elmer I I I mean, I would say, unfortunately, we don't control, uh, what the market bears, and what we can really buy properties for, we can negotiate our end, but we need to have a willing seller. And really what we've seen on the investment grade side is unless you're willing to, you know, take on, you know, code tenancy. And and other types of risks that we're not willing to to really put into the portfolio. The cap rates just haven't moved up enough. Uh for us to really feel like we're getting paid, uh a strong enough risk adjusted return on most investment grade opportunities, which is why you've seen other opportunities get through our filter. Uh, you know, where we've got, you know, larger operators, a very good credits and, and, and very strong.
Mark Manheimer: We're not going to go buy, you know, CVSs anywhere around that type of cap rate, nor are we buying pharmacies. But yeah, I mean, I think it's really been the market has bared, you know, higher cap rates for non-investment-grade tenants and getting better risk-adjusted returns than you are for the investment-grade tenants in most cases. We are seeing, you know, a number of, you know, opportunities still get, you know, that we're able to source, and I think they're maybe not marketed quite as effectively. And so we get, you know, pretty good pricing on a handful of those deals.
Elmer Chang: But to really be able to scale investment-grade acquisitions at cap rates that make sense right now, I Okay, thanks for that.
Speaker Change: Strong unit level coverage. Uh, whereas the investment grade side, you know, we're just not going to go out and pay, you know, like you know like I mentioned we sold a CVS at a 5 and a half Gap. We're not going to go buy, you know, CVS's, anywhere around that type of cap rate, nor are we buying pharmacies? But uh, but yeah, I mean, I think it's really been the market has bared, uh, you know, higher cap rates for non-investment, grade tenants, uh, and getting better risk, adjusted returns than you are for the for the investment grade. Tenants in most cases, we, you are seeing, you know, a number of, you know, opportunities, still get, you know, that we're able to source and I think they're, uh, maybe not marketed, uh, quite as quite as effectively. Uh, and so we get, you know, pretty good pricing on, on a handful of those deals, but to to really be able to scale investment grade. Acquisitions at cap rates that make sense right now, I, I don't think is, is really achievable
Elmer Chang: Given you've had no major events to date, what are you now assuming for bad debt expense for the rest of the year since, you know, while you increase the investment guidance and the AFO range, but, you know, you expect less creation? based their comments for cap rates for the rest of the year.
Speaker Change: Okay, thanks for that.
Speaker Change: And I'm giving you, you had no major experience events to make order you now assuming for a bad bad debt expense for the rest of the year since, you know, why you increased and investment guidance and the XFL range. Uh, but you know, you you expect less crashing. Um,
Speaker Change: It, it's your comments for for a cat rates.
Speaker Change: The rest of the year.
Dan Donlon: Hey, Elmer, it's Dan. I think I caught most of your question. You're breaking up a little bit.
Dan Donlon: But as we stated in prepared remarks, we're assuming about 25 basis points of credit loss between here and year-end at the midpoint of the range. Okay, thank you.
Speaker Change: Hey Elmer it's Dana. I I think I caught most of your your, uh, question. You're breaking up a little bit. Um, but you know, as we stated in uh, prepare remarks. We're, we're assuming about 25 basis points of credit loss, between here and your end. Um, at the midpoint of the range.
Speaker Change: Okay, thank you.
Michael Goldsmith: The next question is from Michael Goldsmith from UBS. Please go ahead. Good morning. Thanks a lot for taking my question. It's clear you're feeling more comfortable with issuing equity at the ATM. Is that contingent of you buying at the cap, you know, these elevated cap rates in the last couple of quarters in the 7778 range? And, you know, as, you know, as you move into more ID stuff, presumably the cap rates will come down on a blended basis. So just trying to understand, you know, what spread you're comfortable issuing and acquiring. Yeah, hey, Michael, you know, we've always said that, you know, we would be comfortable issuing equity, you know, if we were north of 100 basis points of spread relative to our WAC.
The next question is from Michael Goldsmith from UBS. Please go ahead.
Speaker Change: Engine, you know, a as uh, you know, as you move into more IG stuff, like presumably, the cap rates will come down, uh, on a blended basis. So just try to understand, you know what, spread your your comfortable issuing and acquiring
Dan Donlon: You know, as we sit here today, and you think about a 7.5% cap rate, you know, in the back half of the year, maybe 7.4, when you think about our AFFO yield using our run rate AFFO coming out of the second quarter, and then looking at 5.5 year to 7 year term loans as the debt source there, you know, we can source transactions about 150 to 160 basis points wide of what we think our WAC is at the current moment.
Yeah, hey Michael, you know, we've always said that, you know, we would be comfortable issuing Equity. You know, if we were north of, a 100 basis points of a spread relative to to our wac, you know, as we sit here today and you think about a 7 and a half percent cap rate, you know, in the back half of the year, maybe 74. Um, when you think about Rao using our run rate afo coming out of the, the, the second quarter. And then looking at 5 and a half year to 7 year term loans that's as the debt Source there. You know, we can Source transactions about 150 to 160 basis points wide. Um, of what we think our wac is at, at the current moment.
Dan Donlon: Got it. Thanks for that, Dan. And my follow-up question is, based into the guidance, obviously, you've been able to require more on a net basis, but are there any mitigating factors that are contemplated within the guidance? Are you taking into account the Treasury stock solution, just given some of these issuances, and just trying to understand the moving pieces within the outlook? Yeah, at the midpoint, I mean, that's the mitigating item that we mentioned at the midpoint, we're assuming a little bit less than than a penny of dilution from the Treasury stock method. Obviously, we have no idea, you know, where the stock's going to go.
Michael: Got it. Thanks for that, Dan. And and my follow-up question, is baked into the guidance of obviously, you've been able to acquire more on a, a net basis. But are there any mitigating factors that that are contemplated within the guidance? You know, are you taking into account the treasury stock solution just give given uh, given some of these issues and um just just trying to get understand kind of like the moving pieces within the within the Outlook. Thanks.
Dan Donlon: But, you know, we assumed a pretty healthy movement even from current levels to justify our guidance range. So we feel eminently comfortable. We've been conservative on that front.
Yeah, at the midpoint. I mean, that's, that's the, the mitigating item that we mentioned at, at the midpoint, we're assuming a little bit less than than a penny of dilution from the treasury stock method. Obviously, we have no idea, you know, where the Stock's going to go. But, um, you know, we assumed a pretty healthy movement, even from current levels, um, to to, uh, to justify our our, our guidance range. So we feel Emily comfortable. We've been conservative on that front.
Michael Goldsmith: Thank you very much. Good luck in the back half.
Thank you very much. Good luck in the back half.
Michael: Thank you.
Michael Gorman: The next question is from Michael Gorman from BTIG. Please go ahead. Yeah, thanks. Good morning.
Speaker Change: This question is from Michael Gorman from btig. Please go ahead.
Michael Gorman: I was wondering if you could just talk a little bit more about competition in the deal market. We've seen some new entrants, I would say, from non-traditional net lease investors. And I understand it's a deep liquid market, but I'm just curious if you started to bump into any of these new buyers in the marketplace or kind of where you're seeing them show up as you look at the deal pipeline and future transactions. Yeah, thanks, Michael. Yeah, I mean, good question. We've certainly heard a lot about some, you know, some new entrants are aware of, you know, some capital that, you know, has been deployed by a number of them.
Speaker Change: Yeah. Thanks, good morning. Um, I was wondering if you could just talk a little bit more about competition in the deal market. We've seen some new entrance. I would say from non-traditional at least investors and I understand it's a deep liquid Market, but I'm I'm just curious if you started to bump into any of these new buyers in the marketplace or um, kind of where you're seeing them show up, as you look at the deal Pipeline and future transactions.
Mark Manheimer: But we just really have not run into them at all on the acquisition side. And so, you know, I think most, most of the deals that we're looking at are pretty small, you know, bite sized deals or their relationship deals, where really, the only negotiating that we're doing is, you know, with the tenant and them, you know, or the tenant and the seller, trying to figure out, you know, where they're willing to, you know, to part with their property with their properties. And less so in getting ourselves in bidding wars, anytime we see those opportunities, you know, we, you know, we'll come in and we'll bid, but you know, we're not really interested in paying the top price for our deals, we want to get the best risk adjusted returns.
Speaker Change: Yeah, thanks Michael. Uh, yeah, I mean, good question. Uh, We've certainly heard a lot about some, uh, you know, some new entrance or aware of, you know, some Capital that, you know, has been deployed, uh, by a number of them. Um, but we just really have not run into them at all. Um, the acquisition side and so, uh, you know, I think most most of the deals that we're looking at are pretty small. Um, you know, by size deals or their relationship deals, where really the only negotiating?
Michael Gorman: And, and from our perspective, the largely marketed deals, you know, typically don't, don't really yield those, those opportunities too well. And so, you know, I'm pretty aware of a number of the new entrants, and I think their strategies don't really line up, you know, too much with ours. So I'd be surprised if we, you know, run into them very frequently, I'm sure there will be a situation here or there where we see them, but I don't think it's gonna have much impact on our capital deployment. That's helpful. Thanks.
Speaker Change: That we're doing is, you know, with the tenant and them, you know, or the tenant and the seller, trying to figure out, you know, where they're willing to, you know, to, to part with their, with their properties, um, and less. So, in a getting ourselves in bidding wars, anytime we see those opportunities, you know, we, you know, we'll come in and we'll bid. But yeah, we're not really interested in in paying the, the top price for our deals. We want to get the best risk adjusted returns. And, and from our perspective, the largely marketed deals, you know, typically don't, don't really yield those, those opportunities to well, um, and and so, you know, I'm, I'm pretty aware of a number of the new entrance and I think their strategies don't really line up, you know, too much with ours. So, uh, I'd be surprised if we, you know, run into them very frequently. I'm sure there will be a situation here or there where we see them, but, uh, I don't think it's going to have much impact on our on our Capital deployment.
Mark Manheimer: And maybe just one more on the competition side, and maybe a little off the wall here. But given the supply demand dynamics in retail kind of broadly, Are you starting, are you coming across more user bidders or owner occupants in the marketplace, either looking at properties previously sold? Or is it more competition in terms of looking at the sale leasebacks, that they want more control over their properties or to keep control of their properties in a supply constrained environment? Yeah, we have not really seen that, you know, quite yet.
Speaker Change: that that's helpful, thanks, and maybe just 1 more on the competition side and maybe a little off the wall here, but given the supply demand Dynamics in retail kind of broadly,
Are are you starting? Are you coming across more user uh bidders or owner occupants in the marketplace? Either looking at properties, previously, sold or is it more competition in terms of looking at the sale lease backs, um, that they want more control over their properties or to keep control of their properties in a supply constraint environment.
Mark Manheimer: But you know, I think that's something to potentially keep an eye on.
Speaker Change: Yeah, we we have not really seen that, you know, quite yet. But, you know, I think that's something to to potentially keep an eye on
Linda Tsai: Okay, great, thanks for the time. Thank you.
Speaker Change: Okay, great. Thanks for the time.
Speaker Change: Thank you.
Linda Tsai: The next question is from Linda Tsai from Jeffries. Please go ahead. Hi.
Speaker Change: The next question is from Linda, Tsai from Jeffrey's. Please go ahead.
Linda Tsai: With your cost of capital having improved, what verticals or investments are you considering now that you couldn't have before? And then how would investment spreads trend as a result? Yeah, Linda, I don't think really much is going to change at all in terms of what we're looking at, you know, I think if we were to deploy a lot more capital than we are right now, which isn't necessarily the plan in the near term, I think just maybe the filter kind of opens up a little bit more, where we're going to acquiesce a little bit more in pricing, which is why I think our 7.8 could come down to a 7.4, 7.5, if we want to deploy more capital, but I would expect, you know, for us to continue to buy similar types of products, that we have over the past five years.
Speaker Change: Couldn't have before. And then how would investment spreads Trend as a result.
Speaker Change: Maybe the filter kind of opens up a little bit more, uh, where we're going, you know, acquis a little bit more in pricing, which is why I think our 78 could come down to a 7475. Uh, if we wanted to deploy more Capital, but I, I would expect, you know, for us to continue to buy similar types of product, uh, that we have over the past 5 years.
Mark Manheimer: And then, can you give us some general color on dynamics in the CSTOR space, and does your pipeline have more of these? Yeah, I mean, the C-Star space is, you know, an attractive industry for us. Obviously, you've got, you know, two large profit drivers, you know, coming from the gas pumps as well as the, you know, the inside sales of the store. And you know, we've got really good relationships, you know, in that space. I mean, I know I've been doing, you know, convenience store deals for, you know, I guess going on 20 years, so pretty aware of who's in the space and who the operators are as well as our team has done a great job of going out and finding some of these opportunities and building relationships with some operators.
Speaker Change: And then, can you give us some general?
Speaker Change: Of these.
Mark Manheimer: You know, we'll continue to look for those. We did a few of them this quarter. We may do one this quarter, but I, you know, I think it's less likely that we're going to do as many as we did, you know, in the second quarter as in the third.
Dan Donlon: One last one for Dan. What do you expect G&A as a percentage of revenues to be at the end of next year? No, I think it should continue to trend down.
Uh, yeah. I mean, the, the core space is, you know, an attractive, uh, industry for us. Obviously, you've got, you know, 2, uh, large profit drivers. You know, coming coming from the guest bumps as well as the, you know, the inside sales of, of the store. Uh, and you know, we we've got really good relationships, you know, in that space. I mean, I know I've been doing, you know, convenience store deals for, you know, I guess going on 20 years. Uh, so pretty aware of who's in the space and, and, and who The Operators are as well as our team has done a great job of going out and finding some of these opportunities. And, and building relationships with some operators. Uh, you know, we'll continue to look for those. We did a few of them, this quarter, we may do 1 this quarter, uh, but I, you know, I think it's less likely that we're going to do as many as we did. Uh, you know, in the second quarter as in the third
Dan Donlin: Just 1 last 1 for Dan. Um what do you expect GNA is a percentage of revenues to be at the end of next year? Similar to this year.
Dan Donlon: And I don't have the model pulled up. I definitely think when you think about the year over year growth, it should slow dramatically next year versus this year. Just given that we, you know, we had a lot of hiring to do this year and into the back half of last year. And that hiring pace should moderate considerably as we look out to 2026. So I don't know what that would impute necessarily on a percentage basis, but it's certainly going to be lower as a percentage of revenues next year. And again, the year over year growth rate should be down considerably versus what it was this year.
Dan Donlin: No, I think it should continue to Trend down and I don't have the model pulled up. Um I definitely think when you think about the year-over-year growth it should slow dramatically next year versus this year. Just given that we, you know, we had a lot of hiring to do, um, this year and into the back half of of last year. Um, and that hiring patient, moderate considerably, um, as we look out to 2026. So, um, I don't know what that would impute necessarily on a a percentage basis but it's certainly going to be lower as a percentage of revenues next year. And again the year-over-year growth rate should be, you know, down considerably versus what it was this year.
Dan Donlin: Thank you.
Smedes Rose: The next question is from Smedes Rose from Citi. Please go ahead. Hi, thanks. I just wanted to ask a quick question. You talked about 25 bps of rent loss embedded through the back half of the year. And so what what is it now for the full year, I guess? I think you I think you had said last quarter was 75 bps baked into full year or? Yeah, so last quarter, we said our guidance is based on 75 basis points of credit loss, I guess, for the full year. I mean, this, this 25 basis points of credit losses for the full year as well.
Smith Rose: The next question is from Smith Rose from City. Please go ahead.
Hi, thanks. Um, I just wanted to, um, ask, uh, a quick question you talked about, um, 25 bits of, uh,
Uh, rent Los embedded through the back half of the year. Um, so, and so, what, what is it now for, for the full year? I guess, I think you, I think you had said last, uh, quarter, it was 75 bits back into full year or
Smedes Rose: It's just that, you know, half the year is over. So Okay, okay, sorry. Okay.
Smith Rose: Yeah, so last quarter, we set our guidance was based on 75 basis points of credit loss, I guess for for the full year. I mean this this 25 basis points of credit losses for the full year as well. Um, it's just that, you know, half the year is over. So,
Dan Donlon: And then I just wanted to ask you, would it be your expectations to settle much of this forward equity by year end? Or are you in a position now where you can start to kind of I guess get ready with dry powder for next year as well. Yeah, I mean, when we think about our leverage, we always incorporate the Ford. And so at 4.6 times today, we feel good about our leverage. We don't really have to, we don't have to do anything, you know, to hit the high end of guidance at 175. We'd still end the year about 4.9 times.
Smith Rose: Okay. Okay sorry, okay. Um and then I just wanted to ask you and you were would it be your expectations um to settle the much of this forward Equity um by year end or are you in a position now where you can start to
Smith Rose: kind of, um,
Smith Rose: you know, get I guess, get ready with dry powder for next year as well.
Dan Donlon: Obviously, we've shown a propensity to raise ATM equity in and around current levels. But as far as selling the Ford, it just really depends on, you know, if we raise additional capital, but you know, the governor for us is kind of we need to maintain our debt to gross assets below 35% to get the most attractive pricing off of our term loans and credit facilities. So that's really what governs our decision to pull down the equity. So I think you'll probably see a little bit in the third and you should see a healthy chunk into the fourth quarter as well.
Smith Rose: Yeah, I mean, when we think about our leverage, we, we always incorporate the Ford. And so I at 4.6 times today, we feel good about our leverage. Um, we don't really have to, we don't have to do anything, you know, to, to, to hit the high end of guidance at 175. We'd still end the year about 4.9 times. Um, obviously, we've shown a propensity to to raise ATM equity in and around current levels. Um, but as far as settling the Ford it, it just really depends on, um, you know, if we raise additional Capital, but, you know, the governor for us is kind of, we need to maintain our debt to gross assets below 35% to get the most attractive, um, pricing off of our term loans and credit facilities. So um, that's really what governs our decision to to, to pull down the equity. So I, I think you'll probably see a little bit in the third and you should see a healthy Chunk in into the fourth quarter as well.
Dan Guglielmo: Okay, great. I appreciate it. Thank you.
Speaker Change: Okay, great. Appreciate it. Thank you.
Daniel Guglielmo: The next question is from Daniel Guglielmo from Capital One Securities. Please go ahead. Hi, everyone. Thank you for taking my questions.
Daniel Google: The next question is from Daniel Google from Capital 1's. Please go ahead.
Daniel Guglielmo: I think it was in the 4Q call where we had talked about increased population growth in the Sun Belt and elevated opportunities there, but that you all don't have a specific regional focus. Has there been any changes to that view or population trends you're watching? And then are there regions that are more attractive in the second half? Yeah, I would say it really hasn't changed very much at all. You're still kind of seeing population growth in the in the same areas, which is where retailers are going to continue to try to grow. So you're going to see more opportunities there on the development side, as well as the sales spec side.
Speaker Change: Hi everyone. Thank you for taking my questions. I, I think it was in the 4q call where we had talked about increased population growth in the Sun Belt and elevated opportunities there. But that you all don't have a specific Regional Focus. Has there been any changes to that view or or population Trends you're watching? And then are there regions that are more attractive in the second half?
Daniel Guglielmo: So I don't think that has really changed much since since fourth quarter last year. Okay, thank you. I appreciate that.
Speaker Change: Yeah, man. I, I would say it really hasn't changed very much at all. Uh, you're still kind of seeing population growth in the, in, in the same areas, uh, which is where retailers are going to continue to try to grow. So, you're going to see more opportunities there on the development side as well as the salesy spec side. So, uh, I don't think that has really changed much since, uh, since fourth quarter last year,
Mark Manheimer: And then year over year, average hourly earnings has continued to increase across the country. When you talk with tenants and then think about your investments, has the spending and revenue been able to keep pace with some of like the labor and technology costs, or has it become an increased kind of topic of conversation when you're talking with them and thinking through the investment? Yeah, no, I don't know if it's really been an increased topic of conversation with people. I mean, there are challenges in some industries as it relates to labor costs. Yeah, more specifically, restaurants and some others where, you know, just the labor line item has become more expensive and has squeezed profitability a little bit.
Speaker Change: Um, year-over-year average, our earnings has continued to increase across the country. When you talk with tenants and then think about your Investments, has the spending and revenue, been able to keep Pace with some of like the labor and Technology costs. Um, or or has it become an increased, kind of topic of conversation, when, when you're talking with them and thinking through the Investments,
Mark Manheimer: And then you've, of course, seen inflation last year, you know, kind of squeezed margins a little bit for some operators, but that's really moderated quite a bit. And yeah, most of the retailers that we're talking to maybe are kind of curious to see what happens with tariffs, but there really hasn't been much of an impact from that yet. So most retailers that we've spoken to are feeling pretty bullish and are really more in growth mode than they were, you know, maybe this time last quarter. Great, thank you, appreciate it.
Speaker Change: Ya know I I don't know if it's really been an increased topic of conversation with people. I mean I there there are challenges in some Industries as it relates to labor costs. Uh, yeah. More specifically restaurants and some others where, you know, just the the labor line item has become more expensive and has squeezed profitability a little bit and then you've, of course, seen uh, inflation last year, uh, you know, kind of squeeze margins a little bit for some operators, but that's really a moderated quite a bit. Uh, and, you know, most most of the retailers that we're feeling, you know, talking to, uh, maybe, you know, kind of curious to see what happens with, uh, with tariffs. But there really hasn't been much of an impact from that yet. So, uh, most retailers that we've spoken to or feeling pretty bullish and, and are really, uh, more in growth mode than they were, you know, maybe this time last quarter,
Speaker Change: Great. Thank you. Appreciate it.
Upal Rana: The next question is from Upal Rana from KeyBank Capital Markets. Please go ahead. Great, thanks for taking my question.
Upal Rana: The next question is from upal Rana from keybanc Capital markets. Please go ahead.
Upal Rana: With the net investment activity accelerating and that you expect cap rates to trend lower to the mid 7% range, are there any changes you would point out on lease economics in terms of wall escalators or rents that we should expect? No, I mean, you know, we had pretty attractive, you know, terms this quarter, you know, with longer lease terms, I think you can expect something, you know, something similar to that. Maybe not quite as long in the third quarter. You know, a lot of what we're looking to do in the third quarter is going to be on the sale-leaseback side and even with the on the non-sale-leaseback side, still pretty long lease terms with attractive rent escalators.
Upal Rana: Great. Thanks for taking my question, you know, with the net investment activity accelerating and and that you expect cap rates to Trend lower to the mid 7% range. Are there any changes you would point out on lease economics in terms of Walt escalators or rents that that we should expect?
Mark Manheimer: It's been a focus of ours over the past, you know, call it year, year and a half to really improve the internal growth in the portfolio. And, you know, that continues to be the case. And I don't think you'll see, you know, much change as we kind of moderate closer to what we were doing, you know, previous to the second quarter at, you know, 7.4, 7.5. But I think it's, you know, I feel pretty good about the opportunity set and what we're looking at right now. Okay, great.
No, I mean, you know, we had pretty attractive, you know, in terms of this quarter, you know, with longer lease terms, I think you can expect something, you know, something similar to that. Uh maybe not quite as long uh, in the third quarter. Uh you know, a lot of what we're looking to do in the third quarter is going to be on the sell lease back side and even with the on the non-selling spec side, still pretty long lease terms with with attractive, uh, rent escalators. It's been a a focus of ours over the past, you know, call it year year and a half uh, to really improve the internal growth in the portfolio and you know, that that continues to be the case. And I don't think you'll see you know, much change as we uh, kind of moderate closer to what we were doing, you know, previous to the second quarter at, you know, 7475 um but I think it's, you know, you know, feel pretty good about the opportunity set and and what we're looking at right now,
Mark Manheimer: That was helpful. And then, you know, I want to get your sense on what the appetite is from buyers for Walgreens today. You mentioned you wanted to sell maybe one or two by year end to reach that 3% ABR. But, you know, has demand for pharmacy changed in any way in recent months? You know, I know you did sell that one CVS for five and a half cap. Yeah, sure. I mean, I think CVS and Walgreens may be a little bit different. You know, Walgreens, there's just, there just isn't a lot of clarity to, to the, to the buyer environment, as to what the balance sheet is going to look like with Walgreens.
Speaker Change: Okay, great. That was helpful. And then uh, you know, I want to get your sense on what the appetite is. Uh from buyers for Walgreens today, you mentioned you wanted to sell maybe 1 or 2 by year end to reach that 3%, APR, but you know, has demand for pharmacy changed in any way in recent months, you know, I know you did sell that 1 uh, CVS for 5 and a half cap.
Mark Manheimer: I think we've got some insight there, that it's not going to be a very leveraged balance sheet. So I think once that information comes out, which, you know, presumably, the transaction should close in December, at least that's the it does provide for financial reporting. So people will start to see that they didn't lever up the balance sheet. And so I think that's going to be a big positive, you know, come early next year, when people people start to see that.
Mark Manheimer: So I think until that happens, it's, you know, a little bit more challenging to sell those assets, which is why we're pretty happy that we got out ahead of a lot of that and really sold that exposure down to three and a half percent as it sits today, and only needing to sell, you know, one, maybe two, to get to below that 3%. And I think we should be able to have, you know, little trouble finding a 1031 buyer for, you know, one or two of the assets, that'll get comfortable that they're not closing the store and that, you know, it's a good location.
Speaker Change: Yeah, sure. I mean, I think CVS and Walgreens may be a little bit different. Um, you know, Walgreens there's just there just isn't a lot of clarity to to the um, to the buyer environment. Uh as to what the balance sheet is going to look like with Walgreens. I think we've got some insight uh their uh that it's not going to be a very leveraged balance sheet. So I think once that information comes out which, you know, presumably the transactions should close in December or at least that's the schedule today. Uh, in the leases it does, you know. Um it does provide for financial reporting so people will start to see that they didn't lever up the balance sheet and so I think that's going to be uh a big positive, you know, come early next year, when people people start to see that. Uh so I think until that happens it's you know a little bit more challenging to to sell those assets which is why we're pretty happy that we got out ahead of a lot of that. And and and really sold that exposure down uh to 3 and a half percent as it sits today. Uh and only needing to sell, you know 1, maybe 2 uh to get the below below that.
Mark Manheimer: Fortunately, our rents at $19 a foot, you know, well inside the average of what you see with, you know, with Walgreens and CVS for that matter. So that allows, you know, other people to get comfortable that even if they ever do have to take the box back that they're, you know, that they can replace the rent and there are other things that they can do with the assets.
Mark Manheimer: There has been, we've had a lot of inbound demand from retailers and developers interested in our sites, but the problem is we can't get Walgreens out. So, you know, I guess maybe a good problem to have, but I think our downside protection on the Walgreens is actually pretty good with, you know, with cheaper rents and really good real estate. And so whether that be a convenience store operator or kind of the auto services, hub stores, or there's just a lot of, you know, different operators that are interested in those stores at or above the rents that we currently have.
Mark Manheimer: But it's, you know, I think, you know, we're just likely going to only sell one or two more and likely just keep, you know, continue, you know, collecting rent from Walgreens over the next 10 plus years.
Speaker Change: 3% and I, I think we should be able to have, you know, little trouble finding a 1031 buyer uh for you know, 1 or 2 of the assets, uh, that'll get comfortable that they're not closing the store and that, you know, uh, it's a good location. Fortunately, our rents at $19 a foot, you know. Well inside the average of what you see with uh, you know with Walgreens and CVS for that matter. So uh that allows, you know, other people to get comfortable that even if they ever do have to take the box back that they're, you know, that they can replace the rent. And there are other things that they can do with the assets. There has been, we've had a lot of inbound, uh, demand from retailers and developers interested in our sights, but the problem is, we can't get Walgreens out. So, uh, you know, I guess maybe a good problem to have, but I think our downside protection, uh, on the Walgreens is actually pretty good with, you know, with cheaper rents and really good real estate. Um, and so whether that be a convenience store, operator or kind of the auto services Hub Source, or there's just a lot of, you know, different operators that are interested in those stores at or above the rents that we currently have.
Speaker Change: Um, but it's, you know, I, I think, you know, we're just likely going to only sell 1 or 2 more and, uh, likely just keep you know, continue, you know, you know, collecting a rent from Walgreens over the next 10 plus years.
Mark Manheimer: Okay, great. That was lovely.
Mark Manheimer: Thank you.
Speaker Change: Thank you.
Jana Galan: The next question is from Jana Galan from Bank of America. Please go ahead. Thank you. Good morning and congrats on a great quarter. Just a quick one, looking at the 1.2% of ABR expiring in 2026, and granted it's very small, but can you remind us of how early renewal discussions start and when do you typically get notice of a tenant's decision? Yeah, I mean, each lease is a little bit different. But typically, it's about six months at a time that you'll have to tell you whether they're leaving or staying. But you know, we're somewhat proactive, especially if we have a reason to be talking to a tenant about other locations, we usually try to loop those, you know, conversations in, you know, it's, you know, typically not a great idea to reach out to tenants, you know, a year or two out, you know, without having another reason to talk to them.
Speaker Change: The next question is from Jana Galan from Bank of America. Please go ahead.
Jana Galan: Thank you. Good morning, and congrats on a great quarter. Just a quick 1, looking at the um, 1.2% of ABR expiring in 2026 and granted. It's very small. But um, can you remind us of how early renewal discussions start? And when do you typically get notice of a tenant's decision?
Mark Manheimer: Otherwise, that you kind of start to lose some leverage in that in that negotiation, if there is one. But yeah, I mean, we feel very comfortable with what's expiring in 2026, we think we'll have, you know, you know, very close to if not all of those renew at their option. Great. Thank you.
Yeah, I mean, each lease is a little bit different, but typically it's about 6 months, uh, at a time that you'll, you'll lot to tell you whether they're leaving or, or, or staying. Um, but you know, we're somewhat proactive, especially if we have a reason to be talking to a tenant about other locations. We usually try to Loop those, you know, conversations in, um, you know, if you, you know, typically not a great idea to, to reach out to tenants, you know, a year or 2 out, uh, you know, without having another reason to talk to them otherwise that you kind of start to lose some leverage in that, in that negotiation, if there is 1. Um, but yeah, I mean, I we feel very comfortable with what's expiring in 2026. We think we'll have, you know, if you know, very close to if not all of those, uh, Renew at their option, right?
Great. Thank you.
Speaker Change: Thank you, honor.
Operator: There are no further questions at this time.
Mark Manheimer: I would like to turn the floor back over to Mark Manheimer for closing. Thanks everybody for your interest in the call today and in the company and we look forward to continuing the dialogue here in the near future.
Speaker Change: There are no further questions at this time. I would like to turn the floor back over to mark mannheimer for a closing comments.
Mark Mannheimer: Well, thanks everybody for your interest. Uh, you know, on the call today and in the company. And we look forward to continuing the dialogue here, in the, in the near future.
Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.