Broadstone Net Lease, Inc.

Hello and welcome to Broadstone Net Leases 4th quarter 2024 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 Maidle, Director of Corporate Finance and Investor Relations at Broadstone. Please go ahead.

Thank you, everyone, for joining us today for Broadstone Net Leases 4th quarter 2024 earnings call. On today's call, you will hear prepared remarks from Chief Executive Officer John Marana, President and Chief Operating Officer Ryan Albano, and Chief Financial Officer Kevin Fennel. 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. We caution you not to place under reliance on these forward looking statements and refer you to our SEC filings, including our Form 10K for the year, and the December 31st, 2024, for a more detailed discussion of the risk factors that may cause such differences. Any forward looking statements provided during this call are only made as of date of this call. With that, I'll turn the call over to John.

Thank you, Brent. And good afternoon, everyone. I am extremely proud of our 2024 results, achieving $1.43 of AFFO per share at the top end of our guidance range with a portfolio that is more than 99% leased and with more than 99% rent collection and executing on over $400 million in total investments, while substantially completing our clinical health care portfolio simplification strategy. But before I dive further into our 2024 results and plans for 2025, I want to take a moment to thank Shekhar Narasimhan and Denise Brooks Williams for their dedicated service to B&L during their respective tenures on our board of directors. As we announced on Tuesday, they will not be standing for reelection to the board at our annual meeting in May. Shekhar has been a member of the board since the company's inception in October of 2007, and Denise has been a member of the board since May of 2021. We are incredibly grateful for their years of service to the company and their contributions to our success, particularly in the last several years post IPO, as we have worked to reposition B&L and put this company on its current path to generating consistent and attractive long term shareholder value. As also announced on Tuesday, I am delighted to welcome Rick Imperiali and Joe Safire to B&L's board of directors. Rick's extensive experience managing investments and REITs and alternative asset strategies at Uniplan Investment Council, as well as his previous service as a director for multiple publicly traded REITs, will provide invaluable insight to the board. Further, the board will benefit greatly from the insights and experience Joe acquired during his accomplished tenure as the chief executive officer of life storage. Rick's and Joe's appointments represent the next step in the evolution of B&L's board as we continue to implement our differentiated investment strategy built upon our core building blocks of growth. Turning to our 2024 results, we had a solid year all the way around, including generating $1.43 of AFO per share, representing .4% increase compared to 2023, which I believe is a fantastic achievement considering the substantial portfolio repositioning we undertook last year to our clinical health care portfolio simplification strategy, which could have resulted in negative to neutral AFO per share growth, as is the case with most portfolio repositioning efforts. When considered in that light, .4% growth is a home run. As of December 31st, we have substantially completed our simplification strategy, reducing our clinical and surgical assets to .2% of our ABR from .7% at the end of 2023. As a result, we updated our core property types to industrial, retail, including restaurants and med tail assets, and other to realign our portfolio reporting and emphasize our core growth property types. With the success we achieved on this front in 2024, we are now turning our focus towards our long term growth strategy. I do not intend to emphasize our continued efforts with respect to our remaining clinical assets, some of which could find a more permanent home in our portfolio if we do not believe proper value can be achieved in the dispositions market. Turning to our 2025 plans and strategy for growth, we have ambitious goals for the year and intend to meet or exceed them, positioning B&L for even better growth in 2026 and beyond. As a reminder, our differentiated strategy as an industrial focused, diversified net lease reef is driven by our four core building blocks. First, solid in-place portfolio performance anchored by 2% weighted average annual rent escalation. Second, revenue generating capex with our existing tenants, which helps our tenants grow their businesses and improve the quality of our portfolio while providing better than market returns. Third, and arguably most importantly, a laddered pipeline of committed build to suit development projects, constructing high quality new buildings for creditworthy tenants that provide attractive yields and de-risked future AFO per share growth. And fourth, regular way acquisitions, that is sale these backs and lease assumptions, particularly those that are directly sourced and relationship based that supplement and enhance our built in growth profile. We are well set up for growth in 2025 and beyond through these differentiated core building blocks, including a strong pipeline of new investments with 103.5 million of acquisitions under control, 5.4 million of commitments to fund revenue generating capex with existing tenants, and 227.3 million of high quality build to suit developments scheduled to reach stabilization during 2025 and 2026, adding approximately 17.6 million of incremental ABR with more than 700 million of build to suit developments in active discussions that would be scheduled for stabilization in 2026 and 2027. As we saw in 2024, when we reached stabilization on our UNFI build to suit development, which we funded at an initial cash yield of 7.2%, that when coupled with a 15 year lease term and .5% annual rent escalation results in a straight line yield of 8.6%, our build to suit development strategy is an incredibly powerful tool for driving long term, accretive, de-risked growth in ways unique to the net lease space. While the traditional net lease model relies on inorganic growth from a regular way transaction market, it can at times experience unexpected shifts in volatility in volumes, cap rates, and asset quality. We are seeking to drive B&L's growth through this differentiated and long term focus build to suit development strategy. With above average tenant credit quality, brand new construction, mission critical facilities and real estate, and attractive economics with straight line yields in the mid to high 8% range or better, there is a lot to love here. Added to that with our industrial focus, we have consistent access to build to suit transactions of considerable size that move the needle for our growth based on our attractive denominator. And with evaluation increase we can capture of 75 to 100 basis points or more once our developments reach stabilization, we are also generating a consistent pool of assets that we can use to fund our growth plans without needing to rely on the equity capital markets. At a time when our share price is not where we believe it should be, unless there is a material and significant rerating of our multiple, we have no plans to raise any equity in 2025 or for the foreseeable future and will manage our equity capital needs and cost of capital through a creative disposition as needed. We have large goals for our build to suit development strategy and are looking forward to making some exciting announcements in the next few months. Our goal for this year is to add at least 500 million in additional build to suit developments to our committed schedule for projects that would stabilize and begin paying rent in 2026 and 2027, further strengthening our laddered build to suit approach. For 2025, we are initiating our AFFO guidance range at $1.45 to $1.49 per share, or approximately 3% growth at the midpoint. As the year progresses, we expect to revisit our guidance range as well as the underlying assumptions, which Kevin will review with you in a moment. Later this year, we also hope to be able to provide you with a preview of our forecasted run rate growth for 2026 and 2027 based on the contributions we expect to receive from our core building blocks and our execution in 2025. During 2024, we made decisions that we believe are in the best interest of B&L and its investors for the long term and are confident that those decisions will lead to attractive and sustainable AFFO per share growth in B&L's future. We established a differentiated strategy through our high quality portfolio of diversified properties with strong operating metrics, pruned tenant credit risk and lease rollover risk through targeted dispositions, and maintained a fortified investment grade balance sheet with low pro forma leverage at 4.9 times and ample liquidity to capitalize on additional investment opportunities. Most importantly, we put a stake in the ground as to who we are as a company and what our differentiated growth strategy will be for the future. We are proud of our accomplishments in 2024 and excited for what's to come in 2025. 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.

Thanks, John, and thank you all for joining us today. As John mentioned, we have continued laying the necessary groundwork for sustained success in our laddered and long term build to suit strategy. We currently have $227.3 million in build to suit developments with attractive initial cash yields in the mid to high 7% range and straight line yields in the mid 8% to mid 9% range. These build to suit projects are all for identified tenants with structures in place to mitigate the traditional development risk associated with construction delays and cost overruns. Best of all, we are leveraging existing and direct relationships to build this pipeline and further deepening relationships that should provide ample opportunity for more projects in the near term. Our development partners need someone that brings surety of execution, deep experience and expertise, and a willingness to be creative and help them secure projects and grow their businesses. They have found that in B&L. On top of our announced and committed pipeline of build to suit developments, we are hard at work on more than $700 million of additional projects in active discussions that we hope to provide updates on in the coming months. We are also in process of expanding our pool of developer relationships and expect to have some exciting news to share on that front in the near future. These transactions take more work and have longer lead times than traditional regular way acquisitions. However, we believe the corresponding benefits of higher returns, stronger tenant credit, higher quality buildings and better real estate fundamentals along with the ability to de-risk our long term growth profile more than outweigh the additional offer. These projects will drive attractive, de-risk future AFFO per share growth and reduce our reliance on the regular way transaction market where we continue to be cautious as we have consistently observed a disconnect between pricing expectations and the quality of opportunities. Turning to our investment activity for 2024, we invested $404.8 million including $234.3 million in new property acquisitions, $115.3 million in build to suit developments, $52.2 million in transitional capital and $3 million in revenue generating capex. The completed acquisitions in revenue generating capex had a weighted average initial cash cap rate of 7.3%, weighted average straight line yield of 8.1%. Our total investments were weighted approximately 70% to industrial properties and 30% to retail. Subsequent to year end, we invested $22.3 million in build to suit developments including obtaining control of the land and initial funding for one previously announced project. We have a total of $200.7 million remaining to be funded for our build to suit development projects and supplemental. We also have an additional $103.5 million of acquisitions under control and $5.4 million of commitments to fund revenue generating capex with existing tenants. During 2024, we sold 58 properties for gross proceeds of $364 million at weighted average cash cap rate of .8% on properties. Substantially completing our clinical health care portfolio simplification strategy. We expect our dispositions for 2025 to be more muted, returning to historical averages in the $50 to $100 million range except to the extent we choose to opportunistically sell additional assets to fund our growth as John mentioned earlier. Now, shifting to our in place portfolio. For 2024, we executed on seven lease rollovers addressing near term lease expirations for .6% of our ABR and were able to achieve a 112% weighted average recapture rate in an average new lease term of over nine years. With only .2% of our ABR set to roll in 2025 and 3% in 2026, we have minimal near term rollover concerns and are actively engaged with our tenants on those leases. While our overall operating results remain strong and we are executing on our growth initiatives, we continue to see incremental pockets of credit risk as the duration of the higher interest rate environment lengthens. We see further strain being placed on consumer centric industries and entities with bulk capital structures. 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. Our watch list has remained fairly consistent and consumer centric tenants as well as some of our remaining clinical oriented health care properties including our tenant's loss surgical remain in focus. The home furnishing space continues to be in focus for us as well, specifically including our tenant at home which we have highlighted for multiple quarters and represents approximately 1% of ABR. We are also navigating the recently announced Zipz car wash bankruptcy. We own 10 of their car wash sites under three separate master leases which account for 62 basis points of our full year ABR. We received rent for January, expect to receive rent throughout the bankruptcy process and are currently negotiating terms of our sites. Although the initial rejection list includes seven of our sites, we expect the final result to be more favorable due to the strength of our master lease structure. For any sites that may eventually be rejected, we are in active discussions with multiple other interested parties for potential sales or new leases. We are also acutely focused on managing downside risks associated with our vacant properties which come with higher property operating expenses than our lease portfolio. We are working towards swift resolutions whether sale or lease for these assets to reduce these carrying costs. With that, I'll turn the call over to Kevin to provide an update on our financial results as well as further details on our initial 2025 guidance.

Thank you, Ryan. During the quarter, we generated adjusted funds from operations of $70.5 million or 36 cents per share, a flat per share result year over year. For the year, we generated $282 million or $1.43 per share, a result that benefited from timely transaction activity early in the year with respect to redeploying the first portion of our healthcare disposition proceeds. Additional positive contributions for the year came from lower GNA and interest expenses with core GNA totaling $7.5 million for the quarter and $29.3 million for the year, reflecting our continued focus on controllable expenses as well as savings from personnel departures and reduced DNO insurance premiums. That debt of 67 basis points and just under $3 million of carrying costs associated with vacant properties partially offset some of those gains. With respect to the balance sheet, we maintained our strong and flexible financial position with pro forma leverage of 4.9 times net debt and more than $900 million available on our revolving credit facility, providing us ample capacity as we evaluate incremental investment opportunities. Regarding our dividend, our board of directors maintained our $0.29 dividend per common share and OP unit payable to holders of record as of March 31, 2025, on or before April 15, 2025. Our dividend remains well covered and continues to represent an attractive dividend yield relative to many of our peers. Finally, details of our 2025 guidance and key assumptions were included in our earnings release last night and include adjusted funds from operations of $1.45 to $1.49 per diluted share, investment volume between $400 and $600 million, disposition volume between $50 and $100 million, and finally, core G&A between $30 and $31 million. Given the front-end incidence of tenant events with ZIPs and standards laws, we are including 125 basis points of bad debt within our 2025 guidance and will revisit this assumption throughout the year. It's also worth noting that our per share results for the year are particularly sensitive to the timing, amount, and mix of investment and disposition activity as well as capital markets activities that may occur during the year. Please reference last night's earnings release for additional details and with that, we will now open the call up for questions.

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. If you change your mind or you feel like your question has already been answered, you can press star and then two to withdraw yourself from the queue. The first question today comes from Anthony with JP Morgan. Please go ahead.

Great. Thank you. I guess first question, I just want to clarify and make sure I understand. Your $400 to $600 million of investment guidance, is that money out the door or is that deals that actually contribute net rents?

Yeah, that's money out the door. It would be a mix of both regular way deals that will contribute net rent today as well as investments that we're making our build to suit program.

Okay. So how much of that should we think about is actually contributing to earnings during the year versus because it sounds like a lot of this is based on a growing build to suit pipeline where we won't actually see the income until the out years.

Yeah, so it'll be a balance and we'll need to see what happens with the deal flow that we got in front of us, but this is always an and equation for us, not an or as evidenced by the 103 and a half million of regular way deals that we have under control that should close by the end of the first quarter or soon after the end of the first quarter. So we're going to have a decent amount deployed into current earning assets fairly quickly into the year. And there's a handful of other things that we're currently contemplating and underwriting. So it'll be a mix, but we'll do as much as we can to make sure you all are able to model out what's going to be rent paying this year versus stuff that'll come online later in the year.

Okay, and remind me that, like, for instance, the four build to suits and the supplemental, the 200 some odd million dollars, do you earn anything while you're extending the capital during this process or is that just, you know, it's on you and you have to carry that?

Yeah, there's a capitalized interest component to that. It's added to the basis. So it's part of the equation that we use for determining rent at the back end of this. And then we get the benefit over time and we capitalize that interest. Basically, if there's a revolver balance, we use the revolver rate and then the extent that exceeds the revolver balance, we use our weighted average cost of debt.

Okay, but there's not so there's not a like a current pay by the future tenant to kind of like fund the finance. Okay. And then I just last question on the credit side, you mentioned 125 basis points in guidance for the year. If I look at page nine of the supplemental and just look at sort of the the uncollectible, you know, that that kind of average for 2024, about 100, 125 basis points as well. So it's am I looking at that right, that there's not a whole heck of a lot of difference there in terms of how you're thinking about 25 versus 24? And, you know, that kind of the right way to think about what we should take off of your 2% to think about long term organic growth?

Hey, Tony, Kevin, I think if you're looking at 24, the guide last year was 75 basis points for the year, but was excluding what we already were expecting in the form of Green Valley. So that total number for 24 includes that hospital for last year. So 125 this year will be an incremental 50 versus last year.

Okay. Okay. Thanks.

Next question comes from Eric Borden with BMO. Please go ahead, Eric.

Hey, good afternoon. Just going back to the development. I was hoping you could talk about a little bit about the funding side. So you have about $200 million of current funding obligations for this year. You have about, you know, 50 to 100 million dollars of dispositions and you don't plan to issue equity. So the remainder, do we assume that's just put on the revolver?

Yeah. So the 227 we've got, there's a bunch that's going to get funded in 2026 as well. So it's not all for this year. And we'll schedule that out, but you can see it if you look at our schedule in terms of when the stabilization dates are, as well as in terms of overall project commitments. So we've got a handful of those. It'll be 2026 stabilization. So they'll be continued to fund throughout the first half of 2026. But generally speaking, our goal will be funding these things on the revolver and then with incremental disposition proceeds.

Okay. That's helpful. And same goes for the incremental $500 million that you're currently evaluating.

Yeah. So our goal for the year is to add an additional 500 million of new build suit commitments. We've got active discussions going on about 700 million or so right now. So we feel pretty good about what we're looking at from a laddered build to suit pipeline going into 2026 and 2027. We'll continue to fund that and controlling it in our own way. So whether it's revolver balance, retained earnings, or, you know, accretive dispositions, that's the focus. You know, not intending on raising any equity capital this year or for the future until that stock price changes.

Okay. That's helpful. And then just how are you thinking about leverage just given the lag effect between the timing of the NOI coming online and the use of revolver? You know, how high are you willing to let leverage, you know, creep today in order to get that benefit down the road?

Yes. I mean, we introduced the pro forma leverage component last year after getting the rating agencies comfortable with it. Future cash flows associated with our build to suit programs are ones that are very much credit worthy. And so it's something that we can take into account and how we think about long-term leverage. We'll ladder this out and look at where it takes us on an absolute basis, as well as pro forma. There's also the consideration there in terms of whether revolver utilization lands that we have to keep in mind. You've heard Kevin say this for a long time. You know, we've got religion on staying inside six times on a sustained basis. On an absolute basis, we could exceed that for a period of time with a clear view to coming back inside of it. Our efficiency, efficient spot is really at five and a half times, but we'll play around with that. We've got some chunkier things that we're evaluating that would come online in 26 and 27 that would provide some substantial relief from that standpoint. But you have to balance out the longer term view with a revolver utilization, and then we'll make up the difference with some creative dispositions.

Okay, that's helpful. And just one last one for me. Just on acquisitions, the $100 million of assets under control. Just curious, what has changed over the last 90 days since we last spoke? Just given that, if I remember correctly, 3Q, you didn't like the product that was on the market or just didn't fit what B&L was looking for. So I'm just curious too, what has changed over the last 90 days and what's currently in terms of asset mix under control today? Thank you.

Yeah, so still heavily weighted towards industrial. As Ryan said, it's about 70-30, and that's been consistent for us for at least five or six years at this point. So that's probably a pretty good barometer for what we're going to be doing going forward. Some of this stuff, there's actually one deal, a fairly chunky deal as a part of this that we were looking at over the summer, and it was just a spot where we weren't able to get to the right gap rate in terms of where we thought should price versus where the seller was, and we eventually got to the right spot. It just took a long time to get there. So our view in terms of taking a fairly disciplined, prudent approach to how we're evaluating this market, because we still continue to be very cautious, as you heard Ryan say during his prepared remarks, hasn't changed. We are excited to have $103.5 million to kick off the year. We're looking for more opportunities, but it's incredibly competitive out there right now. So you're fighting Klon for every deal you can get.

The next question comes from Opal Rana with Key Bank Capital Markets. Please go ahead.

Great. Thank you for taking my question. I just want to return to the Zip's car wash bankruptcy. Could you give us a sense of what you expect to occur here as it relates to timing or possible outcomes here?

Yeah, so Brian talked about this during his remarks. We've got 10 assets, about 62 basis points tied up in them. These are assets that we bought back in 2017, 2018. So we've had them for a long time. The initial list rejected seven of them, but kind of completely ignored our masterly structure. So we took a pretty strong stance going back into the bankruptcy that that was not something we were going to stand for. So we're having active discussions with them right now. It's hard to know exactly where it'll go, just because bankruptcies always are a little bit of a wild card, but we feel pretty confident that we're going to end up in a decent position on the other side of this. Our understanding, and don't hold me to this, is that they're looking to exit bankruptcy as soon as March or April here, depending on how the negotiations go and what they're trying to accomplish. But bankruptcies always can go sideways at some point. So we're working hard to make sure that we preserve as much value as possible on our sites, and we'll be sure to keep everyone updated.

Okay, great. And then is there a possibility that you'd be interested in selling those, the Zipf's mass release?

Yeah. So one of the great things about bankruptcy hitting the news is you get a whole lot of inbounds. We've had a lot of folks reach out to us that are interested in buying these assets, buying some of the assets, leasing these assets. So in terms of the opportunity set that's in front of us, that's part of the reason why we have as much confidence as we do. If we can find a good resolution to this with Zipf themselves and come out the other side feeling good about what that resolution is, then that's great. But if not, we've got a pretty good backstop in our ability to sell these assets or release to somebody else if that's the way that we need to go.

Okay, great. That was helpful. And then, given the lighter investment activity in 4Q, was that result of the – that kind of resulted in the company finishing at the low end of the year, 24 investment guidance? Was that timing related or was that related to something else?

It's just more of the competitive environment. We have, over the last couple of years, sort of post the piting contest of 21 and 22, have really made sure to take a disciplined approach to this and we're not just going out and doing deals for the sake of doing deals. And if that means that you put up a bogey for the fourth quarter of the year, then that's okay. We're not afraid of doing that. We want to make sure that we're making the right decisions for the right reasons when we're investing capital. As I mentioned, some of it was timing. The deal that we looked at this summer didn't come together, but it came together now. So it's under control and we're looking forward to closing it.

Okay, great. Thank you.

The next question comes from Jay Cornrich with Webush Securities. Please go ahead.

There's much. Going back to the $700 million of -to-suit developments in conversation, which seems like you're experiencing enhanced interest from prospective tenants to work with you despite some uncertainty with interest rates and just the economy. I'm just curious if you can comment further. What's driving off that interest from these potential -to-suit development tenants and if you're experiencing any changes to cap rates or lease terms in the negotiations versus last year?

Yes, I'll take the returns first. We're continuing to see sort of upfront cap rates in that mid-seven cap zone, but on these longer, larger industrial -to-suits, we're talking 12, 15, 20-year lease terms, two and a half to three and a half percent rent bumps. So our straight line yields on these are solidly mid-eight to high eights, sometimes low nines. So really, really attractive places for us to be allocating capital. In terms of the interest here, it's part of an overall, you would hope, is a renaissance of American manufacturing where you've got people near-shoring, on-shoring. The specialized build that we're doing, whether it's they need it in an absolutely mission-critical location or they need to consolidate multiple sites that are causing inefficiencies in their distribution networks or they have to build out something that's going to be a part of a manufacturing supply line for them. Folks are looking at this as a long-term investment. JLL actually came out with a report this week that talked about how the -to-suit pipeline as a portion of the overall development pipeline has returned to pre-pandemic levels, where it now is a full 30 percent of development that's occurring. So we're very excited to continue to participate in it. You heard Ryan, we are also expanding our relationships, and so that's part of the reason why we're starting to see as many additional deals as we are. It's not just individual deals with individual developers. There are a handful of things that we're seeing right now where on individual deals, multiple developers are presenting it to us. So names getting out there. We're finding lots of people to work with, and we're really excited to see this start laddering out into the future years.

I appreciate that. And then just one more. Within the $75 million at the midpoint of disposition to outline the guidance, how much of that is part of the final trench of the healthcare dispositions versus just additional pruning of the overall portfolio?

It's a little of both. There's absolutely some additional clinical assets that are a part of what we're expecting to be in that guidance range, and there's also some general pruning that we'll do. The wild card there in terms of what might change from a guidance standpoint was if we opportunistically choose to sell an asset on a decorative basis to fund growth.

Okay, I understand. Thanks so much.

The next question comes from Michael Gorman with BTIG. Please go ahead.

Yeah, thanks. Good morning. Just a couple of quick ones. Good afternoon, actually. On the Zip's car wash, are you able to share what the coverage is under the master release for all 10 sites? Yeah, it was close to two, I want to say, right before

bankruptcy.

Okay, great. And then, John, maybe on the -to-Sue pipeline, as you think about the opportunity set there and the competitive nature there, understand you're getting more inbounds, which is great. Are you seeing any change on the competitive side here? We've been hearing in other sectors that financing for development is still really tough, so I'm curious if you're experiencing a different close rate as you think underwriting these projects or how much more competition you're seeing on the -to-Sue side of things.

Yeah, so the conversion time is long on these. Getting a site fully entitled and ready to go, getting the design build stuff done, working through the economics, and then working through sometimes the dog and pony show in terms of being selected, either individually for funding or as a partner to the developer and the developer being selected. It's a long process. The competition is difficult at times on certain assets. It's not as difficult as we would say if we were to compare the -to-Sue process with, say, mid-market down the middle of the fairway industrial deal right now. And in both cases, what we're seeing is a big increase in the amount of private buyers that are participating in it. I think it's a little bit more frothy in terms of the competition on regular way deals, where we're seeing 15 to 20 or more offers and participating in late round bids on some of these deals. So it's getting incredibly competitive on regular way deals. Less so on the -to-Sue, but certainly more than it was in the past. Now, the nice thing is because of our industrial focus, the size of the -to-Sue that we're looking at is so large, there's only a handful or more of folks out there that are going to be looking at something like that. For others that are doing -to-Suits in the retail restaurant space, where it's in that $2 to $5 million range, they're not looking at biting off $100 million or more, and we're able to do that on a pretty consistent basis. So the pool of folks there is a little bit smaller, but it's still competitive.

That's helpful. And is there any kind of rule of thumb or general sense for how much maybe kind of plant and equipment that the tenants are putting into these facilities on top of the investment that you're making? I'm just trying to get a sense for kind of the tenants' financial commitment once these facilities are open and operating.

Yeah, it depends on the facility. So it's a little hard one to answer. If you think about just a regular box for a distribution logistics facility where there isn't going to be much in there besides racking, relative to the cost of the build, it may be relatively immaterial, but if you think about something like our UNFI build in Sarasota, they were putting in tens of millions of dollars of additional investment. So it's a significant amount of investment from the in addition to what we're doing.

Okay, great. And then just last one from me, and I'm sorry if I missed this, when you think about 25 or even going forward, any additional appetite for transitional capital here, just given some of the disjointed nature of the transaction markets right now, an opportunity set there and also appetite from your side to put more money to work on in that type of investment.

Yeah, we're certainly always open to it. I think the place where we would be most open to it is on a direct relationship basis where we're helping someone that we have an existing relationship with grow their business and solve a problem. On a new basis, if we've got alternative areas to allocate capital, whether it's regular way deals or in -a-suites that don't come with the complexity that transitional capital come from, we likely would allocate it but if one of our tried and true long-term partners came to us and said, hey, we need help here, we'll be more than willing to entertain it.

Great, thanks for the time.

The next question comes from Michael Goldspin with UBS. Please go ahead.

Good afternoon, thanks a lot for taking my question. Clearly the portfolio has been evolving, so historical bad debt expectations may not be fully comparable. So is the 125-day supply of reserve this year indicative of what we should expect in a normal year going forward or is it elevated based on the visibility into those incremental pockets of credit risk that you talked about earlier in the conference?

Yeah, I'd say our hope certainly is that it's not indicative of what it's going to be in the future. We have a lot of faith in this portfolio we've used a lot of time and effort building it up and we feel good about it but I think you answered it yourself with there's this couple of incremental pockets of credit risk that we know about early in the year. Obviously there's a big difference if something hits late in the year, it doesn't have that huge of an impact. We saw that last year where there was definitely some things that we knew were going to come but they didn't hit until the late third and fourth quarter and so the impact to 2024 was fairly minimized but with Zips and a couple of other things including stainless loss being on front end of the year, it certainly hits a little bit harder because of the length and duration of it so that's really the main driver behind the 125 this year. We'll have to evaluate where we are at the end of the year but our hope is that that would be something less next year but wait and see.

Yeah and then as a follow-up, following the reclassification of the different property types, retail has jumped quite a bit so just kind of curious about where the focus going forward within retail is going to be in sectors that is particularly attractive and you're looking to expand there anything that is maybe less relevant and you'd be looking to use to fund some of your further investment just trying to get a sense of what that could look like over time.

Yeah I think the main driver behind the sort of reclassification of our asset types into primarily industrial and then retail with retail including restaurants and med tail assets is just to give a very clear picture to folks of who we are and where we're headed. We are an industrial focused diversified net lease rate. You should expect to see us probably in that 70-30 range in terms of industrial and retail. That's what we've been doing for the last five or six years. The particular sort of subcategories or asset types will change over time. If you look at industrial an area that we spent a lot of time on and a lot of investment in the last few years has been food production related distribution. We've got a bunch of that in the hopper right now as well so that's been something that we've been leading into a lot more heavily but I think that 70-30 break is where you should expect to see us fairly consistently into the future.

Thank you very much. Good luck in 2025.

Thank you.

The next question comes from Spencer Aue with Green Street. Please go ahead Spencer.

Thank you. As it relates to the disposition guidance can you just remind us what's in that bucket currently and how you would describe the composition and depth of the buyer pool just based on what you're looking to divest today?

Yeah so within the guidance it's still a little bit of the clinical health care stuff but some of the stragglers there. There's a handful of other things that we would be looking at. Certainly we'd be open to pruning the office portfolio to the extent that we're able to and then you know a handful of things over the year that we may pursue on an opportunistic or creative basis. The pool of buyers depends on the asset. You know some of the larger stuff you're going to need bigger pockets of capital. It's not necessarily a good fit for the 1031 market. Smaller assets maybe more on the 1031 market. That still needs to rebound a bit from where it was before. So it can range from small individual high net worth, regional buyer to large institutional stuff. So these are not anything that we're looking at selling on a portfolio basis other than sort of related buildings with existing with the same tenant. So I don't expect there to be any large portfolio transactions similar to what you've seen from us last year.

Okay and then as it relates to re-tenanting vacant spaces can you just remind us on your stance on providing catbacks or TIs as it relates to that re-tenanting efforts or are you inclined to provide that or do you tend to avoid that?

We're open to it. It totally depends on the economics of the deal and what we're talking about in terms of lease length, what's the return, the tenant, you name it. It's not something that we avoid. We're real estate managers at heart. This is what we do. So part of that is managing real estate and finding the right outcome for each of our individual assets and sometimes that means selling it. Sometimes it means putting a little bit extra money in to get somebody in the door and sometimes you get lucky you don't have to do either of those things you can get a new tenant that comes right in. So we'll take each one in turn and if it means that we've got to roll our sleeves and get in there a little bit we're okay doing that.

Okay that makes sense and then one more just on tenant health if I can. So I appreciate the color you provided on the watch list and the bad debt expectations for 25 but I hope you just talked about rent coverage in general. So any notable changes across industries or segments of the portfolio and can you just remind us what the portfolio average is?

So we only disclose it related to our restaurants. It's been pretty consistent -by-quarter. We're still sitting at 3.3 times on a rent coverage basis. We evaluated on other asset types within the portfolio and it's been pretty consistent. The stuff that we've been concerned with watch list wise some of the handful of things in home furnishing some of the stuff in clinical the individual ones that we've mentioned by name hasn't really changed. It's been pretty consistent -by-quarter for a little bit here.

That's really helpful thank you so much. Next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead Caitlin.

Hi there maybe just starting on the build to suit side. I was wondering if you could talk a little bit about the sourcing. It seems like in the past they've kind of been one-off deals that came together for kind of one reason or another which works. I was wondering if there's any change to how you're sourcing deals today and how that's

evolving? Yeah so a couple of things there. One as we've done more of these our names gotten out there so there's a little bit of organic marketing that's happening that we're getting the benefit of. Two we're getting some referrals. Developers that we've worked with are very happy to refer us on to their friends when they've got capital needs and the third is we've expanded our team. So Will Garner who heads it up and Sam Dilemos who we brought on at the end of the year both have pretty deep relationships throughout the development community from their years operating in this space and so all three of those things together put us in a great spot to start seeing a lot more of the active pipeline that's out there.

Got it and then I think you mentioned that like there could be an announcement about development. I forget exactly how you phrased it so I was wondering if that might be like a partnership or something else that ends up kind of evolving that sourcing further or any comments on that?

Yeah it's both new development opportunities and new relationships both of which are exciting for us. We've got a policy in place that makes sure folks are aware of what's happening in this pipeline particularly because of the long nature of it and the way that we're laddering it getting you all an updated schedule so we have a policy where as soon as we close on the land the next few docs we issue a press release so we're hopeful that if a couple of these things go our way the way that we expect them to in the next couple of months we'll have some new press releases out there in between earnings.

Got it and then maybe just back to funding and I guess the dividend could you go through how much of your 25 investments you think will be funded with retained cash and then like how does the dividend compare to taxable income and I'm wondering if there's any room for reduction there in order to retain more cash?

So first part question we retain around number 60 million and as you think about that in relation to build the suits the longer these get the more that starts to multiply itself so that's definitely a funding component as we think about these projects and then second on the dividend I not set any expectation towards a reduction. It's well covered certainly is a little bit an outlier in terms of the yield but our intention is to make that temporary but our dividend well covered and not on the table for reduction.

Got it thanks.

The next question comes from Ronald Camden with Morgan Stanley please go ahead.

Hey just two quick ones so I'm on the build the suit pipeline which is really helpful in the supplement and it sounds like you have another 500 million beyond that if I understand that correctly just did you talk about sort of the economics of that 500 million is it sort of similar to what I'm seeing here in the supplement? Is it industrial? Is the yield the same as the you know the rent escalator is the same just just trying to get a sense of that 500 million dollars economics

thanks. Yeah so the 500 millions are our goal for the year that's the goal that we're sitting publicly and working on internally in terms of what we want to add in terms of new additional committed build the suits. We've got about 700 million in active discussions of course with a long conversion timeline and the world taking weird turns every now and again you know there's no guarantee that all of those are going to hit or hit in the way that we're expecting them to so these are goals that we've set you know we've got the 227 million in hand right now we want to see another 500 million on top of that this year and so big goals for the year the things that we're looking at within that sort of active discussion pipeline are all pretty consistent with what you've seen from us so far you know upfront cash yields in the mid-sevenths straight line yields in the mid-eighths to mid-nines rent bumps in that two and a half to three and a half percent bump it's primarily industrial a handful of fairly large facilities that we're working on but all in the same vein of really attractive economics solid tenant credit really attractive new builds in good locations so real estate fundamentals hold up strong in addition to the credit so as I said in my remarks there's a lot to love in this strategy and the way that we're building it out I think is going to be very attractive for investors as they start to see benefit of that long-term de-risk laddered -to-suit program.

Great and then my second one was just on the you know the other other assets right which includes some of the office and some of the health care just obviously not a four seller but you know curious if the markets are going to look interesting to start putting some of those on the

list. We'll take it bit by bit a lot of those will probably end up holding through the end of the term and collecting rent good tenants good credits so we don't have any real concerns there certainly not a spot that we're intending to invest more and on a standalone basis but with the clinical and surgical assets there's a handful of those that we will actively look to dispose of in 2025 and 2026 and there's also a couple of them that will probably have a long-term home in this portfolio if we can't get the right value for those assets despite it not being core to where we will invest in the future we're not going to light that value on fire by just selling it at any price we'll hold it and continue to reap the benefit of the rent.

Great that's it for me thank you.

Thank you we have no further questions and so I'll hand the call back to the management team for any closing comments.

Great well thank you very much we appreciate the dialogue today and we're getting into the busy conference season so we look forward to seeing many of you in person in the coming months have a good rest of your day thanks all.

Thank you everyone for joining us today this concludes our call and you may now disconnect your lines.