Spirit Realty Capital, Inc.

Realty Capital Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Pierre Revolve, SVP of Corporate Finance and Investor Relations. Thank you, and over to you, sir.

Thank you, Operator, and thank you, everyone, for joining us for SPIRIT's fourth quarter 2021 earnings call. Presenting on today's call will be President and Chief Executive Officer, Jackson Shea, and Chief Financial Officer, Michael Hughes, Ken Heimlich, Chief Investment Officer will be available for Q&A. Before we get started, I would like to remind everyone that this presentation contains forward-looking statements. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from those currently anticipated due to a number of factors. I'd refer you to the safe harbor statements in our most recent filings with the SEC for a detailed discussion of the risk factors relating to these forward-looking statements. This presentation also contains certain non-GAAP measures. Reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are included in the exhibits furnished to the SEC under Form 8K, which include our earnings release, supplemental information, and investor presentation. These materials are also available on the Investor Relations page of our website. For our prepared remarks, I'm now pleased to introduce Mr. Jackson Shea. Jackson?

Thank you, Pierre, and good morning, everyone. Over the last few earnings calls, I've talked about the quality of our portfolio, the strength of our balance sheet, and our ability to source transactions. Given what we've achieved in these three areas, I believe Spirit is well-positioned for success in 2022 and beyond. In the last four years, we've executed on our strategy to create a highly diversified portfolio with large sophisticated operators while significantly growing our industrial exposure. During this period, we sold or spun off 3.8 billion of assets, retained 4.1 billion of the original portfolio that fit our strategy and acquired 3.8 billion of new assets. This effort has resulted in a high quality stable portfolio with low volatility. At quarter end, our lost rent was virtually zero, and we had only four vacant properties. In addition, the strength of our diverse portfolio has been proven out during the COVID pandemic, which caused minimal disruption in our rental income. In fact, the majority of our tenants are performing better today with improved profitability, and credit profiles. To help illustrate the transformation of our portfolio and its resulting impact on performance, we've included several pages in our current investor deck that provide additional disclosure, which I hope you will review and find informative. Our balance sheet has also continued to strengthen, allowing us to transition away from ABS and convertible debt secure a triple B rating from all three major rating agencies and become a serial investment rate bond issuer. Today, our portfolio is almost completely unsecured and our debt maturities are well laddered and long dated. In addition, our low dividend payout ratio allows us to propel earnings growth by reinvesting more free cash flow while enabling us to grow the dividend consistently and sustainably over time. Finally, with the completion of our recent follow-on equity offering, we remained extremely well capitalized to execute on our growing acquisition pipeline. Regarding acquisition sourcing, the goals we laid out for our acquisition platform have all been achieved, and we are doing exactly what we said we would do. We have the team and processes in place to source and close transactions, which will allow us to drive strong, consistent earnings growth. We've built out integrated acquisitions and asset management teams, expanding the reach and allowing for concerted sourcing efforts with a focus on relationship development with our existing tenant base, owners, and new partners. In addition, Our extensive underwriting capabilities focused on evaluating industry relevance, tenant credit strength, and key real estate attributes allows us to allocate capital across a wider opportunity set, which we believe delivers superior diversification and better risk-adjusted returns. Our fourth quarter investment activity is emblematic of what our platform can deliver. as we've deployed 487.9 million in capital, acquiring 92 properties across 28 transactions with a mix of 60% retail and 40% industrial. Most notably, 75% of these transactions were sourced through existing relationships, which is well above the target we laid out at our investor day in 2019. We're also off to a strong start in 2022 with 179 million of acquisitions completed year to date through 13 transactions. And with the strongest forward pipeline in my history at Spirit, we believe our acquisition capability has hit a stride and we're seeing the benefits of the relationships we've built with our counterparts. Our teams are in sync and growing, and we are leveraging the many technology tools and processes we have developed. Finally, I want to highlight that the noise is behind us. Instead of completing structural changes or dealing with the impact of COVID, we're entering a truly clean year with a solid portfolio, strong balance sheet, and best in class team in place. This will be the first year for our team to showcase what this platform can do, and I expect great things to come. With that, I will turn the call over to Mike. Mike?

Thanks, Jackson. Good morning. We had another great quarter. AFO per share increased to 85 cents compared to 84 cents last quarter. Many of our operational performance metrics improved. Occupancy ticked up 0.1% to 99.8%. Forward same store sales increased from 1.8% to 2.4%. Loss rate decreased from 0.1% to effectively zero. portfolio wallet increased to 10.4 years. We also further diversified our portfolio, adding nine new tenants and reducing our top 10 and top 20 tenant concentrations by 1% and 2% respectively. Our annualized base rent increased by $30 million to $588 million, driven by acquisitions and rental increases, and is just shy of the $596 million we reported in Q1 2018, right before the spinoff of SMTA. For the year, we reported AFFO per share of $3.31. As we have previously mentioned, our 2021 results included $7 million of out-of-period amounts related to the COVID-19 pandemic. Excluding these amounts, our 2021 adjusted AFFO per share is $3.25. Our deferred rent receivable balance declined by $1.5 million to $15.3 million. We collected 100% of the deferred rents contractually owed for the quarter. Starting in January, we have no remaining tenants under a deferral arrangement. Our theater portfolio also continues to perform well, and we recognize $700,000 in rent from our two new theater tenants, Imagine and Look Cinemas, up from $260,000 in the third quarter. Turning to the balance sheet, at quarter end, we had unsold Ford contracts for 56,000 shares of common stocks. In January, through a follow-on offering, we entered into additional forward contracts to issue 9.4 million shares of common stock. With expected proceeds of $433.4 million upon settlement of all forward contracts, we are well-capitalized to fund a significant portion of our 2022 acquisition pipeline. At quarter end, our leverage was 5.1 times, and our fixed charge coverage ratio was 5.7 times. With the upgrade we received from Moody's in October, we are now rated BBB across all three major rating agencies. We are reaffirming our 2022 guidance previously provided on January 10th with an AFO per share range of $3.52 to $3.58, capital deployment of $1.3 to $1.5 billion, and dispositions of approximately $100 million. The AFO per share midpoint of $3.55 implies a growth rate of 9.2% over our normalized 2021 AFO per share of $3.25. Given the underlying strength of our portfolio and balance sheet, and the visibility we have into our pipeline, we are optimistic about what we can achieve in 2022 and beyond. With that, I will turn the call back over to the operator to open it up for questions.

Thank you.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. As a reminder, we ask that you limit to one question and one follow-up. One moment, please, while we poll for questions.

Thank you.

The first question comes from the line of Kee Bin Kim with Twist Securities. Please go ahead.

Thanks, Don. Good morning, everyone. So you mentioned a very strong forward pipeline for acquisitions. I was wondering if you could just give some more color on some of the larger deals within that pipeline, what kind of assets they are in the pricing.

Hey, Kee Bin. Good morning. It's Jackson.

Well, I'll just comment just quickly on the transactions we've closed to date, the 13 this quarter. It's pretty much split 50-50 in terms of percentage between industrial and retail. And I would say that we generally have sort of a targeted balance for the rest of the pipeline, pretty evenly split between industrial and retail. We still are finding some interesting opportunities within the light manufacturing sector. part of that sector, the industrial space. And I really think it's a function keeping of our fully built out team. We have four VPs in our acquisition team. We have five officers that run different asset management verticals that are also originating transactions. So when you look at the totality of the different people at Spirit that are focused on new business, it's a much higher number than say at Investor Day. So I think you're seeing the benefit of all of that collectively coming together, plus improved relationships with our tenant base. So I would say the shape looks great. In terms of cap rate, let's say our business that we've closed to date is around a six and a half cap right now of that 179 million. And we're looking at that as a target for this year.

And does that target of 6.5%, maybe you can bracket that with what you're seeing in the macro environment and rise and raise if that 6.5%, if there's been any repricing trends that you've noticed?

Well, one of the things that we consciously wanted to do was to have a higher number of transactions as a target per quarter. We think that, first of all, we think that there is a portfolio premium right now in terms of cap rate. And what we've seen with larger, what we call defined as portfolio opportunities, there has been more competition. I don't know if it's better financing that's driving some of this on the acquisition side, but we have seen a portfolio premium out there, anything up to 50 bps on the cap rate. We've had more success doing one-off transactions, more repeat business with existing tenants. And so that is going to be a core part of our strategy going forward. We talked about it last quarter. And look, with 13 transactions closed into the first quarter, we're already exceeding what we did prior to last quarter in terms of average transaction count per quarter. You know, we are still evaluating portfolios, and my guess is, you know, we'll end up doing something hopefully this year in terms of portfolio activity. But right now, we think that we can drive better risk-adjusted returns on higher-frequency transaction activity through our acquisition effort.

And how about that second part of the question, meaning if given the rising rate environment, How are you thinking or how are other investors thinking about pricing in this type of environment?

Well, it's interesting. On the raising rate environment, on the one hand, what we're seeing in our portfolio is sort of unprecedented credit improvement, i.e., their top-line business is better. They're having better control of their margins and bottom-line profitability. And so I think what we're starting to see is more interest on our tenant base wanting to expand, expand facilities, expand unit growth. That's perfect for what we want to do, right? Because we want to be on the other end of that transaction, financing, providing capital for those people. What we haven't seen yet is increasing cap rates. I know that rates are rising and presumably in time, maybe that'll start to translate, but So far with this kind of raising rate environment in the private market, we haven't seen a net increase in cap rate. If anything, slight decrease across, depending on what industry sector you're looking at.

Okay, thank you. Thank you.

Thank you. The next question comes from the line of Joshua Dennerlein with Bank of America. Please go ahead.

I hope everyone's doing well. I saw that Lifetime Fitness did like a sale lease back. Just curious if you guys had any color on that transaction or if you looked at it. There might be more deal flow coming from them.

Well, Josh, we don't like to comment on Existing transactions are working on, but what I can tell you is we like lifetime. We'd like to do more. Relative to their pressure, I think they talked about an LOI being signed. Generally, people that announce that, LOIs are typically non-binding. That being said, I'll say that we are very interested in doing more lifetime business. We expect to do more this year with them. Okay.

That's good color. And then, sorry if I missed it, but did you say what you've done year-to-date on the acquisition side?

Yeah, Josh. In my prepared comments, we talked about $179 million closed through the first quarter, and that comprises 13 separate transactions. And obviously, I mentioned that our forward pipeline is as strong as I've seen it since I've been at Spirit. i.e., it's very large. And obviously, we're funded to execute that. I'm glad we were able to access the equity markets to kind of button up everything so we've got the capital to execute our pipeline right now.

Okay. Awesome. Appreciate the time. Okay. Thanks for joining.

Thank you. The next question comes from the line of Greg Greg McGinnis with Scotia Bank. Please go ahead.

Hey, good morning. So given the sustained high inflation, do you have any ability to negotiate for higher escalators or more capped CPI leases in this environment? What I'm trying to determine is whether the high inflation today may create an opportunity for greater long-term growth.

Hi, Greg. Good morning. Yeah, look, I think that the answer is categorically yes, as it relates to our existing tenants. I can tell you that the level of conversation has continued to increase as our tenants have been getting stronger post-COVID. There's obviously been a lot of stimulus, a lot of top-line growth. Anytime a tenant wants to do something new, we look at that as an opportunity where if we have an existing master lease to provide capital and hopefully attractive to them and attractive to us, sometimes that conversation includes extending the existing lease maturity of our current master lease. Sometimes it includes different economic terms. Sometimes it includes we create a new master lease. So I think if if there is an opportunity to improve escalations or take advantage of inflationary trends relative to a CPI, we have that ability, especially with our existing tenants, as they look to execute some of their growth needs. And like I said, some of them may include new units. Some include more M&A activity. Some are looking at expanding new – you know, new additions to some, especially in the industrial side, to some of their existing facilities or manufacturing. So we're starting to see that conversation improve. And I think it'll only get stronger as more, as things continue to improve in the economy.

Okay. Maybe along the same lines, could you touch on the increase in the forward same-store sales to 2.4% this quarter from 1.8% last quarter? And what impact does that have on results You know, is that something that is flowing through to the guidance range? Is there an offset there? And could it potentially keep going up with sustained inflation?

Yeah, Mike, I'll let Mike take that call. Yeah.

Yeah, no, it's definitely ramped up. You know, it's driven by a lot of factors. I mean, CPI is part of that. We do have 16% releases by the CPI. And a lot of those do have caps, but you're kind of getting into the cap range. We've been doing a lot of industrial. Industrial does have higher escalators than retail, and so we've been enjoying some increases there. You do have some leases that have bumps every five years, and so when you have some of those leases hitting your 12-month period, you can have a 10% bump every five, so those also add to that. And then we do have some tenants that we've renegotiated new leases to stay in. We've gotten bumps there. Some of our new theater leases have some pretty big escalators. over the next, you know, 24 months that are also hitting that number. So, you know, we're pleased where that number is going. I think as we continue to add more industrial into the portfolio, you know, we'll see that number, you know, continue to be strong. I think 2.4% is pretty strong. I don't know if that's going to be sustainable forever, but we'll, you know, we'll certainly see. That's definitely good for the next, you know, 12 months though. We're happy with it.

And Mike, just to follow up on the theaters real quick. You spoke about the, you know, The rent increase from last quarter, is that due to percent rent deals, or is that just some timing-related items?

No, I mean, on our new theater operators that we put in, they're ramping up to a higher base rent level as they stabilize. We talked about that those would ultimately get to about $5.2 million of base rent over about a 24-month period, and so those are continuing to kind of hit. step-up levels over time to base rent. So we don't put percentage rent into our forward sales number. That only includes base rent. So as they hit those metrics, those gateposts over time, their base rent is going to step up to a normalized base rent over 24 months. And we're seeing that. And I mentioned that the rent did go up from last quarter. So you'll continue to see that growth from those operators over the next 24 months.

Right. Thanks, Mike. Okay.

Thank you. The next question comes from the line of Rob Stevenson with Jenny. Please go ahead.

Good morning, guys. Was there anything abnormal that pulled down the cap rate in the fourth quarter? I mean, was it industrial assets? Were there ground leases or anything else abnormally low there? Or is that just where the markets moved down to the sort of six and a quarter, seven and a quarter range on your numbers?

Hey, good morning, Rob. It's Jackson. I tell you, when you look at cap rates for us in a quarter, if you could focus on the mix of what we're buying, that really drives a lot of what the cap rate end result is. So in the fourth quarter, we had 21% of our acquisition business in the car wash industry. As you know, the car washes tend to be low sub-6 cap rates. We had 40% of our acquisition business in the industrial area. Obviously, that's on the lower end of cap rates. in terms of our range, and also there was some auto service in there. So I really think that when you look at those cap rates, it has a lot to do with the mix of what we're acquiring. And as I mentioned in my earlier comment, I think in one of the questions, that cap rate for the business that we've closed is already higher than that, and that's a function of, like I said, the mix. I wouldn't take too much out of just one particular quarter, whether the cap rate is low or high, because we really look to try to target an overall cap rate target for the year. So at any given quarter, depending on the mix of business that we're closing with our tenants, it's going to shift.

Okay. And then how are you guys – Thinking about the $100 million of disposition guidance in relation to the acquisition guidance, you guys have very little vacant assets. Presumably, the vast majority of that $100 million of expected sales this year is going to be income-producing property. You guys did sub-4.5% on the 2021 leased dispositions. You know, is there any thought there, given how low that cost of capital is for you, to increasing that to, you know, $150, $200 million to fund, you know, the acquisition pipeline as you go forward?

I think, you know, obviously we've got equity capital to date with the recent raise that we did in January. But I would say, like, that disposition number is just a – target number, it's probably going to happen later in the calendar year for us. And I'd say it's just a mix of opportunistic sales as well as, you know, sales that we think are good for risk mitigation for us. I mean, I think, you know, we've got our funding to date put in place, so I think it's very comparable with that number at this $100 million placeholder right now. And like I said, it'll be later in the year when we execute that on the disposition part.

Okay. Thanks, guys. Appreciate the time. Some of them. Some of them. Yeah. Okay, great. Thank you.

The next question comes from the line of Heindel, just with Mizohu. Please go ahead.

Close enough. Well, thank you. Good morning, guys. So, Jackson, I guess first question to you. So, I think your five-year anniversary as CEO is coming up here in May. And you outlined earlier in the call a lot of the initial goals that you set out and you've achieved here in regard to the portfolio, improving the quality, the spin code transaction. And more recently, your $600 million annual revenue target, you're getting close to that too. So I guess I'm curious, as you kind of think about the next five years, or even just more broadly, how you're thinking about priorities for or spirit, any particular goals or any guidelines that you're thinking about and maybe willing to share? Thanks.

Thanks, Hansel. Good morning. It's a great question. As I think about the last five years, in my prepared comments, we talked about the assets that we sold, the $3.8 billion and the $4.1 billion that we've acquired. But during that period of time, if you look at 2019 total return total shareholder returns to date i mean i think it's sort of close to 56 so i think it's the second highest within the net lease group and if you look at our relative multiple compared to our peers since 2019 you know it's continued to compress i mean it's taken longer you know quite honestly for for that multiple to compress relative to our peer group i think in 2019 The differential with our AFFO multiple was like 5.4 times or 554, 540 basis points difference between our multiple and our peer group. That's continued to decline in 2022 year to date. We're finally sub three times at like 290 basis points. What I'd like to see in the next five years is to really close that gap. And I really believe that we have performed. We've done everything. with a lot of complexity around it in terms of having to deal with certain tenant assets and industries and done a great job. What I'd like to see is have us get appreciation for what the team is doing, how we're performing. Everything is really set up well, as I said in these comments, for 2022 and beyond. This is a very, very sustainable platform that we've built and we think we can perform in a competitive environment, and we think we've been able to prove that over the last few years. So I suspect that you'll see us be very, very consistent going forward in terms of execution on the acquisition front and asset management front. So that's what I'd like to see, really close that gap relative to our peer group of AFFO multiple.

Got it. Understood. And I guess, you know, curious of any more thoughts on how – you're going to do that, right? I think you mentioned consistency in the execution, and you certainly have done a fair amount of that. Any other particular items which you think are maybe either underappreciated or you think maybe you need to focus on to drive that multiple gap down?

Well, I mean, look, I just recall it's been difficult for investors. It sort of seemed like every year over the last five years, we've had some story, whether it's COVID or spinoff, ShopGo. It's just been a lot. In spite of all that, if you look at some of those investor pages that we put out, some are really good. The team did a great job. If you look on page 14 of what we've acquired since that time, that $4 billion, there's a remarkable list of top 20 tenants. I wish we could have done more industrial. Obviously, it was a significant part of what we did. I would say that Every quarter that we continue to punch out really good numbers, exceed guidance or meet guidance, it's going to benefit this company. It is very repeatable. It can take a lot of drama to do this now. That wasn't the case three years ago. Three years ago, there was much more pressure on the organization to accomplish corporate restructuring moves as well as acquire property and rebuild the team. All that's done. And I think that investors need to find good companies to invest in that can provide growth and economic opportunity. And our total shareholder return has been very, very good historically. And I think it can only get better. So I think it's still a good entry point for investors as they call through and look at these pages, see what we've done.

No, that's great. Thank you for that. Can I ask you about, you mentioned you're evaluating portfolios and hope to do something. I guess Maybe you could talk a bit more about that, maybe the type of opportunities and categories that would be of interest, sizing. I wonder if they'll be in the retail or light manufacturing sectors you're focusing on, or would you be looking outside of those? And then any color on portfolios that are out there in the market. Are you seeing more, and certainly the competitive forces as well? Thanks.

Yeah, well, I mean, I'd say one of the things that I really like about what we do is, you know, we've got a wide opportunity set that we pursue. And I think our team and our technology tools allow us to really size up these different opportunities very quickly without taking a lot of bandwidth or hours out of the organization. So at any given time, we can evaluate multiple portfolios very, very quickly and size up how that relates and what kind of impact that has, kind of what I'll call an organic growth that happens just from our day-to-day blocking and tackling. One of the nice things about being able to drive a lot of existing activity out of your existing tenant base, we've got a much longer runway in terms of our visibility on our acquisition pipeline for the year. So at any given time, when we look at a portfolio, we can really evaluate if that's really accretive, not just from a property ranking standpoint, but accretive to what we're doing relative to our pipeline, relative to our capital that we have in place. So that, I think, is a real advantage. We did not have that ability three years ago to do that the way we can do it today. So I can tell you, at any given time, we're looking at multiple portfolios right now on that basis. As it relates to specifics, like I said, we have a wide opportunity base that we're looking at. And if we feel like we're getting good risk-adjusted returns, we'll go for them. But that's... I'd say that there's a lot of stuff out there. There's big and small, as you know. There's been some notable bigger portfolios that have been recently closed and very, very attractive cap rates.

And I think a lot of that's related to financing on the debt side for private buyers. That's helpful. Thank you for the time. Sure. Thanks, you. Thanks, Randall.

Thank you. The next question comes from the line of Ronald Camden with Morgan Stanley. Please go ahead.

Thanks for your time. Hey, just going back to sort of the acquisitions questions, I think you touched on maybe seeing opportunities in light industrial. I was just curious if you can comment on one, just what you're seeing in terms of cap rates and cap rate compression, and number two, competition. Are you seeing more sort of private equity come into the space, or or not. Thanks.

Hi, Brian. Good morning.

I think it is competitive. It's not just private equity funds, but we've seen examples of family offices, for instance, being competitive in some of these smaller portfolio opportunities out there. For us, what's really important is, and Ken, let him share a minute on this, is we have a very, very wide acquisition funnel that we're reviewing. I won't give you the stats, but it's a large acquisition funnel that we review every week on multiple basis. I don't know, Kev, do you want to share any thoughts on just our pipeline and the funnel and everything else that we're looking at?

Yeah, we're not seeing – what I will tell you is there's not a shortage of opportunities to look at, especially when you talk about we have a pretty wide funnel. both on the what you would call industrial and the retail side. We have a, we have, you know, every week we have two pipelines where we're, you know, parsing through a lot of opportunities. We spend, you know, some of that time we spend in our pipeline is simply calibration on what's going on out in the marketplace, what type of opportunities are available. But what I will tell you is, The universe of opportunities has done nothing but grow for the last several years. It's not a static level of opportunities. So we spend a lot of time reviewing everything that's out there.

Great. Thank you. Thank you. Thank you.

The next question comes from the line of Brad Heffern with RBC Capital Markets. Please go ahead.

Hey, everyone. I think most things have been asked. I just have a couple modeling questions. On the theater ABR for the new tenants, is what's in the current ABR just that $700,000 times four, and then as they pay more rent over the next 24 months, that'll just gradually move up to that 5.2 number?

Yeah, that's right. I mean, we expect that to get to about – on the incremental, the new theater operators, we expect that to get a little over $2 million this year. About $2.5 million, I think, is what we're expecting to get to this year relative to the $5.2 million kind of stabilized number. So that's what's built into our model.

Okay, got it. And then any commentary on how we should assume the settlement of the forward equity? Is it just sort of rateable with the acquisitions for the year?

Yeah, yeah, we tend to fund. I think about funding acquisitions, it's about 50% equity, 40% debt, about 10% free cash flow. So yeah, radically, we'll bring that down as we close acquisitions.

Okay, thank you. Thank you.

The next question comes from the line of John Masoka with Leidenberg Thelman. Please go ahead.

Good morning.

I know you've talked a bunch about targeted property types, but I was curious what kind of cap rate differential you're seeing on kind of manufacturing industrial assets versus more traditional retail properties, if any.

But I think that if you're comparing different – retail is a big universe, right? So if we're talking about car washes, especially with some of the public car wash operators, those are very aggressive cap rates, as you know. Same with QSRs. And I would say probably cap rates maybe inside of some of the industrial opportunities that we're looking at. You know, for us, when we're looking at our industrial business, it really starts first, obviously, with real estate, industry, credit. It's a whole confluence of discussions with our teams to try to figure out where we can be competitive with a particular operator, especially on the light manufacturing industrial side. So I would say that cap rate-wise, overall, the industrial space would be slightly lower on average to our overall, the way we look at industrial. It's hard to put a cap rate differential to it, like I said, because you've got very different cap rates within each of these different verticals. Car washes are lower than, say, health and fitness. Home decor is going to be a little wider. Warehouse clubs will be lower. probably even lower than decor. So it really depends on the mix of things. And that's where we spend a lot of time, trying to balance that mix of different sub-industries within these larger two food groups that we're looking at, trying to balance that and trying to generate that positive spread to our wage and average cost capital.

OK. And then moving on to the in-place portfolio, what is your kind of remainder of the year and the long-term outlook for credit loss? Obviously, four basis points is a really strong number, and it sounds like the color from tenants is positive. But what is kind of maybe being roughly assumed in guidance and even beyond 2022? Mike, do you want to talk about that?

Yeah, I mean, it's sub 1%. We're obviously not modeling perfection. My biggest fear today is that when you've hit zero, there's no place to go but down. So we do have an assumption. It's a little less than 1%. We used to model 1%, so it's sub 1%. But it's all kind of unidentified. It's just the placeholder for what you don't know.

And if we do better than that, then obviously that would drive our numbers higher. Are you still there?

It seems like we have lost the line from the participant. So we will move on to the next question now. Before that, if you would like to ask a question, ladies and gentlemen, please press star 1 on your telephone keypad. Thank you. The next question comes from the line of Linda Sai with Jefferies. Please go ahead.

Just going back to some earlier comments, when you say there's a 50 base points portfolio premium in the market these days, how big does the deal size have to be for you to see that?

Well, that's kind of just a very hot overall average. But I would say things that are worth of $100 million to $2 billion. I'd say that range, you know, it's interesting, like $2 billion opportunities can get really attractive financing in the marketplace. And obviously, there's a confluence of private equity firms as well as public companies that can pursue something in that sort of scale. You know, when you get down to the $100 million range, Linda, you bring all kinds of other different type of parties to the table. There's family offices. There's private equity firms. There's companies like ourselves. that can be very competitive there. So we're seeing that premium across the board. And look, it ranges 35 to 50 basis points at any given time. But it is competitive in these portfolios. We're certainly seeing that today.

Thanks for that. And then you discussed having improved relationships with tenants. How do you define that and what's driven this change?

Well, first, it's been something that we've really focused on since I've gotten to this company. And you can see it in some of those charts that we put out where that acquisition related to where we have existing relationships. I think we put that in the investor deck out there. It's something that's really important for us. I can tell you that as part of our year-end process – especially with our asset management team. It's something really important to Ken where we really focus on trying to have repeat business because I think that's where ultimately we'll have a competitive advantage. Sure, anybody can buy an asset and get financing, but when you can be in that really intimate conversation with an existing tenant where they need something from you or they may need money, they may need a change to the lease, they may need change to the property complexion, to what they own, it just gives you an advantage and a seat at the table. And we think that we'll over time drive better returns that way, as well as just trying to find new tenants and new opportunities. So I can tell you it's getting better. It's a really important part of what we're doing. I'm spending my own personal time with the teams on trying to talk about how to improve our new business effort as it relates to our existing tenant base and Look, that's not the only area for growth for us, but it's important.

Thank you. Thank you.

Thank you. Ladies and gentlemen, we have reached the end of question and answer session, and I would like to turn the call back to Jackson Shea for closing remarks. Over to you, sir. Thank you.

Thank you very much. Look, I appreciate everyone taking the interest in hearing our story. I think the results speak for themselves. And I just leave you with a couple comments that, you know, our team, our portfolio, and our balance sheet are just poised to really have an excellent 2022 and beyond. So look forward to more quarters like this and appreciate your interest. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.