Spirit Realty Capital, Inc.

Greetings and welcome to the Spirit Realty Capital First Quarter 2022 Earnings Conference Call. At this time, all participants are in 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 and then 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 Rizal. Please go ahead, Phil.

Thank you, Operator, and thank you, everyone, for joining us for SPIRIT's first quarter 2022 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 risk 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 Statement in our most recent filing 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 and 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 Shang. Jackson.

Thank you, Pierre, and good morning, everyone. As I've stated in the past, Spirit has great tenants, a pristine balance sheet, and a fully integrated asset management and acquisition platform that is producing results. Our underwriting approach, focused on industry relevance, in-depth credit analysis, and real estate fundamentals, allows us to pursue a wider opportunity set, which we believe generates more value for our stockholders. If you look on page 13 of our investor presentation, you'll see that our strategy is being validated with many of our recently acquired tenants going public, being acquired, receiving credit upgrades, or recapitalizing their balance sheets. Our intensive underwriting capabilities have consistently allowed us to identify opportunities that are underappreciated or mispriced in the market. resulting in strong yields and asset value accretion over time. The most recent example of this success is Main Event. During the first quarter, we added three main events, raising them to our number seven tenant. Just a few weeks ago, Dave and Busters, our number 72 tenant, announced plans to acquire Main Event, with Main Event's CEO assuming leadership of the combined entity. We view main events absorption into a strong public tenant as a significant credit upgrade that will result in further cap rate compression for one of our largest tenants, making this merger yet another example of our ability to identify and underwrite strong operators in relevant industries that will continue to improve. During the quarter, We deployed $511.4 million in investment capital at a weighted average cash capitalization rate of 6.42%, including the acquisition of 41 properties across 29 transactions. Approximately 62% of this transaction volume was relationship driven, and 72% of the acquired rents were from publicly listed tenants. We expanded our relationships with our top 20 tenants, including Lifetime, BJ's Wholesale, and Main Event. We also continued to increase our industrial exposure, which accounted for 37% of our first quarter acquisition volume, with a mix of 66% distribution, 29% manufacturing, and 5% flex. Our industrial exposure now stands at 19.8%. a 120 basis point increase over the last quarter. As you can see on page 14 of our investor presentation, since the spinoff, we added 4.3 billion of assets, comprised of 54% retail, 33% industrial, 9% other, and 4% office. Our retained portfolio largely included public retail tenants that fit our strategy. At quarter end, our ABR was $623.3 million, surpassing one of the key milestones identified at our 2019 Investor Day of reaching our pre-spinoff rent of $600 million. Given the strong performance of our tenants, coupled with the strength of our real estate and leases, we have seen increased demand for our properties. To capitalize on that demand, we are increasing our disposition guidance from $100 million to a range of 200 to 300 million. We expect these dispositions will generate attractive returns and be accretive to our AFFO per share growth, while reducing exposure to office, flat leases, and certain tenant concentrations. The increased disposition plan, combined with our outstanding forward equity and upsized credit facility, places us in a very strong liquidity position to achieve our acquisition guidance and benefit from the impact of capital market disruptions on undercapitalized market participants. One disruption we're paying close attention to is the impact of higher borrowing spreads for asset-backed debt, which is negatively impacting private net lease acquirers, IRRs, and ability to push aggressive pricing. This dynamic helps spirit in two important ways. First, it heightens the importance of relationships and certainty of execution, which aids us as a trusted, well-capitalized counterpart that follows through on our commitments. Second, it allows us to be more competitive on opportunities as risk is being more fairly priced today than just a few months ago. Based on what we're seeing today, I anticipate that in the back half of the year, we will be able to find investment opportunities 25 to 50 basis points higher than where they have priced over the last few quarters. Finally, before I turn the call over to Mike, I want to highlight our ESG accomplishments as laid out in our first sustainability report. Our 89-member team is making meaningful impacts to the community through our Women's Leadership Council, DEI, Think Green, Young Professionals, and Spirit One Committees. Most recently, our employees supported the humanitarian relief efforts in the Ukraine, donating $25,000 in total to UNICEF, World Central Kitchen, and Doctors Without Borders, which Spirit matched dollar for dollar. Our company has developed a great culture that attracts and retains talent. Notably, we have had no voluntary departures this year, several promotions, and a few former Spirit employees recently rejoined. As I've said before, we have one of the best teams in place, functioning at a very high level, and well-equipped to move quickly to uncover the best risk-adjusted return opportunities. With that, I'll pass the call over to Mike. Mike?

Thanks, Jack, and good morning. We had a very strong start to the year. Our annualized base rent increased by $35.2 million compared to last quarter, with $30.3 million driven by net acquisitions and $4.9 million driven by organic rent growth. We originated one $12.7 million loan this quarter and recognized interest income of $319,000, which we expect to increase to a little over $500,000 next quarter. Also during the quarter, we received $875,000 of rent from the new theater leases. of which $275,000 was recognized as base cash rent and is reflected in our ABR, with the remaining $600,000 recognized as contingent or variable rent. Our cash interest expense increased by $1 million from last quarter to $24.2 million, and cash G&A increased by $1.1 million. The G&A increase was driven by internal promotions and new hires, predominantly in our acquisitions, asset management, credit, and closing departments, as well as employer taxes on bonus payments and stock grant vesting, that occurs during the first quarter. For the year, we expect cash G&A will be approximately 40 to 43 million. For the second quarter in a row, we had virtually no lost rent, and our deferred rent receivable balance declined by 2.3 million to 13 million. Our occupancy remains at 99.8%, with four same-store sales of 2.1%, and a portfolio wealth of 10.4 years. Due to the strong portfolio performance, coupled with accretive acquisitions, our AFFO per share increased to $0.88 compared to $0.85 last quarter. Turning to the balance sheet, in January, we completed a follow-on offering, entering into forward contracts to issue 9.4 million shares of common stock. During the quarter, we issued 6.6 million shares to settle certain forward contracts, generating net proceeds of $299.8 million. As of quarter end, we have unsettled forward contracts for 3.1 million shares leverage of 5.2 times or five times inclusive of our remaining Ford equity contracts outstanding, and a fixed charge coverage ratio of 5.8 times. In March, we closed on a $1.2 billion revolving credit facility, amending our previous $800 million facility, which includes an accordion feature to increase capacity to $1.7 billion and matures in 2026. Notably, our pricing grid improved meaningfully to 77.5 basis points over an adjusted SOFR rate versus 90 basis points over one month LIBOR, and our facility fee tightened by five basis points. We ended the quarter with total corporate liquidity of $846.6 million, including unused line capacity, cash, and outstanding forward equity. Turning to guidance, given first quarter capital deployment results and the visibility we have into the second quarter, we are increasing our acquisition guidance to approximately $1.5 billion. As Jackson mentioned, we are also increasing our disposition guidance to $200 to $300 million to take advantage of the strong demand we are seeing for our assets. Finally, we are maintaining our AFO per share range of $3.52 to $3.58. Again, we've had a very strong start to the year, and with our low leverage, increased disposition plan, expanded line of credit, and outstanding forward equity, we are in a great position to execute on our strategy. With that, I will turn the call over to the operator to open it up for Q&A.

Operator?

Thank you, Sal.

Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then two 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 key. Our first question is from Nick Crosses from Daring Dog. Please go ahead.

Hey, good morning, guys. The question on the guidance, I guess, you know, per share was maintained. Is it just a function of higher dispos, offsetting, you know, higher acquisition volumes? I just want to make sure there's nothing else in there that's, I guess, preventing the guidance from being raised. And then maybe you can just comment on what you're seeing in terms of pricing and what your outlook is. I know you mentioned that the leveraged buyers have pulled back a little bit. So I appreciate your comments there.

Yeah, and I'll start with the guidance question. You know, first of all, it's good to point out that we did come out with the year with pretty robust guidance, you know, at 9.2% AFO per share growth at the midpoint. You know, so I think we, you know, put forward a pretty good number there, you know, near the highest in the space. And we put that guidance out in January. Obviously, the interest rate environment was a little different. Keep in mind, that was actually, we raised guidance in January. The first time I put out this guidance is back in 2019, if you remember. And interest rates have certainly gone up. You know, the curve is higher. You know, we are borrowing money to fund acquisitions. And so that's not really the dispositions that are affecting guidance. Those are going to be accretive. So it's really just the forward curve that we're looking at in our model. has certainly peeled off some of the other good things that we've done on operations, on capital deployment. I'd say probably the impact is about $0.04 to our forecast on the rise in rates. I said another way we would be increasing guidance had the Fed not gotten so aggressive. So we're happy we can maintain a very aggressive guide where we are, but it's just really just interest rates in the back half of the year that we're seeing that's just keeping our numbers where they are.

And Nate, I'll take the question.

Yeah, my comments on cap rates rising, you know, I think if you sort of look around between rate hikes and what's going on in Ukraine with the Russian crisis has had a pretty profound impact in the fixed income market. So if you look at mortgage CMBS, SASB loans, AAA CMBS, all that stuff has gapped out meaningfully since the beginning of the year as compared to year-round last year. So, for instance, like AAA TMBS spreads for like a 75% LTV loan are probably 180 basis points wider today than where they were at the end of last year. If you look at larger financings, like something larger like over $1.5 billion in secured lending right now, I mean, that is really probably you start paying pretty meaningful premiums over SOFR to get financings in that kind of range. So all that said is there's a lot of pressure on people that are looking to finance in the mortgage market today, commercial mortgage market. So like 5% is probably, 5% plus is like the new new for people that want to borrow there. So I think what that's doing is it's having obviously a reduction in potential bidders. I think some people are just, sitting it out right now to see where prices settle. What we're seeing is some deals are coming back around that didn't perform. And of course, the way we fund ourselves using bank term loans and unsecured bonds, well, unsecured bonds are not that great right now, as you know, but there is some opportunity in the bank market that has not largely widened across the board like all these other fixed income bonds where we could borrow. So bottom line is that, in my mind, is having a real impact on pricing. I think if I were just to do a rough guess, probably had a 5% to 10% impact in prices today. And so when we look at our pipeline, which I can address later, but we're sort of factoring that into our strategy as it relates to investment in the back half of this year.

Okay, that's very helpful. I'll leave it there. Thank you.

Thank you.

The next question we have is from Greg from Scotia Bank.

Hey, good morning. Jackson, I guess I will give you that opportunity to talk a bit more about the investment pipeline and what you guys are seeing and maybe why there's a potential expectation for a bit of a slowdown versus the strong $511 million you were able to achieve in Q1.

Okay, thanks. I'll take that. I guess what I'd maybe have you think about is if you go back to our last quarterly call, we talked about this concept of there were portfolio premiums out there, like hard to compete because financing was so aggressive. And that was just putting a lot of pressure on cap rates for us. And so we made a pivot, as you know, in the fourth quarter of 2021. We said, hey, we're going to start buying granularly. We're going to focus on 30 transactions, small to control cap rate, that we thought we'd have a better chance of kind of accomplishing what we wanted to accomplish. And that largely flips, as you can see, is what we saw in the first quarter of this year. You know, high number of transactions, 500 million. You know, if you look on our 10Q in Note 6 on where we have purchase or capital commitments outstanding, you know, there's 300 million sitting there. So, you know, you do the math. you know, half of our expected pipeline is already spoken for because it's all granular, very small, and probably largely looks the same as what we just did in the first quarter. What we're seeing in our pipeline going forward, you know, in the third and fourth quarter is probably pricing near 7%. That's our target. So when we look at investment, you know, performance in the year, you know, we don't kind of look at it on a quarter-by-quarter basis. We target an annual kind of production. And we talked about 6.5% earlier in the year. I think it's going to be higher when we get all said and done for this year. It'll be closer to somewhere in the 6.5% to 7% range for the entire $1.5 billion. So I think that's one of the benefits of kind of doing what we did was We raised capital efficiently earlier this year, equity, obviously. We've got it match-funded for the pipeline that we got committed. Between our $100 million of free cash flow, $140 million of unused equity, plus our dispositions that we've got targeted, I mean, we're largely trying to basically say we can fund ourselves the rest of the year without going back to the equity markets. Now, you didn't ask, but it'll probably come up. On dispos, we've made a decision recently as the quarter progressed through the first quarter, that we wanted to be able to self-fund ourselves. So when we put that guidance out there of $200 million to $300 million, you should expect that we have a lot more property for sale. We are being very opportunistic and very price-driven. So like a five-cap asset is the equivalent of us issuing stock at $55 a share. So we're not going to sell all those assets. We're very price-conscious. But there's good property being marketed right now in the home improvement, industrial, restaurant, grocery area. And we'll see where we get. It's not portfolio sales. It's one-off. And there's still 1031 buyers out there. There's still people buying all equity. So that was kind of the logic there.

Okay. Thank you. And then Mike.

One last question.

One last thing on your question, I didn't have to mention.

I think I wouldn't be surprised in the third and fourth quarter if you saw the number of transactions that we closed start to look more similar to what we did like in previous quarters. I mean, we're really focusing on more yield. So that probably means maybe there's a larger transaction in there or two, maybe not as many, really focused on good credit, really high risk-adjusted returns. That's kind of what we're focused on. And we obviously know how to do it.

We've done that in the past. Right. It seems fair. Thanks, Jackson. And Mike, in regards to the $520 million on the line of credit, potential capacity there for another $1.2 billion, do you anticipate raising unsecured notes or maybe something in the bank market, as mentioned in the prior answer? And if so, what rate feels achievable?

Yeah, I mean, we'll see. I mean, right now, the bond market is still a bit disrupted. So, I mean, I wouldn't go out and issue bonds today. But, you know, that market, I mean, if you look at it, it can move up and down pretty quickly. So, it's too early to tell. I think if the bond market's, you know, more favorable, we'd look at that. If the bank market's more favorable, we'll look at that. The nice thing about being an investment-grade issuer is we have options for different pockets of capital. So, you know, as we get a little later in the year, we do have a nice-sized revolver now. So that gives us time. And I think one thing you should expect from this team, as you've seen, I think time and time again, is we're pretty optimistic about when we issue to get good pricing. And we'll pick our spot and we'll pick the right, you know, the right avenue to go to maximize our cost capital. So still too early to tell, but I think there'll be options to choose throughout the year.

All right. Thank you. Thank you.

Thank you. The next question we have is from Michael Goldquist from UBS.

Good morning. Thanks a lot for taking my question. you acquire in a lot of different markets with varying cap rates. And given rising interest rates and steady cap rates, are you seeing fewer bidders in kind of the lower cap rate products given the smaller spread? And given that smaller spread, how do you think of acquisition allocations going forward?

Look, I mean, I can tell you, if we have some experience just in our disposition effort, because these are These are high quality properties that we have in the market. I would say it's certainly from what we can tell right now, like I'm not sure sellers have really kind of woken up to this is the real, real. So like if you're a, you know, our bread and butter is like a single B rated credit, you know, 500 million in revenues, preferably public. That stuff got really aggressive in the back half of last year. I can tell you right now, for us to do stuff in that zone, it's a higher cap rate. And so I'm not sure everyone has sort of come to that realization yet. So it always takes time between buyers and sellers. But some of the things that we're putting out there are really, really high quality. And it'll be interesting to see if we can demonstrate low cap rates for what I'll call trophy-like properties in some of the areas that we're looking at. And I think the number of bidders, I would say, I think for larger transactions, larger being portfolio, I feel like those got really sought after last year. And the fact that some of these deals are coming back around and they're coming around to people like us that can just stroke a check and then figure out how to finance it later, I think that's probably going to help companies like ourselves right now. So I don't know if that's a trend for the rest of the year or not, but I think there's some price discovery happening out there in the market today. And if you talk to brokers, they'll probably tell you that if they're being honest.

That's helpful. And I don't know if we fully explored, you know, the detailed view of the acquisition pipeline, but can you provide a little bit more color on that and just kind of Within that, you do play in the light warehouse space. Clearly, Amazon's comments are not completely comparable to what you're doing, but in the same sort of arena, are you seeing any changes in tenant demand and acquisitions in the industrial space that you look at?

I don't think we're changing what I'll call our lines of trade that we invest in. We like golf courses. haven't been able to find any, unfortunately, that suit us. We like industrial light manufacturing. We like certain retail, non-discretionary service retail type opportunities, like auto service is still a big focus. You'll probably see us slow down in car washes for the time being, but there are other things that we see that are interesting for us. We did an interesting deal that was related to a defense company sector player. That was interesting. We'd like to do more in that area. They make fuel tanks, inflatable bladders for military use. Obviously, people need that kind of stuff right now. So there are things that we feel like we can execute on, especially given how strong our current pipeline is. It's very identified. So what we've instructed our teams to do is, hey, we want yield. We want to get paid for risk. That might mean that we can't do a relationship deal if it's not in the right zone for us. It might take a pass for the time being. So, yeah, I'd say not huge changes to the mix of business, but just more driven towards yield is what we're focused on right now.

Thank you very much. Sure.

Thank you.

Ladies and gentlemen, just a reminder, if you would like to ask a question, please hit star and then one now. The next question we have is from Anthony Colon from J.P. Morgan.

Thank you. I guess, Mike, you talked about some of the financing options and what's available to you, but just trying to understand, you have an 85-15 split right now, fixed floating. So do you want that to be you know, less on the floating side, or how do you think about that just longer term?

Yeah, I mean, we're comfortable with that split today. I think it could rise even more. If we term something out, say, in the bank market, for example, you can always swap that to fixed. But, you know, for now, I think, you know, having the floating component be the revolver, having that grow in the short term is not a concern for us today.

Okay. And then just, you know, have a multi-currency line. Can you just talk about just, you know, your geographic buy box and how to read that?

Yeah, I mean, look, one thing we've always said is we have a wide opportunity set. We play in a wide sandbox. We look at everything. And, you know, I think when I think about the company over the next four or five years, and when you put a new revolver in place, you know, it's really the idea is that's for the next four or five years of growth of the company. Um, you want to set that up to handle whatever opportunities arise and we're not actively pursuing international today. We need to be a bigger company. And if we find the right opportunity, I would not take international off the table in the future. And so, you know, when you're doing it, it's, it's a free option to put that in there. And it was just good to go ahead and just, you know, gear it to be able to handle that kind of capacity should an opportunity arise in the future.

Okay. Got it. And then, uh, just last one I had, um, You know, you're ramping up the dispositions, and it sounds like there is an opportunity to, you know, sell things in the fives perhaps. And does that give you any appetite to revisit the stock at these levels from a buyback point of view?

You know, I'd say on the buyback, we've done that before. I mean, we always will look at it, but probably not. I mean, I think we have better – I don't know. If you look at that, there's a table we put in, the team put in, titled Underwriting Value. It goes through examples of different tenants that we've acquired where they were upgraded or there was an M&A or refinancing or recap, really solid real estate, solid industries. I mean, it's 20% of our ABR, but the real story is it's a third of the $4.3 billion that's been acquired by this team since we all got here. So, I mean, I think we make more money for shareholders doing that than just a one-time buy stock back. We've done that before. I'd rather – this is a great time to be investing, honestly, right now for companies like ourselves. There's a couple of other people, private, that have a lot of money too that have access to unique capital. I mean, we're supposed to be investing now, in my opinion. That's what we're supposed to do. If you want to buy back stock, you can always do that, but I think that doesn't really – create really long-term sustained value. I'd rather lay the chips down in credits, because you're actually getting paid for risk now, appropriately. I'd rather continue to unearth those unique credit opportunities, which we time and time again do. And we have a good track record of it. So I think it's underappreciated, to be honest with you. But we're just going to keep doing it until we find something else to do.

Okay. I appreciate the answer.

Thank you. The next question we have is from Rob Stevenson from Jenny.

Good morning, guys. Jackson, you talked about the upgrades and recaps and specifically main event being bought by Dave and Buster's. How much does that change the value of a main event asset in the market? I mean, obviously, Walt and location, other factors are important here. But is there tangible value creation that you can point to, let's say, 25 basis points or whatever from a cap rate perspective from some sort of combination like this?

I'm going to let Ken take that, but I would tell you one thing. I mean, today it's really hard because we're in this really unusual period in the world right now just in terms of what's going on in the markets. But, Ken, you should talk about the liquidity profile, what happens like to a main event or companies that do that.

I'd start out by saying the mere fact that you've gone from a private tenant to a large, well-known, publicly traded tenant. Right off the bat, yes, we believe if we were in a situation where we wanted to dispose of any of our main events, you would see cap rate compression today versus where it would have been prior to the transaction that was announced. Is it 25, 50, 75 basis points? Don't know. Like Jackson said, there is still some price discovery going on. But there is no question in our mind that, yes, that transaction would result in cap rate compression for main event assets.

Okay. And then you guys talked about demand and pricing as the key driver in the increased disposition guidance. But how much of this is also the attractiveness of dispositions as a funding cost given the rise in interest rates? if the 10-year was still 150, would you still be increasing the dispositions? Or given the impact on the market and asset pricing, et cetera, would that be different? And is part of this also a desire to cycle out of certain assets and tenants as well?

I'll tell you what, like from my personal standpoint, it's an interesting question you ask. If there were no change to our cost of capital, i.e. if rates were still low, One of the things that was kind of interesting for me as it relates to our pipeline process, acquisition pipeline process, is I think sometimes we can get a little bit isolated from the market. I mean, we're constantly buying, we're constantly doing things, but we're not really selling. So, you know, one thing that really struck me last year was You know, go back to the third quarter. You know, it was kind of light with the exception of Club Corp. The reason why was we were just getting blown away by bidders coming over the top. You know, you'd start to get into a process. You think you have something. Someone knocks you out by 5% to 10%. And we're not even close to that price. So I felt like, you know what, we need to be kind of buying and selling. And maybe we're selling in smaller amounts just so we kind of have a good feel for where the buying is where the buyer market really is. So I'd say if there were no change in the treasury, we'd still be selling. It'd just be a lot less, but we'd still just to kind of be in the flow to understand market dynamics. I would say when we ramped it up, it was really just, I just wanted to have, not be beholden to go back to the equity markets. I didn't know when we started this, it would be where we are today. I'm glad we started this exercise in pretty robustly. Candidly, I wish I did it in the fourth quarter, but at least we started. But I think you'll see us always selling premium assets. I think you're always going to see us to a small degree because I kind of want to know where the market really is. It's one thing when you're buying and competing. It's another when you're actually selling. You sort of have a better feel for things.

Okay, and you said that you're putting out more than the $200 million to $300 million out there. I mean, if you get good pricing, are you comfortable going up to $300 million to $500 million of dispositions, depending on what the redeployment opportunities are for you?

Yeah, for sure. I mean, it would inform us on how we attack the third and fourth quarter. Like I said, we've kind of already funded the front half of our $1.5 billion fund. And like I said, we have free cash flow, unused $140 million of equity we raised, plus these dispos. So if we sold more, we ended up buying more. I mean, in terms of kind of increasing that spread.

Okay. Very helpful. Thanks, guys.

Sure.

The next question we have is from Kim from Trace. Please go ahead. Good morning.

Good morning. So if I take a step back and think about how your company has progressed over the years, you know, you guys have done a lot of right things and your earnings are up, your leverage looks fine. You know, yet your stock price just continues to trade at a pretty big discount. I know that's something you always highlight. And then I combine that with, you know, your past, Jackson, of doing kind of smart, creative M&A spinoff type of transactions. You know, just given the current situation and how I laid things out, you know, does that spark other kind of creative juices in your mind to do something different with the spirit here?

Well, I would tell you, Keevan, it's a good question. We talk about it at the board quite a bit. You know, it's not just now. We actually talk about strategy and what's the best thing we can do. In some ways... Personally, I think there's going to be some amazing investment opportunities this year, I hope. That's my hope. It's not a great strategy, but I believe that there will be as the year progresses, just because it's so difficult given what's going on in the fixed income market. So in some ways, you hate to just step out of the room when you have that opportunity. And we did all this as a company heavy lifting. One of the things, if you think back to Investor Day, I remember you were there, right? December 2019, we said, hey, we're going to do $3.32 to $3.52 in 2022. We said that back in December 2019. Now, think about what happened. COVID, lockdowns, market volatility. Guess what? We're doing more than $3.52. That's our guidance, at least. So we totally did what we said in spite of having a not-so-great cost of capital. So there you go. I hope that people will look at us and say, hey, look, we have this little chart that says strong growth at a reasonable price. There's nine public net lease peers on that page that we put out there. We're number two in 2022 AFFO per share growth. We're number two in the last three-year TSR out of the nine. Our AFFO growth from 2019 to 2022 is number three. And yet, if you look at our 20, our multiple, we're number nine, we're at the back half. So it totally doesn't make sense. So in some ways, yeah, you know, should we do something different strategically? Always can do that. Always available. Portfolio is tight and clean, but there's this amazing opportunity to make money right now. So you hate to get off that. So I don't know, you guys got to write more or do stuff because we know what we're doing. We're performing. but sometimes we're sort of not getting a fair shake right now out there. So I appreciate you asking the question, but to answer your question, yeah, we do look at it all the time. But if there weren't this, you know, like right now, like there's less competition. You can actually really make some money now. So, like, why jump off right now? You can always jump off at a premium.

Got it. That was my only question. Thank you.

Thank you. The next question we have is from Bob.

Please go ahead.

Hey, good morning, guys. I want to dig in a little bit deeper into the asset recycling spread. Are you essentially looking to arbitrage pricing of larger deals versus small? And then conversely, are you also looking to buy ahead of credit improvement, which you have in the past, but also at the same time looking to sell ahead of credit weakness?

I mean, we... I mean, do you want to try that one, Ken?

Yeah, yeah. Well, on the DISPOs, one thing I would say is I think some folks tend to think of it as either it's an opportunistic or it's a risk mitigation. And what I would tell you is they're not mutually exclusive. We have some of the assets that we do have in the DISPO plan we view as both opportunistic and risk mitigation, whether it's a flat lease, a shorter term you know it could be there's a lot of different characteristics but each one of those assets has something about it that we we feel it just makes sense to go ahead and put it in a dispo plan but uh you know so that's of course those dispos we feel are going to be accretive and when you think about that are we talking like a 25 basis point spread if the can you give us maybe a ballpark range when we model this out

Well, I mean, I hate to give it, well, I mean, like, just, if it's accretive, let's just say 150 to 200 basis points spread right now. So what we think we can sell at and reinvest in, yeah, I think that's a fair ratio.

Okay, that's a lot worse than I thought, so thanks for that.

Yeah, I mean, look, I went through that last answer with Keevan. Look, we're ranked number nine out of nine peers with the weakest equity multiple. So we've got to figure out other ways to – portfolio is worth a lot more than that, guys. So we're just going to keep doing good spreads, and eventually hopefully people wake up and see that this is sustainable.

And then one quick one on the balance sheet. I think at the beginning of the year, there's some potential thoughts about taking out the preferred. Is that still in the game plan this year? I think we'll have to see. That's going to be TBD. I mean, certainly we'll have that option come in November, but we'll see if that's a good use of capital at that time.

Okay. Thanks for the time, everyone.

Thanks.

Thank you. The next question we have is from Joshua Denilson, Bank of America.

Yeah. Morning, everyone. Jackson, I'm just curious what your guidance assumes as far as a cap rate. I believe last quarter, I think you said six and a half. It sounds like maybe you're speaking to acquiring a 7% yield going forward.

I mean, look, I think we've

I think you should assume that we're going to target trying to end the year overall somewhere in the range of 6.5% to 7%. It's just going to be a function of the weighted average of what we're able to do in the third and fourth quarter. So, I mean, if you want to be safe, set 675. That's not a crazy target for the year. Okay. And we think we can accomplish that or close to it.

Okay, awesome. Thanks for that color. And then I'm just curious on the 2023 expiration. It looks like 3.9% of ABR is rolling. What's your visibility there on renewing those leases or what your expectations are?

Sure. Hey, Josh. This is Ken. For 2023, we actually think it's going to be pretty much what we've historically done. I think we're going to look at renewal rates in the 90% range as well as recapture in the mid-90%. For what it's worth, you know, 2022 is interesting. Right now, our recapture is tracking meaningfully higher than our historical average, somewhere in the range of 110%. So, you know, we've always had a a great plan in place of attacking renewals as early as possible. And so that's what we're seeing right now in the headlights.

Thanks, Ken. Appreciate that.

Thank you.

Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then one now. The next question we have is from the panel team, just from Ruby. Please go ahead.

Hey, good morning, guys. So let's talk a bit about maybe break down the pricing amongst the major asset types acquired in the first quarter, the industrial versus the retail and the other. And within the other, I noticed data centers was included there. I'm not sure if this is your first investment in data centers. Maybe you could talk more about what you perceive the opportunity there to be and how much more exposure you might be comfortable getting to there. Thanks.

Sure. I mean, that property that was in that category was Southwest Airlines Backup Logistics Center, which is up in McKinney, Texas. It's obviously a mission-critical, got to have backup data center, got to have backup logistics center, flight control logistics backup for major airlines. And they happen to be, obviously, there's a major hub here in Dallas. So we like that opportunity. We're not really focused on data centers. That had a very unique you know, good location, good market, super sticky, mission critical, that we thought is at a good price relative to yield, so.

Okay, and then maybe some color on.

And then in terms of, yeah, and then in terms of like industrial retail split, like we don't, I'll just give you kind of a breakdown. We did a lot better on the industrial cap rate this past quarter versus retail. And, you know, maybe some of that's, some of the lifetime fitness and things like that that are part of that first quarter. But we did, we were able to outperform on a cap rate basis by 100 basis points on industrial versus retail in the first quarter.

Yeah, that's helpful.

And maybe, Carl, I don't know if you mentioned anything in second quarter here, anything you have perhaps under contract or that you bought already, any color or comment you're willing to provide on what's already kind of been maybe agreed to here in early second quarter or any color on maybe asset types or if that includes any portfolios? Thanks.

I feel like the second quarter is going to look largely similar to the first quarter. in rough scale, rough mix, rough cap rate, just generally. And it's pretty much already identified, I can tell you. So right now what we're focused on is really third quarter already.

Okay, fair enough.

And then I guess one more, and maybe it's an unfair question to ask, but I'm curious, you know, why – 25 to 50 basis points perhaps is the expectation for the cap rate moving back after the year maybe that has to do with some of the what you already have are close to agreeing upon in terms of uh cap rates in under negotiation but obviously the moving rates has been uh far far more significant so uh maybe perhaps help us understand how you know 25 you're thinking there on a 25 to 50 basis point thanks i mean it's just what we're seeing uh

Handel, right now. I mean, just we have, you know, we're pricing deals every week. We're evaluating deals every week. And the things that are coming into our pipeline now are just, they're just wider for the same kind of things that we were looking at before. And I just think that's just a function of, I think it's a function, as I said earlier, of what's happening in the debt markets. You know, we unfortunately, I mean, I wish we had more luxury just to stop, take a pause, Our private equity brethren that do this, family offices, they can stop. They don't have to do stuff. We put these earnings guidance out there. We have to kind of keep investing. Sometimes it's not a bad idea just to slow down a little bit, but we don't have that luxury. But what I can tell you is we're putting that number out there because it's things that we're seeing that we're getting under agreement right now in terms of just like-for-like things that are wider in cap rates.

Okay, thanks, Jackson. See you guys, I guess, in the next interview. Yeah, definitely. Look forward to it.

Thank you. The next question we have is from Morgan Stanley.

Hey, just two quick ones, and we've touched on some of these already, but if I can just go back to the guidance. I think you just sort of mentioned that sort of the interest rate assumptions obviously have changed with the rate movement. I was just wondering if you could sort of help us build back for what that interest rate assumptions did on the negative side and what was the positive offset that got you back to even, if that makes sense. Just trying to get a sense of the two or three moving pieces, both to the good and to the bad, that got you back to even. Thanks.

Yeah. I mean, you know, when we set our guidance in January, obviously we used the forward curve back then that didn't incorporate, you know, the hawkish fed stance today. Um, you know, we find in the short term, a lot of acquisitions using our revolver that's tied to silver. So as we look forward with the projected, you know, fed news that directly impacts, you know, that borrowing rate. So that, that would be the negative. Um, and then obviously the positives are, we had pretty strong acquisition volume. And both the fourth quarter and the first quarter. So remember, what we do in the fourth quarter of 21, you don't close all that, you know, at the very beginning of the quarter. So some of that earnings does bleed into and affect your growth rate in AFFO in 22. And then, of course, we had strong acquisition volume in Q1. And then so that large volume early in the year really has a big impact to your AFFO, much more than, say, what you do in fourth quarter of 22. That really starts to affect 23. And then finally, we've had really clean operations. We obviously project some lost rent, and we haven't had any. So those are the good guys that are offsetting the higher rates.

Great. Makes a ton of sense. Ben, if I could just piggyback on the dispositions. I think your comments are really interesting. I think you mentioned that you're going to be putting on more on the market than just the amount that you put out. I think I heard Office in the opening comments just trying to get a sense of, What is being put on the market? Is it all the office? Is there some industrial? Is there some retail? What are you putting on the market and bidding right now? Or is it all the above?

Thanks. Look, I think when we came up with this constructed disposition plan, it included office, not all office. It's very select, very specific. It included industrial. It included home improvement. It included grocery. things that had good vaults or had really high real estate value associated with them. I mean, it was a lot of thought. It wasn't just putting things out there. And there was a lot of thought given to what brokers worked on what. And so that's all kind of happening out there. And hopefully next quarter we'll come back and say it is what we did. And obviously with a mind towards looking at it as a potential equity source for us.

Great. And if I could just ask one more, just switching back to tenant health. Look, the occupancy is very high, flat. Lost rents is negligible. Just can you update us, what are you hearing from tenants in terms of either pain points from supply chains or inflation? Just what's the pulse that you're getting from them? Because the numbers look pretty strong, but just trying to get a forward look.

Yeah. Maybe I'm going to answer that question, but just give me a minute to cover a point. What people have to understand about this company spirit is just go back to 2017, right? We had to spin off and get rid of a lot of properties that we believed needed to get rid of. We got rid of and were successful doing that, that were acquired by other management teams. We started with $3.9 billion, right, that post-spinoff, good, high-quality properties, retail, We acquired $4.3 billion since that period. Over 30% were industrial properties. A third of them are related to this kind of unique credit upgrade that occurred within that $4.3 billion. So what you end up with, if you look at 2017 to where we are today, we have this little chart on page in the deck. If you look at public tenants as a percentage of our ABR, industrial as a percentage of our ABR, our top 10 concentration, our investment grade tenancy, unreimbursed property expenses, lost rent. All of that stuff is going positive, i.e. getting better and meaningfully better. You can see it. So when we come back and talk to you about tenant health, tenant health is great. Our credit watch list right now, those meetings are pretty non-eventful. Because we've been able to really have so much intention on our investment process. Now, to answer your question, Ron, on where we have concern, guys, we talk about this every week, you know, with our head of credit. I would say labor has been more manageable from a lot of our tenants. That was a huge issue at the beginning of the, you know, kind of when the reopening started to happen after, you know, the COVID lockdowns. Labor was a major, major issue. A lot of our tenants have seemed to be able to deal with that. That doesn't come up to be an issue. They've managed around supply chains. Things are surprisingly good. You know, I hate to say it, but that doesn't mean we don't lose sleep. So, you know, I look at our, you know, our public tenants are obviously very sophisticated. That's over 50% of our ABR. You know, we're looking at our private equity portfolio because a lot of those guys are are working with floating rate debt in some cases and looking at – and so we do focus on those tenants. But right now, they're all performing. Part of it is because of the industries that they're in, the way the credit was underwritten, and the nature of the real estate or the lease structure. So the results are not by accident. That's just my point. And we feel really good about whatever kind of curveballs are coming down in terms of the future, recession or whatever, rate changes.

Great. Thanks so much. Appreciate that.

Thank you. Our final question is from John from .

Please go ahead.

Good morning. You touched on it a little bit in the last question, but, you know, we talk a lot about the impact of rising interest rates on your cost of capital, but maybe if you look out and you underwrite future acquisitions, sorry, Is that impacting what kind of transactions or tenants you're willing to do transactions with?

Absolutely, it goes into it.

I mean, look, we are, you know, small tenants get impacted by credit markets and liquidity. Bigger public tenants probably have better ability to access credit you know, capital like we can. Like we can access the bank market, which is very, very advantageous for us right now. You know, if you're a small private company, eh, not so easy, right? Not as much access to liquidity. So you'll see stronger operators access the bank market. So when we're looking at a sale lease back today or looking at a potential investment opportunity, we're looking the same way. Like, do they have access to liquidity? You know, what are their, you know, where are their, how are they sourcing um, you know, their, their merchandise or, or their operations, do they have the ability to pass on costs to the consumer? You know, all those things are going to our calculus as to, you know, is this the right investment to make and are we being paid appropriately for it? Um, and the answer is yes, today it was, it was harder last year, to be honest with you.

So, okay. And then with regards to your own balance sheet, you kind of mentioned that bank debt looked relatively attractive compared to other options, at least today. I mean, what kind of spread are you seeing maybe in the swaps term loan market versus unsecured debt?

Yeah, look, I mean, unsecured debt is so disruptive right now. I'm not even asking for quotes at this point. But, I mean, in the bank market, you're seeing so far plus 95%. probably swap that into the high threes today. So it's pretty attractive.

Okay.

That's it for me. Thank you very much.

Thank you.

Ladies and gentlemen, we have reached the end of our question and answer session. And I would like to turn the call back to President and Chief Executive Officer Jackson Chase for closing him off. Please go ahead, sir.

Thank you, Operator. I'd just like to thank everyone for participating in our call. We're very enthusiastic about the pipeline that we have going into this quarter and opportunities for the rest of the year. And we look forward to seeing everyone at NAREIT, hopefully in person. And just want to once again congratulate, you know, our 89-person team here. They've been doing a great job.

So thank you all for participating. Have a good day.

Thank you. This concludes today's conference. We will now disconnect your lines at this time.

Thank you for your participation.