BNL - NYSE

Hello, and welcome to the Broadstone Net Lease Third Quarter 2024 Earnings Conference Call. My name is Carla, and I'll be operator today. Please note that today's call is being recorded. I will now turn the call over to Brent Maedl, Director of Corporate Finance and Investor relation at Broadstone to begin. Brent, please go ahead.

Thank you, everyone, for joining us today for Broadstone Net Lease’s third quarter 2024 earnings call. On today's call, you will hear prepared remarks from CEO, John Moragne; President and COO, Ryan Albano; and CFO, Kevin Fennell. 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 undue reliance on these forward-looking statements and refer you to our SEC filings, including our Form 10-K for the year ended December 31, 2023 for a more detailed discussion of the risk factors that may cause such differences. Any forward-looking statements provided during this conference call are only made as of the date of this call. With that, I'll turn the call over to John.

Thank you, Brent. And good morning, everyone. We began 2024 with two main goals; first, to reposition our portfolio through our clinical healthcare simplification strategy, focusing our future on industrial, retail and restaurant assets; and second, to put in place the foundation for attractive and sustainable AFFO per share growth through our differentiated strategy and core building blocks. With the progress we have made to date, particularly in this last quarter, I am proud to say that we believe we have substantially accomplished both and are now looking forward to setting a new baseline for BNL's growth and performance in 2025. Starting with our clinical healthcare simplification strategy. With the completion of the latest tranche of sales, comprising 10 clinical healthcare assets that closed on October 2nd, we successfully brought our total healthcare exposure below 10% but most importantly, reduced our exposure to clinical assets to approximately 4% of our ABR. The 6% of our assets that include animal health services, medtail or medical, retail and life science assets will generally continue to have a home in our broader portfolio and are not the focus of our current disposition efforts. Selling the 4% of our remaining clinical, surgical and traditional medical office assets will remain a goal for us but will not be as much of a front and center focus now that our total clinical exposure is relatively immaterial. In order to maximize value for the remaining clinical assets, we anticipate those dispositions will have various transaction timelines that comfortably extend extended into 2025 and beyond given the need to address some combination of shorter lease duration, space utilization rates or elevated credit risk. With a heightened focus on the clinical healthcare dispositions winding down, we have been able to devote more resources to our year long effort to put in place the foundation for attractive and sustainable AFFO for share growth through our differentiated strategy and core building blocks, a key tenet of which is a laddered and long term pipeline of attractive build-to-suit development projects. We saw the considerable benefits of this strategy in multiple ways this quarter. First, we reached substantial completion on our UNFI build-to-suit development in early September. This brand new high quality 1 million square foot tri-climate food distribution asset strategically located in Sarasota, Florida is now operational and contributing to our earnings base with an initial cash yield of 7.2%, a 15 year lease term and 2.5% annual rent escalations that drive a straight line yield of 8.6%. The project was ahead of schedule and below budget, thanks to solid execution by all parties. We are incredibly excited about this project and are grateful to UNFI, Sansone, our development partner and all of the parties that made this build-to-suit a success. Second, we continued laying the necessary groundwork for sustained success in our laddered and long term build-to-suit strategy. We currently have $405 million in committed development with attractive initial cash yields in the mid to high 7% range and straight line yields exceeding 9%. Subsequent to quarter end, we closed and began initial funding on two developments with an estimated total cost of approximately $114 million and expect to close and begin funding the rest of our committed pipeline in the coming weeks. I'm extremely proud of our team's ability to execute on this differentiated core building block of our growth. 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. Maybe 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. 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 BNL. With our attractive denominator, the individual size and aggregate scale of the build-to-suits comprising the strategic initiative moves the needle for our growth and does so in a differentiated way that drives long term value. Just with this existing pipeline, we have already secured approximately $33 million of incremental ABR that will come online in Q4 2025 and the first half of 2026, and are actively seeking additional built to suit opportunities to round out our targeted ABR growth for 2026 as well as into 2027. While the traditional net lease model relies on inorganic growth from the regular way transaction market, we are seeking to drive BNL's growth through this differentiated and long term focused core building block. No one can predict what the net lease acquisitions market will look like in Q4 2025 or 2026, but we can tell you today without having to do anything else that we will add a minimum of approximately $33 million of ABR during that time period through this strategy in our built to suit pipeline as it exists today. And with the incremental new ABR added, as each project reaches substantial completion and rent commences, we're able to maintain our leverage ratio comfortably below 6 times. We're doing things differently here at BNL and we couldn't be more excited about what's to come. We also have our eye on the future operationally. Our asset management team emphasizes engaging in re-leasing touch points as early as 24 months prior to lease expiration. So we are already actively evaluating our lease rollovers through 2026. This approach not only strengthens our relationships with tenants but also provides us with valuable insights into their needs and intentions, such as identifying potential revenue generating funding opportunities and gives us great confidence in our ability to successfully navigate upcoming lease expirations. Recently, we secured two new leases for properties that had just vacated, achieving impressive lease terms of 13 years each and recapture rates of 100% or better. Year-to-date, we've executed six lease extensions or tenant renewals all at or above 100% recapture with minimal tenant improvements required. Offsetting some of these gains, we now have three vacant properties generating higher property operating expenses in the back half of the year. We are working towards optimal sale or lease outcomes for these assets to reduce these carrying costs and are cautiously optimistic about near term resolutions. 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 broader impact from the duration of higher interest rates impacts consumer centric industries and entities with less flexible 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 that may arise. Leveraging our core building blocks, consisting of best in class fixed rent escalations, revenue generating CapEx investments in our existing tenants and assets, development funding opportunities and traditional acquisitions gives us confidence as we ramp towards returning to growth in 2025 and 2026, much of which is already visible through our committed to build suit pipeline. For the current year, we are maintaining our AFFO guidance range of a $1.41 to $1.43 per share. Starting this year with a view that a neutral AFFO per share result would be a positive outcome given our decision to strategically exit our clinical healthcare assets and redeploy the proceeds in the quality investments, I am pleased that our accomplishments this year, including a reduction in cash G&A, we will result in modest growth for 2024 and position us to establish a return to growth in 2025 with an ability to scale and ramp that growth in 2026 and beyond. We made decisions this year that we believe were in the best interest of BNL and its investors for the long term, and are confident that those decisions will lead to attractive and sustainable AFFO per share growth and BNL's future. With that, I'll turn the call over to Ryan, who will provide additional updates on our built to suit pipeline, completed transactions and portfolio.

Thanks, John. And thank you all for joining us today. Before turning to routine portfolio updates, I wanted to provide all of you with some additional details on our exciting and robust built to suit pipeline. As John mentioned, we have made tremendous progress in our continued efforts to advance our built to suit strategy. The current pipeline consists of $405 million in committed developments with highly attractive initial cash yields in the mid to high 7% range and straight line yields exceeding 9%. Earlier this month, we closed on the first two of these projects where initial funding has occurred and construction is now underway. This built to suit opportunity consists of two maintenance, repair and overhaul hangers, commonly referred to as MROs, supporting one of our existing tenants, Sierra Nevada Corporation and advancing a project of significant importance. Earlier this year, the U.S. Air Force awarded a $13 billion contract to Sierra Nevada Corporation to develop a successor to the E4B plane. Over the next decade or so, Sierra Nevada Corporation will assist the U.S. Air Force in replacing their aging fleet of E4B nightwatch planes, also known as the National Airborne Operation Center or Doomsday Aircraft. If a catastrophe were to occur that destroyed the military's command and control centers on the ground, the president would direct forces through an airborne E4B, thus the doomsday term. The U.S. Air Force currently operates a fleet of four E4Bs, which have been flying since the 1970s and are near the end of their service lives. The two MROs that we are building for Sierra Nevada Corporation will be directly supporting this very important project. Each MRO will be approximately 120,000 square feet in size with 75 foot clear heights, a two story office and an overhead crane system. It will be located directly adjacent to two of the company's existing MROs at the Dayton International Airport, strategically positioned within a few miles of Wright-Patterson Air Force Base. The total estimated cost of these two projects is $114 million and funding is expected to occur over an 18 month period with estimated completion dates of Q4 2025 for the first MRO and Q2 2026 for the second MRO. We are grateful for this opportunity to partner with one of our existing tenants and assist in their advancement of such an important project. In the coming weeks, we expect to close and begin funding the remaining $290 million pipeline of currently committed build-to-suit opportunities and we look forward to sharing further details related to those projects at the appropriate time. As John noted, we are very excited about the progress we have made on this front and believe these investment opportunities are highly compelling, featuring newly constructed, well located buildings with strong tenant credit and yields that exceed most of the regular way transactions we've evaluated since the interest rate hiking cycle began. In today's environment, these projects will drive future growth as we remain cautious about the regular way transaction market where we have consistently observed a disconnect between pricing expectations and the quality of opportunities. Now turning our attention to our routine quarterly updates. Alongside our build-to-suit efforts, we closed on $93.9 million of investment opportunities during the quarter, bringing our year-to-date total to $381.9 million. This investment activity included $69.3 million of new acquisitions with a weighted average cap rate of 7.2% and an additional $24.6 million of fundings associated with our UNFI build-to-suit investment. After reaching substantial completion, we are excited to count UNFI as our second largest tenant. This property is a premier Sunbelt asset located in Sarasota, Florida that adds tremendous value to our overall portfolio from both an NOI and NAV perspective. Now shifting to our in-place portfolio. Trends remain largely unchanged during the third quarter. While we are confident that our portfolio will continue to deliver strong performance and generate durable and predictable cash flows, we remain cautious of industries that are sensitive to discretionary consumer spending and tenants who are exposed to persistently higher interest rates on their floating rate debt or face near term debt maturities. Our watchlist has remained fairly consistent this year and consumer centric tenants as well as some of our remaining clinically oriented healthcare properties remain in focus. Of particular note, we are pleased with the successful resolution of the Red Lobster bankruptcy proceedings with all 18 of our master lease sites remaining open, while realizing a modest rent reduction of 8.25%. Broadly speaking, the home furnishing space continues to be in focus for us, specifically including our tenant at home, which represents approximately 1% of ABR. As a reminder, we own a distribution center in Plano, Texas and a strong retail site in Raleigh, North Carolina. Both sites are well located in strong markets and we believe they would garner significant interest from alternative users if we were ever to get them back. Finally, as John mentioned in his remarks, we have substantially accomplished our clinical healthcare simplification strategy. On what remains of our clinically oriented healthcare properties, we continue to work toward optimal disposition outcomes. The majority of these sites are under negotiation regarding some combination of lease extensions, tenant improvement allowances and change of control transactions. We will manage these situations and strive for resolutions in the near to intermediate term. With that, I'll turn the call over to Kevin to provide an update on our financial results.

Thank you, Ryan. During the quarter, we generated AFFO of $70 million or $0.35 per share, a decrease of 2.7% in per share results year-over-year. Results were largely driven by lower lease revenues in connection with our healthcare simplification strategy, as well as incremental expenses associated with vacant assets. These factors were partially offset by lower cash G&A and interest expenses. As John and Ryan mentioned, our portfolio continues to show resiliency, realizing 39 basis points of bad debt year-to-date, excluding Green Valley. For the full year, we remain comfortable holding our 75 basis point bad debt reserve and expect some elevated operating expenses to persist in the fourth quarter in connection with current vacancies. The continuing trend of G&A coming in below expectations we set at the beginning of the year is primarily driven by lower compensation costs as a result of reduced headcount and lower professional services expenses. As a result, we incurred approximately [$70 million] of cash G&A expenses during the quarter and we are lowering our full year cash G&A guidance to a range of $31 million to $33 million. We ended the quarter in a strong and flexible financial position once again with pro forma leverage of 4.9 times in line with where we ended the second quarter. At the end of the quarter, we had unsettled forward equity of approximately $39 million in estimated net proceeds, which combined with approximately $870 million of revolver availability, gives us ample capacity to fund our committed built to suit investments and evaluate incremental investment opportunities. At our quarterly meeting, our Board of Directors declared a dividend of $0.29 per common share in op unit payable to holders of record as of December 31, 2024 on or before January 15, 2025. Our dividend represents an attractive yield relative to many of our peers, remains well covered and will continue to more closely align with our targeted AFFO payout ratio in the mid to high 70% range. As John mentioned, we are reaffirming our AFFO guidance range of a $1.41 to $1.43 per share. In addition to the cash G&A reduction I previously mentioned, we are lowering the high end of investment guidance from $700 million to $600 million. Please reference last night's earnings release for additional details and we'll now open the call up for questions.

[Operator Instructions] Our first question comes from Eric Borden from BMO.

John, just maybe on the guide. What's keeping you from raising it at this point in the year? Just rent collections are up sequentially, UNFI is now online and ahead a schedule and cash G&A is tracking well. Is it really just the offset from increased expenses in the back half of the year?

Eric, that's exactly it. This was all things that we anticipated coming. There were a handful of tenant credit events that we had earlier in the year that had to work their way through the process where we knew the impact was going to hit in Q4. We mentioned earlier that there was also some additional carrying costs on some of the vacant assets that we're going to have between now and the end of the year. We're confident that we've got some resolutions to take care of those in this quarter, so that way we'll be on a better footing going into Q1. But just these were things that we took into account as we set the guidance for the year and why we're comfortable holding where we're.

And then maybe just turning to the acquisition environment. Can you just discuss what you're seeing today more broadly in terms of volumes and cap rates? And if you were to acquire traditional net lease assets, what cap rates are you currently targeting? I know you guys are focused on the build-to-suit environment. Just curious if there's any opportunities in the near term for you guys.

So I think it's pretty consistent from what we've been saying the last quarter or two in that, there's not a whole lot that's out there right now that we really like. There's certainly volume. The risk adjusted returns on those relative to how we think about investing in regular way transactions aren't necessarily working for us. Now there's certainly a cost of capital component to that. And we are solidly in the [indiscernible] in the way that we're thinking about what the actionable universe is. But the things that are there aren't necessarily penciling for us in the way that you would want to see. So what we've been telling a lot of investors is, and Eric, you've heard say this has been, if you want to understand the way that we're thinking about the regular way transaction market look at where we're allocating capital today. And the place where we're allocating capital is primarily into our build-to-suit pipeline and we think that is a really compelling differentiated strategy. And so we are much happier allocating there where we're getting mid-7 cap on upfront initial cash cap rates with our capitalized interest, and we're getting straight line yields in the 9s. That's a really compelling place to allocate capital. And we're much happier doing that than chasing things down on a price basis in the regular way transaction market.

And then just on the acquisitions in the quarter. Just we noticed that annual bumps were above the portfolio average and what's been acquired year-to-date. So could you just talk about was this a unique situation where you’re able to drive annual bumps higher or is this kind of the expectation going forward for you guys?

A lot of it has to do with the weighting that we have towards our industrial portfolio. The bumps that you see in regular way retail and restaurant assets are always more muted than what we're able to get in the industrial sector. And so when you weighed out what we've acquired this year and get down into the particulars of what we have, particularly in this last quarter, the majority of it's in industrial where we're able to command a higher aggregate rent bump. And so I think that's why when we talk about our four core building blocks, the first one there is weighted average rent bumps of 2%, which is highest tier in the space.

Our next question comes from Anthony Paolone from JP Morgan.

I was just wondering if you could talk a bit more about just thinking into next year and investment spending. It sounds like acquisitions will just be a much smaller piece of this. So just trying to think if that's, A, fair and maybe B, like what is the order of magnitude? Because historically you have done a pretty meaningful amount of investing. And if it's just going to be build-to-suits going forward, it seem like the capital out the door will be a lot smaller as that builds.

So I think if you're talking about capital in the near term, potentially yes, it might be smaller. When you start looking out to the nine month -- nine month three quarter period that we were talking about in our remarks where we've got the ABR associated with allocating $420 million worth of additional investments, it's right in line with what we've done historically. It's just on a sort of longer term view of the way that we're thinking about the world, and with our focus now on laddering out those build-to-suits. So that way, we're having conversations today about what else can we add for 2026, are there things that are going to come online at the end of ‘26 and the beginning of ‘27. Once you ladder into that, we're not going to have that conversation of how much are you putting out because we'll be doing it on a consistent basis quarter-over-quarter, year-over-year as those build-to-suits come online. Now in the short term, we'll continue to be opportunistic and look for acquisitions that make sense for us and if we see those, we'll go after them, particularly those direct relationship based deals that is the majority of what we've done this year, most of what we've done this year from a regular way transaction investment perspective has been with existing relationships, direct deals, things like that. We're not going after a lot of the things that are in the regular way transaction market. I still think there's a lot of uncertainty in the regular way transaction market. I mean, even if you take the last six weeks or so, people had been waiting this entire year for the fed to cut interest rates with the hope that you were going to get some certainty around rates and maybe you'd start to see rates come down and cap rates adjust and seller expectations and buyer's expectations starting to align better. But if you take from when the fed cut rates on September 19th to today, I mean the fed cut rates by 50 basis points and you've seen 60 basis points of increase in the 10 year. So I'm not sure people are seeing the environment that they were working -- looking for in the hopes that you'd get a better regular way transaction market, that's not something that we were banking on and planning for. We were planning to control our own destiny with the build-to-suit program with our four core building blocks. And we're very comfortable as we go into 2025 as the type of growth that we can generate in ‘25 and more in ‘26.

And then in terms of dispositions, on a go forward basis, you talked about just healthcare slowing down and just doing the rest of that over time. But any other parts of the portfolio that we should think about as likely coming up for sale or as a source of funds really in 2025?

Yes, I think it's more a traditional asset management strategy at this point. We've got the 4% remaining of the clinical healthcare that we'll be working on. Some of those we'll look to execute in 2025, some of those may take a little bit longer. We have our office assets, which is about 5.8% of our ABR. There's no real rush there. There's plenty of opportunity in the coming years to evaluate and find good solutions for those office assets and we don't have to go out and light that value on fire. So from here on out, it's going to be more of a traditional asset management strategy where we'll be looking to mitigate some risks, take advantage of some arbitrage, do the stuff that you would expect us to do in years outside of this one when we had the strategic focus on clinical healthcare.

Our next question comes from Upal Rana from KeyBanc Capital Market.

John, with two thirds of the healthcare dispositions out of the way, I know there's about a third left, and you kind of mentioned there's going to be -- there are going to be mostly one offs. Can you share what the appetite could be for from buyers for the remaining assets?

There's certainly interest. This is are going to be, as I said and you repeated, sort of the one-off nature. So these are going to be individual, discreet, local, regional buyers, folks that have a particular interest in that asset and that property from operating standpoint.So we'll take our time on it. And the main reason for taking that time on it, as I said, is we want to try to maintain as much value as possible. There's always a buyer at some price but we're not a seller at just any price. So we want to make sure that we find the right person in the right situation. And if that means we need to be patient and work on a lease extension, do some tenant improvement, work through a credit event, something like that, we'll make sure to do that to try to maintain as much value as possible.

And then I know you are allocating more capital towards built-to-suits. But could you give us some details on what the competition has looked like in the transaction market? And do you think there could be some exhaustion from sellers where you may begin to allocate more capital towards traditional acquisitions?

We certainly are open to it and we'll be as opportunistic as possible. The place that we play the most in sort of that mid market industrial deal has been incredibly competitive this year with bid processes that look like they did back in 2021 and 2022. We haven't seen any exhaustion yet. But at the same, as I mentioned a couple of questions ago in terms of where the rate environment went, people's expectations don't seem like they have been met in terms of what they were hoping for in the back half of this year. So it's possible that you start to see some capitulation here and there as people get used to a higher for longer environment. We'll wait to see. We're poised and ready to jump on that. We've got $875 million of available capacity on our line right now. As I said in my prepared remarks, even with the build-to-suit program, we stay comfortably below 6 times on a leverage basis all the way through to the end of those investments. And so we've got ample opportunity to be opportunistic and go out and buy some things if it makes sense.

Our next question comes from Jay Kornreich from Wedbush Securities.

During the past quarter, you issued a small equity forward to your first two years. And so I'm curious as the focus switches from portfolio repositioning to now growth, how do you think about issuing equity capital to fund transactions going forward?

So the environment is certainly more constructive than it was earlier this year. We are very pleased to issue the $39 million in ATM proceeds on a forward basis. It was great to get back in the market and sort of let the world know that we're open for business. It was a long two years between times when we had issued equity. So we're very excited to do that. At the same time, we're not currently trading in a place where we would feel that excited to go out and do a huge amount of equity. Of course, you have to match these things up. It's a bit of a dynamic equation in terms of what the opportunity set is, what are the yields that we're getting. So the $39 million that we raised was a compelling opportunity relative to the long term straight line yields that we're getting on the build-to-suit program and the 9 cap range. So we're pleased with that. But at the same time, we'll be cautious going forward. There's always a dilutive impact from raising additional equity. So if the opportunity set, the yield and where our cost of capital stands relative to where our stock price is trading, we're happy to do it. But the thing is today, we don't need it. So we're not planning on going out and doing a whole lot more.

And then just with the focus on the build-to-suit developments, which now stands at roughly $420 million. Is there any kind of goalpost of how large you want to build this platform into? And as it continues to grow, how do you think about the funding of this -- of all these commitments as they ultimately start coming online?

So from a funding standpoint, it's not altogether that different from the way we would think about it normally. We have the capacity today. We don't have any near term debt maturities. We'll deal with those in turn. But we'll look at funding pretty similar to the way that we have in the past for the rest of our pipeline. In terms of the capacity and the hope for the future with this, we're looking to make it as big as possible. We've got an opportunity here filling out, as I said, ABR of about $33 million that'll come online sometime between Q4 of 2025 and Q2 of 2026. Sitting here today being able to tell you that feels pretty exciting and pretty differentiated from what you would traditionally hear in the net lease space. So our hope is to be able to ladder this out going into the future, filling out the rest of 2026, start thinking about 2027. This is a differentiated strategy that we believe is unique to us with our industrial focus, with the ability to do large chunky deals and with the relationships that we've been able to build with the developers, with our tenants as a unique funding source for them, gives them surety of close, a one-stop shop, makes it easier for them to grow their businesses and to find projects and then to move on to the next one. So this is something that we're very excited about.

And the next question comes from Ryan Caviola with Green Street.

I just want to see if you could provide a bit of detail on the two new industries you entered last quarter, and maybe share some thoughts on where you're looking to increase exposure or versus where you might feel you've reached optimal levels in specific industries?

Can you repeat that again? I didn't catch the first one.

Just that you -- the industry count went up by two for the quarter. So just if you could provide some color on those two new industries you entered and if you're going to interested in increasing exposure there?

Yes, I'm [blanking] at the moment. I mean, we moved into a different facet of sort of automotive services. One of our -- well the largest acquisition we had in the quarter was with a company called Magna Seating, which is based outside of Detroit and services the auto industry there in terms of providing different versions of seats and automotive products for them. So it's a bit of an expansion of what we've already been into. But to maybe to the heart of your question, the diversified nature of our portfolio is something that we take quite seriously. Having a tenant base where we don't have any individual tenant that's larger than 4%, the number of industries and number of overall tenants that we have is incredibly important, because it helps mitigate the risk of any individual single tenant event causing a significant problem for us. And to your point on the industries, it's not just individual tenant risk, it's also individual industry risk. If you think about our watchlist right now looking at furniture and some of the clinical health operators, the more industries you have in the portfolio, the better off that you can be in terms of mitigating the risk. So increasing that over time is a good one.

And then back with investment activity in general has kind of split 70/30 industrial to retail. Just wanted to see if you expect that mix to remain steady or if there are emerging opportunities in either sector that might shift that balance going forward?

Yes, I mean we've been pretty steady on that for a while now. I think if you go back even five years in terms of our investment activity, 70% of it's been in industrial. So that has been a long time coming, I would say, in terms of the overall industrial focus. If you go back to 2018, our industrial portfolio is much smaller than it is today and where it sits now is the predominant portion of what we have. We are nimble though and we're opportunistic. So if we were to see good opportunities in retail and restaurant assets, we would certainly go after them. We're not afraid of doing that and we do like the diversification going back to your first question. But 70/30 is a relatively sort of par for the course split for us I think going forward.

And our next question comes from Ronald Kamdem with Morgan Stanley.

Its Jenny, on for Ron. I think the first one, I want to follow up on the build-to-suit opportunities. So are you guys open to any -- this kind of opportunity with any new tenant relationship at this point? And going forward, if you do like how would you make investors comfortable with the development -- like development risk and tenant risk related to it?

So with existing tenants, absolutely. This is sort of a marriage between the sort of second and third core building blocks of our strategy here where we certainly are looking to do revenue generating CapEx projects with our existing tenants. But if they have new build-to-suit opportunities for them, we're happy to do that as well and sort of shift from that second to that third core building block. This most recent one that Ryan talked about in his remarks here in Nevada Corporation is a great example. They were an existing tenant already in the portfolio. We have this wonderful opportunity to partner with them on the construction of these two MRO facilities in Dayton for an incredibly important project for the U.S. Air Force and the Defense Department. So we're happy to do that with more. And from a risk standpoint, I mentioned it in my remarks and we've talked to some investors about in more detail. We're not taking traditional development risk. And I think first and foremost, it's important to note that we're not doing speculative development. These are all development projects where we have an identified tenant in place who will start paying rent when the project is completed. We're not sort of building a open a dream here. And the second thing is in the structure of the deals that we're doing. We are putting in place sort of risk mitigants to ensure that if we are ever in a spot where we are taking on more traditional development risk, we are sort of the pocket of last resort, if you will. So it's something that is absolutely important to us. We are not looking to take on traditional development risk and happy to go in more detail with folks on that if it's needed.

So are you open to build-to-suit opportunities with any new tenant relationship at this point?

I mean, any new tenant that has an opportunity for us, we're happy to take a look at, whether every individual deal will pencil or not is an open question. But we are running projects as large as $200 million as we did with UNFI to as small as $2 million per site with a small QSR coffee concept. So we're happy to do things as large and larger than that and smaller than that and everything in between.

And the second is, can you remind me of what happened to the Green Valley Medical Center?

So that's a vacant property right now. There's no rent associated with it. There hasn't been any this year, there won't be next year. We're managing through the carrying costs and the hope is that we'll have a resolution to sell that very quickly. So it's not something that should really be on anybody's radar anymore.

[Operator Instructions] Our next question comes from the line of Caitlin Burrows from Goldman Sachs.

I think earlier in the prepared remarks, you did mention that there could be some pockets of credit risk that you see, which is limited to -- by diversification. But could you talk a little bit more about the risks you are seeing?

I would say it's the usual suspects. We're pleased with how Red Lobster went but we need to see some sustained performance from them on the back side of it for them to come off the watchlist. Ryan talked about at home and we're paying close attention to what's happening there, but their performance is really a concern from a corporate credit structuring issue as opposed to sort of the site level, and the real estate there is pretty compelling. So we'll manage that just fine. We're also paying attention to a handful of smaller operators in sort of the furniture industry home goods as well as we've talked about at length the clinical healthcare. There's a handful of operators there that have some credit issues that they're working through right now and we're helping them through. So usual suspects for us.

And then maybe just also on the restaurant side, I feel like we've heard that there's some difference in how various different concepts are doing and it might relate to whether it's a sit down or quick service, et cetera. But could you give some further comments on how the restaurant portfolio is doing?

So the restaurant portfolio overall, I think we ticked up a little bit in sort of weighted average rent coverage from -- to about 3.3 for this quarter. But if you go down in particular, I mean, the lowest performer for us on a site level basis is Red Lobster, which is about 2 and then it ranges up to things in the 4s. So you got stuff in between. So overall, very pleased with where our restaurants sit.

And maybe just another follow-up on the build-to-suits. I guess, it sounds like a lot of the deals you're doing are with existing tenants, which generally makes sense. Given the size of the industrial properties though, it seems like deepening those relationships would increase concentration somewhat. So is it just that they increase from some really small amount to something larger that's still not a concern or how do you balance that kind of concentration piece?

So we have a pretty hard line that we're not going to go above 5% on an ABR basis with any individual tenant. It's been -- it's a difficult line sometimes because there's opportunities that we've had to go above 5% but we're just not comfortable with it from a risk mitigating standpoint. So we've had to unfortunately decline some opportunities that we've seen in the last 12 months. As the top 10 and top 20 tenant concentration gets a little bit higher as some of these larger projects come online, we're perfectly comfortable with that. We're already sort of top tier in terms of what the lowest concentrations are and adding a little bit to that is going to be fine. But the hard line for us is really that keeping every individual tenant at or below 5%.

The next question comes from Ki Bin Kim from Truist.

Just a couple of follow-ups here. On the $420 million of forward development funding commitments, in your press release, you show a few projects, the UNFI and Sierra Nevada. Is it just safe to assume that most of the remainder is industrial projects? And have you thought about maybe enhancing the development schedule in your supplemental for it?

So we've got an updated schedule in the supplemental that gives a lot more detail and we'll be adding to it over time. What's in the next sort of projects to come is predominantly weighted towards industrial. We have a little bit of retail in there that you'll see when the schedule gets updated. The intention is to start updating these on a more regular basis, not quarter-over-quarter. So you should expect to see some press releases from us with an updated schedule, hopefully, if we've been able to close these even potentially before NAREIT.

And the additional development deals, are these directly sourced or was this again like through the Sansone Group? Just trying to understand the origination process.

So either direct through the developer or direct with the tenant in the Sierra Nevada Corporation situation, and not just through Sansone. We're working with a couple of different developers at this point and expanding those relationships over time. As I said in my prepared remarks, those developers are looking for someone that's going to provide them with some surety with some consistency. We're simplifying the process for them where they used to have to find three different pockets of capital to make a development project work. They now just need to work with us. So these are compelling opportunities for us and compelling for them so they can move on to the next deal where they're going to be looking to grow their business. So these are relationships that are incredibly important. And every deal that we have in our pipeline right now from a build-to-suit standpoint is either direct or is a relationship based one.

And then just last one. On Page 18 in your supplemental, there's a comment that revenue and additional fundings will receive a cash cap rate of 6.8%. Just curious what that means.

Ki Bin, that's the closeout sort of punch list items for UNFI. And so there's a little bit of yield differential from the ongoing project build and the closeout. And the primary gap with the difference is how the capitalized interest is earned under the contract.

[Operator Instructions] Our next question comes from Mitch Germain from Citizens JMP. That was our last questioner. I will hand back over to John Moragne for any closing remarks.

Awesome, thank you. And thanks, everybody, for joining us today. As you can hear, we're incredibly proud of what we've accomplished this year. We're very excited about where -- what we're building and where we're headed. And looking forward to talking with all of you in the coming weeks and seeing many of you at NAREIT. Thanks all, and have a great rest of your day.