Hello, and welcome to the Broadstone Net Lease's First Quarter 2024 Earnings Conference Call. My name is [ Bailey ], and I will be your operator today. Please note that today's call is being recorded. I would now like to turn the call over to Brent Maedl, Director of Corporate Finance and Investor Relations at Broadstone. Please go ahead. .

Thank you, operator, and thank you, everyone, for joining us today for Broadstone Net Lease's First 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 3 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. As we discussed during our call last quarter, the largest variable in establishing guidance this year was the timing of our healthcare dispositions and the subsequent redeployment of proceeds generated from the portfolio sales.

With our team's ability to execute in scale on both fronts early in the year, I am pleased to announce that we are increasing our per share AFFO guidance and establishing a range of $1.41 to $1.43. Before opening the line for questions, we'd like to provide context for this update and our perspectives on the overall operating environment.

As we have been emphasizing since February of last year, the macroeconomic backdrop and interest rate environment has had a considerable impact on commercial real estate markets, and in particular the net lease transaction market.

While the net effect has resulted in historically significant declines in transaction levels, this environment has also presented opportunities to think creatively and differently while continuing to lean heavily on our existing relationships, disciplined underwriting and operational expertise.

Our actions over the last 18 to 24 months have provided us the flexibility to continue making decisions we want to make in this environment, not decisions we were forced to make. With the capital, talent and experience we have at BNL, we are primed to drive long-term value creation and earnings growth.

I am extremely proud of what our team has accomplished so far this year, including the sale of 37 clinically oriented healthcare assets in connection with our healthcare portfolio simplification strategy, generating gross proceeds of $251.7 million.

The closing of these 37 assets along with an additional disposition completed after quarter end accounts for approximately 50% of the assets we have identified as part of our healthcare simplification strategy.

And we remain in various stages of marketing and negotiation and an additional 20% of our clinical assets that we anticipate concluding later in 2024. The remainder will likely take additional time to achieve optimal disposition outcomes. As part of this effort, we continue to work through a final resolution for Green Valley Medical Center.

Completed dispositions have successfully reduced our healthcare exposure to approximately 13% of our ABR as of March 31. Our near-term goal is to reduce our healthcare exposure below 10% of our ABR, at which point it will naturally become a less emphasized portion of our portfolio, similar to office. Turning to our investment activity.

The first quarter transaction market represented the lowest single tenant net lease transaction volume in at least 15 years, highlighting the continued misalignment between buyers and sellers, with a recently reignited rate environment further exacerbating the disconnect.

We still believe a higher degree of selectivity is required as we navigate this environment. And we are focused on sourcing off market investments and unique capital allocation opportunities where we can partner with developers and tenants seeking capital solutions as the constraints on traditional commercial real estate lending persist.

Despite the challenging environment, our team was able to invest $202 million year-to-date with additional $122 million of investments currently under control.

We navigated the transaction environment by leveraging existing relationships, sourcing nearly $150 million of our year-to-date investments through direct off market deals that closed shortly after quarter end, including an $84.5 million investment in retail assets located in one of the most highly trafficked trade areas in St. Louis.

This unique opportunity stems from an existing relationship that resulted from our ongoing UNFI build-to-suit. It includes a $32.5 million investment, 7 individual triple net outparcel assets, leads to strong national and regional concepts, including Bass Pro Shops, Chick-fil-A, LongHorn Steakhouse, and Burger King, to name a few.

The remaining $52 million is transitional capital, with a portion designed to convert to a long-term ground lease subject to tenant consents. The $52 million covers the inline portion of the retail center that is currently more than 95% leased.

This was a unique opportunity in which we were able to step in as a holistic capital provider for the entire center and acquire 7 triple net retail assets with a strong real estate fundamentals and tenants at above market cap rates.

The other significant direct transaction we closed after quarter end was a $65 million single tenant industrial campus in California occupied by a leading candy manufacturer.

While we will normally wait until Q2 earnings to provide additional details on transactions closing in the quarter, we wanted to provide investors a sense of what we are working on in this environment, particularly given the proximity of these investments closing to Q1.

We look forward to discussing these and other Q2 investments in more detail during second quarter earnings. As we execute on our healthcare portfolio simplification strategy, our overall portfolio composition is increasingly weighted to industrial and defensive retail and restaurant tenants.

And it continued to perform well in the first quarter as evidenced by 99.9% rent collections, excluding Green Valley and 99.2% occupancy as of March 31, 2024.

While our overall operating results remain strong, we are seeing incremental pockets of credit risk as a broader impact from the duration of higher interest rates appears to be having an effect.

We remain vigilant in our tenant monitoring efforts and maintain great competence in our portfolio due to its highly diversified construction, which limits the impact of any potential individual credit event and our proven ability to manage through any such situation that may arise.

In this higher for longer environment where financial conditions are less conducive to the type of interest rate fueled growth that the net lease sector had grown accustomed to in the post GFC world, net lease REITs will need to focus on operational expertise and finding creative ways to generate deal flow and a creative growth.

In a historically low transaction environment like this, we could choose to run up the risk spectrum and exchanged for yield. But I don't believe that would be prudent due to potential credit risk in our view of the continuing risk reward and balance on higher cap rate deals.

Now is the time to be creative and opportunistic while maintaining underwriting discipline to position BNL as an alternative capital provider, to take advantage of the commercial real estate lending pullback, and to double down on the things that have made BNL successful over the last 16 years.

Solid portfolio and balance sheet fundamentals, operational expertise, and a growth focused mindset.

With our industrial focused but diversified investment strategy, I believe BNL presents investors with a differentiated approach to net lease investing and growth, the increased role we can play in development and build-to-suit transactions as a compelling additional building block to our growth strategy.

We view these types of opportunities as part of our core building blocks to sustainable long-term growth, which includes best-in-class fixed rent escalations, investments in our existing tenants and assets, traditional external growth, and development funding opportunities.

While the combination of these building blocks will vary based on market conditions, they provide a compelling path to near and medium-term value creation and earnings growth. With that, I'll turn the call over to Ryan, who will provide additional details on our transaction efforts, our building blocks for growth and portfolio updates. .

Thanks, John, and thank you, all, for joining us today. As John mentioned, during the first quarter, we were able to execute on a key piece of our healthcare portfolio simplification strategy through the completion of a portfolio sale comprised of 37 assets for $251.7 million and a cap rate of 7.9%.

These dispositions reduced our medium-term lease maturities and improved our overall portfolio [ WALE ] to 10.6 years. Additionally, the incremental proceeds from the sale add to our existing dry powder, placing us in a position of strength as we actively pursue high quality investment opportunities.

As we step through this disposition effort and begin focusing on the remaining properties identified, we anticipate various transaction timelines that comfortably extend into 2025 given the need to address some combination of shorter lease duration, space utilization rates, and elevated credit risk.

As John and I have communicated in the past, we are intently focused on the tactical execution of our healthcare property sales and maximizing value for our shareholders.

Alongside our disposition efforts, we once again demonstrated our high degree of selectivity during the first quarter, [ the ] funding revenue generating capital expenditures of $3 million, and incremental unified development fundings of $36.9 million.

In total, we have funded approximately $130.7 million towards the UNFI build-to-suit development through March 31. And the project remains on track for delivery and rent commencement no later than October of this year. Now turning our attention to new investment activity.

While our standards remain very high for allocating capital to new investments, our sourcing efforts have yielded several positive outcomes, as John highlighted in his comments.

We favor opportunities to support growth for stable and healthy companies or situations where we can provide solutions to transactions that are disrupted by the current market environment.

This has resulted in our evaluation of more opportunities for build-to-suit transactions, forward commitments of completed developments, and other directly sourced opportunities in addition to selective regular way marketed transactions.

These transaction formats allow us to access high quality opportunities today through a differentiated sourcing model and create embedded AFFO growth for future periods, which when coupled with our in-place portfolio rent escalations produce a compelling run rate growth profile before even considering contributions from external growth opportunities.

While facing historically difficult transaction environment, our pipeline remains robust given an influx of these types of opportunities. Our focus on achieving appropriate risk adjusted returns and creating long-term value for our business and its shareholders is resolute.

And the balance of real estate fundamentals and underlying credits support against prevailing market pricing on investments remains front and center.

In an environment where the traditional net lease growth model and transaction environment is constrained, we feel confident in our ability to drive meaningful, near and medium-term growth through our capacity to leverage opportunities arising from our other core building blocks, investments in our existing assets and development funding opportunities in addition to our best-in-class fixed rent escalations.

Moving toward our in-place portfolio. As we highlighted last quarter, we remain cautious on and continue to pay extra attention to industries that are sensitive to discretionary consumer spending, including some tenants that have been included in recent headlines.

The RoomPlace, a home furnishings operator, occupying one asset and accounting for 0.2% of ABR remains in Chapter 11 bankruptcy, during which time we continue receiving rent. At the end of the bankruptcy proceedings, which we anticipate occurring later this summer, the tenant will vacate the property.

In the meantime, our team is focused on determining the optimal next step for this asset. Red Lobster representing 1.6% of ABR has notably been in recent headlines. Our 18 master lease assets maintain relatively healthy site level performance, and we continue to monitor the situation as it unfolds.

We are comfortable with our exposure which we have reduced over the last several years, remain cautiously optimistic about Red Lobster's future and know the quality of the underlying real estate represents a compelling value proposition to both Red Lobster and other potential users.

Lastly, we only had 3 vacant properties as of March 31, including one that went vacant during the quarter upon the conclusion of our tenants' lease term.

This property received significant interest and we have executed an LOI with a new tenant and are in the process of negotiating a lease anticipating the tenant taking possession in late Q3 or early Q4. Beyond these properties, there is one additional tenant, Shutterfly, that will be vacating its space when their lease expires on June 30.

We have already executed an LOI and are in the process of negotiating a lease with the new tenant for this location. Our new tenant is currently targeting lease commencement during the fourth quarter, resulting in minimal downtime at the property.

In summary, the broader market environment for new investments is certainly challenging, and higher interest rates and sustained uncertainty are increasingly adding risk to the macroeconomic equation.

Despite the difficult backdrop, we continue to demonstrate a differentiated ability to allocate capital to investments that enhance the value of our highly diversified portfolio and execute on assets and portfolio management objectives to drive strong operating performance.

With that, I'll turn the call over to Kevin to provide an update on our financial results for the quarter. .

Thank you, Ryan. During the quarter, we generated AFFO of $71 million or $0.36 per share, an increase of 5.9% in per share results year over year. Results were largely driven by lower interest in G&A expenses. Bad debt in the quarter excluding Green Valley was 15 basis points, driven by a small gap in rent from The RoomPlace.

We incurred $7.8 million of cash G&A during the quarter which tracks in line to slightly better than guidance. We once again ended the quarter in a strong and flexible financial position despite not engaging in any capital markets activity.

From a leverage perspective, we ended the quarter in a position of strength at 4.8x net debt, down slightly from 5x at the end of 2023, driven largely by disposition proceeds from progress on our healthcare portfolio simplification strategy.

We retain a [ multi ] fixed rate debt capital structure with $30 million in existing swaps rolling in the fourth quarter. And we routinely evaluate alternatives as we approach incremental floating rate exposure into 2025. At our quarterly meeting, our Board of Directors approved a $0.29 dividend for common share and OP unit.

This is a 1.8% increase from last quarter and a 3.6% increase over the dividend declared in the first quarter of 2023. This quarter's increase marks our seventh consecutive semi-annual dividend increase since our IPO and is payable to holders as of June 28, 2024 on or before July 15.

Our dividend remains well covered and represents a highly attractive yield in this market environment.

Finally, as John previously mentioned, we are raising our per share guidance from $1.41 to a range of $1.41 to $1.43 as our team's ability to execute on both our healthcare portfolio simplification strategy and growth objectives provides additional clarity on estimated per share results for 2024.

Our revised per share guidance reflects the following key assumptions which remain unchanged. Investment volume between $350 million and $700 million, disposition volume between $300 million and $500 million with ongoing healthcare sales accounting for the substantial majority. And finally, cash G&A between $32 million and $34 million.

With that, we will now open the call for questions. .

[Operator Instructions] Our first question today comes from the line of Michael Gorman from BTIG. .

I was wondering if you could spend a little bit of time as you -- talking about how you think about the investment environment right now? And John, you talked about being a little bit more innovative and focusing on your skill set. And Ryan, you talked about some of the opportunities you're seeing.

Maybe talk about how you're thinking about stratifying the opportunities and the returns required as you think about additional build-to-suits or kind of innovative transactions like the retail center that closed after the quarter ended?.

Thanks, Mike. As we were talking about in the script and as I think everyone knows, these are the lowest sort of marketed transaction volumes we've seen at least 15 years. Conversion's a lot harder right now. So you're having to work a lot harder to find these deals. It's not the same environment that [ Net Lease ] got to enjoy for 15 years post GFC.

So we're focused, as we talked about during the call, on finding direct deals, leveraging our relationships.

We're very proud of the $150 million that we were able to close so far year-to-date as a result of direct relationships with [ Sansone ], our partner on UNFI as well as partner on the retail center, as well as direct relationships on the industrial campus that we acquired in California.

Building from that and touching on the core building blocks that we think we provide from a differentiated growth strategy in that lease is the opportunity to do more build-to-suits.

We're seeing right now -- evaluating opportunities in mid-market industrial and straightway deals as well as some retail, but a lot of the good opportunities we're seeing right now are build-to-suits for commits.

The disruption that we've seen in the last call it and 1.5 years in commercial real estate lending persists, and will persist for some time. So being able to step in as a holistic capital provider, as an alternative capital provider, we think is really attractive. The yields that we're seeing right now are solidly in the [ 7s ]. [Indiscernible].

[ That ] isn't something that really works for us as we -- as I said during my remarks. There is an opportunity right now to run up the risk spectrum if you're looking for yield, but that's not something that we've always been comfortable with and we're certainly not comfortable with it today.

So we're solidly in the 7s and we think there's great opportunities both in sort of regular way acquisitions as well as the build-to-suits and adding to those core building blocks. .

That's helpful, John. And I guess, maybe it's just kind of self-evident, but as you get closer to the rent commencement on the UNFI, I assume the appetite to take on new build-to-suits goes up.

Can you just give a sense for kind of where that that appetite sits in terms of as a percentage of the total business to have a development pipeline underway?.

Yes, there's a strong appetite for it. And UNFI is progressing really, really nicely right now. We're expecting to come online at the end of Q3 or the beginning of Q4. As we talked about before, it has an absolute rent commencement date of October 15 at the latest, but we believe it's going to come online earlier than that.

And so, as we are winding down our remaining commitment there to fund, that starts to open up the opportunity for us to look at additional build-to-suits.

And when we look at our core building blocks, having a ladder build-to-suit structure out into the future over the next 12 to 18 to 24 months, we think is really attractive growth for investors to look at.

As you roll from [ one ] year to the next already having a built-in investment pipeline that you know is going to come online from those build-to-suits, we think should be -- provide a differentiated approach to growth that you don't see in the same material way across our industry that we're able to do with these larger industrial build-to-suits.

So, it's a key focus for us right now. As a percentage, it's pretty significant in terms of the pipeline, and not all of those work out, but we're actively pursuing a handful of them and are excited about a few of them coming online and that '25 timeline. .

And maybe just last one from me. I know it's not directly comparable, but obviously a lot of headlines lately in the pharmacy space and with Walmart with its health clinics. And I'm just curious, you had good execution on the healthcare properties year-to-date.

Have you seen any change in the tone or the [ tenor ] of the discussions you're having in the last month or so, just in terms of how investors are thinking about the healthcare space and the healthcare real estate space specifically?.

Yes, I think the tone -- people I think are comfortable with the approach that we're taking. We're very pleased to have roughly 50% of our goal already out the door. The plan in the near term is to get our overall healthcare allocation below 10%.

At that point when you're single-digit ABR, it becomes naturally a less emphasized portion of the portfolio. And -- so that's the goal that we have here. We've got a good line of sight for the next 20% to 25%. And we anticipate that, that would close in the second half of '24, and then the last 25% will take a little bit more time.

I think it's in healthcare you're looking at a lot of haves and have nots. There's places that are really well structured. And so, from an investor sentiment standpoint, depending on where they're looking at in the healthcare sector, there can be a lot of comfort and excitement about [ what we're doing ].

And then there's a lot of places that are really struggling. And so, where we sit and I think executing on the strategic plan, fits well in terms of getting rid of that complexity, getting rid of an asset class that is not core to our long-term growth strategy. And we're excited to continue executing on it over the course of the next year or 2. .

The next question today comes from the line of Caitlin Burrows from Goldman Sachs. .

Just as a follow up to that last one. So, you mentioned how -- about 50% of what you want to sell in the healthcare portfolio is now done and you're in talks on another 20% to 25% and the rest TBD.

So could you talk a little bit more about the differences between the properties that you expect will take longer versus those that you've already closed or are in talks on?.

Sure. So the ones that will take a little longer are likely to be one-off transactions. They were not ones that were viewed as being a fit for larger portfolio deals.

Larger portfolio deals if you're looking at the private institutions or the public REITs that are evaluating health care assets that are on the market right now, need to fit a certain playbook for them. And not everything that we've owned and acquired is going to do that.

As a reminder, we've been acquiring health care since 2009, 2010, going back to some of the earliest years of our 16-year operating history. So there's a lot that's in there. And so these one-off transactions in that last little bit, our focus is optimal disposition outcomes.

We're not looking to sell these at just any price, and we are good asset managers. We have really strong operational expertise. We're in the real estate business. And so our plan is to look at each of those individually, not rush through a decision on them.

And if it takes a little bit of effort for us to work with the tenant on a lease extension or maybe we need to invest some TI dollars into it to get the asset reposition where it's going to be attractive for somebody to buy on a one-off basis, that's what we're going to do.

So it will take a little bit more time to work through those, but that's okay. .

And just for the additional health care asset sales that you expect to happen in 2024, would you expect those would be in a single transaction or a multiple?.

We're currently working on one single transaction, but it would have stage closings. So we would try to time it out in a couple of different tranches over the course of the second half of the year. .

And then just a follow-up on the build-to-suit opportunities too. I guess, would those be on land that you already have? You mentioned maybe 12 to 24 months kind of outlook or impact, but it seems like it could take longer if you need to get the land and the approvals in permitting.

So just wondering if you could talk about that and kind of what you have, what you [indiscernible] the impact on timing?.

No. We're not buying land for spec development purposes. These are deals that are already in place. We would acquire the land on the front end in connection with funding the deal, but these are opportunities we're looking at where the land has already been identified and [indiscernible] already been identified.

And so there's no risk that you would traditionally see in sort of spec industrial development. .

So like somebody else has already worked on getting it set up or -- it just seems like from what we hear on the industrial side, like there's some time it takes from talking to a potential partner and saying, we're going to build this to actually being able to put a shovel in the ground.

Is it that process has already happened or is -- somehow you're able to do it more quickly?.

No, the process has already happened. Think of this as the same sort of scenario we've be seeing in the last 12 months starting for us with UNFI. The dislocation you're seeing in commercial real estate lending where they haven't been able to find a capital provider, but they've already got a project in mind. They've got the land secured.

They've got the permits they need. They're ready to break ground, but they don't have the funding to do it, and we can step in and provide them with the funding. .

The next question today comes from the line of Mitch Germain from JMP Securities. .

John, are you -- do you have a committed team that is now dedicated to these development opportunities? Or is it just part of the broad skill set of your acquisitions, [ people ]?.

Yes. So we had -- we're leveraging existing experience and expertise. Our head of acquisitions has done a significant number of build-to-suits over the course of his career. We have a 25-year licensed architect on staff.

It's able to come in and provide us with really strong expertise in working through the build structure and the construction over the course of the period of time. And we've got a team that [ have been ] gone through this with UNFI as well as a handful of retail sites during 2023, that is continuing to grow their expertise.

So it's built into the fabric of our acquisitions and investment team, and we're very excited about the types of opportunities that they're seeing. .

And I think you had said you're looking at yields in the mid-7% area, give or take right now.

Is that consistent with one of these development transactions or these transactions maybe skew a little bit higher versus what you could be acquiring a similar asset for?.

[ Runs a gamut ]. Mid-7s is really on a blended basis.

There's a handful of things that we're looking at in that low [ 7% to 7% ] cap range, a handful of things in the higher cap range, a place that we continue to see a lot of great benefit from the build-to-suits in the industrial space as well as sort of regular way acquisitions is what the straight-line yield on these becomes when you start building in long lease terms with the rent bumps and the rent bumps are consistently above 2% at this point, 2.5%, 2.75%, 3%.

So straight line yields on these opportunities are really attractive even when you're talking about cap rates in the low 7s. .

Last one from me. You referenced 25%, 30% of the health care expected sales maybe kind of extended into 2025.

Was that always the expectation? Or did that come about from the education of marketing those properties and seeing where the demand in the market was?.

So I think the answer is both. As we -- as I talked about during our Q4 earnings call, it takes a long time to run a process and get to the point where we were when we made the announcement about the health care portfolio simplification strategy in February.

We had started that process early in 2023, worked through the process internally and with our Board over the course of the summer, brought on JLL and CBRE to work with us on the process in the fall. So we went into it with an open mind as to how we might be able to execute on it.

But when we came out and announced the strategy to the market, we fully anticipated that we'd be able to execute really quickly on the first half. The next 25% we were looking to stretch out a little bit, and the last 25% we're going to be [indiscernible] that we're going to take more time.

So this is exactly what we thought it was when we started talking about this a few months ago. .

Good quarter. .

The next question today comes from the line of Ki Bin Kim from Truist. .

Just going back to the last question on the additional 20% of health care assets that you might look to sell.

Any sense of what the cap rate range might be?.

Similar to the first half. .

And going back to your comments about consumer health and maybe the impact on inflation that certain retailers might be feeling.

I know you went through a list of some of the credit risk that you see today, but do you see other restaurants or retailers that are perhaps kind of getting closer to that red zone where [ you started ] to worry more about them?.

[ Consumer ] discretionary industries like restaurants, casual dining, some retailers wherever else are absolutely focus for us right now. The ones that we talked about are the ones that are at the top of our list for things that we're concerned about. And it's sort of an obvious list that we've been talking about for a little bit here.

But there still continues to be some resiliency. Our rent coverage ratios are still strong. You saw us announce more than -- it was 3.2%, I think, for this quarter for our restaurant assets. The retail stuff continues to perform generally well.

They are experiencing some pressures on a corporate basis, but our sites themselves continue to perform well, and that gives us a lot of confidence. .

And you don't have a ton of lease expirations this year or next year, I think, 80 basis points this year and then 1.6% next year.

Any early indications of renewal probabilities for those type of tenants?.

For this year, we're really pleased with it. On an aggregate basis, we're north of 100% rent recapture on those. So some good assets that are rolling that had below-market lease expirations.

Next year -- we're starting to work on it now, but no direct line of sight or absolute view as tenants are going to continue to work on those right up until they make the final decision. .

[Operator Instructions] The next question today comes from the line of Ronald Kamdem from Morgan Stanley. .

Two quick ones.

Just starting on the guidance raise on sort of the redeployment timing and so forth is really interesting, but trying to figure out what's the bad debt assumption in the guidance that did change at all? And to be a little bit more specific, curious about Red Lobster and what sort of contemplated [ that ] [ bad ] debt number?.

It's Kevin. I'll take the first part and John can take the second. But we started the year with 75 basis points of cash revenue, which we did last year as well. We hold that throughout the year.

And so as you saw, 15 basis points for the quarter, operating inside of that, and we'll certainly update as the quarter rolls forward or the year [ rolls ] forward. .

And on the Red Lobster point, we're actually monitoring that. I mean, it's certainly in the news, anticipated bankruptcy. They haven't done it yet. But we've gone through and evaluate our portfolio every single quarter for the last few years. As we talked about a handful of times, we reduced that exposure from 25 assets down to 18.

When we first initiated that position in 2016, it was 4.5% of our ABR. It's 1.6% today. Some of that's attrition from the growth in the portfolio. Some of that's from us being able to sell it off. We've got a really strong real estate, about [ 2x ] coverage across the portfolio. The real estate is performing well there.

With the Red Lobster on a going forward basis, it's going to need [ quality of ] real estate to be able to operate the restaurants and get people in the door, and we think that we offer that to them.

But even if we're just looking at it from investment from our standpoint, we're $0.82 on the dollar out of these, including the one Red Lobster that we sold at a mid-6 cap rate in Q4. So it doesn't take much for us to get our money back out.

We're out in the business of just making our money back though, and we expect that there's going to be plenty of opportunity here into the future.

As I've said a handful of times, we're cautiously optimistic about where this goes, even if it goes through a Chapter 11, [indiscernible] to not have the jobs to be able to manage casual dining in the continental United States, and someone's going to see good opportunity here with a strong brand, strong real estate, strong historical performance, and they'll be able to take it over and be able to do something with it.

So, I feel good about -- we're cautious and optimistic I should say about where we're headed. .

And then on the portfolio simplification, obviously, a big chunk of it got done, so nicely done.

With the sort of move in rates, does -- could the timing slip a little bit or do you have sort of enough line of sight where you do feel like you'll be below that 10% by the end of the year or potentially?.

Yes. We're pretty confident we'll be below 10% by the end of the year. With the next 20%, 25%, having a good line of sight to where that's headed, that gives us a lot of confidence. And then as we work through the rest of the portfolio on a individual basis, we think we can get there pretty confidently. And then we'll take our time with the rest of it.

As we said, focus there is often with disposition outcomes and not just sort of pushing them out the back of the truck. .

The next question is a follow-up question from Caitlin Burrows from Goldman Sachs. .

I don't know if you're suggesting this might be something more for the second quarter call, but I was just wondering if you could talk about the retail deal for a little bit kind of how it came to be? It seems like a different -- kind of unique strategy in terms of -- I think, also the wording in the press release is that you invested or something rather than acquired.

So invested in that property, it seems like you're generally like keeping the outparcels and then we'll be ground leasing the rest of the retail center.

But could you just kind of talk about how that came to be and if that's something you'd be interested in doing more of?.

Yes. So this is one that we're really excited about. I think it's a great example of the creativity that we can show in a market like this. Net Lease REITs, as I said during my prepared remarks, I think we're not going to be able to rely on the low interest rate fueled growth that we saw for 15 years post GFC.

We have to start relying on real estate expertise, operational expertise, direct relationships, finding creative solutions. And the pullback in commercial real estate lending has provided us that opportunity and we're jumping into it with both feet. So this is a direct opportunity that was brought to us. We partnered with Sansone on this.

Sansone is also our partner on UNFI. They have been managing this retail location for 30 years, initially constructed it. So we have a ton of confidence in their ability to manage this.

The current -- well, not the current, we're the current owner, but the prior owner had a closed-end fund that they needed to harvest and roll those funds into something else and make distributions to LPs.

And they were in a position where there wasn't a huge opportunity from commercial real estate lending or other capital sources to fill the gap and we were able to do so.

And so we went in and this is a creative unique solution where we're really, really happy to have acquired at above average cap rates, 7 retail sites that have a ton of value, as I mentioned in my remarks, Bass Pro Shops, Chick-fil-A, and LongHorn Steakhouse, Burger King, I mean really some quality names that we can add to the portfolio.

And to do that, we needed to step in and provide a holistic capital solution. So the transitional capital we've provided to this site. It's really in 2 tranches. One tranche specially, as you alluded to -- Caitlin, excuse me, we are looking over time to shift that into a ground lease. There's some work to do. You got to work with the tenants on that.

So we need to see where that one goes. And the second tranche of that is likely a 3- to 5-year hold period. It's transitional in sense that there's some lease-up activity and some lease extensions that need to be done.

We're already 95% leased on this site, so it's in great shape, and then converting that over time as they look to find a long-term permit owner. Sansone has been a great partner. There are other people out there that have similar situations.

This is a creative opportunity for us to allocate capital in an environment where you're seeing historical lows on traditional net lease transaction activity. And so we'll happily look at these. This may be a unique one-off opportunity that we pursue, and it may be something that we do again.

We'll just have to wait and see what the opportunities that brings us. .

That sounds good. And then maybe just similarly on the industrial deal, I guess, bigger picture like to have acquisition cap rates in the mid-7% range for retail and industrial does seem like a really good outcome for you guys.

So incremental to what you just said on the retail side, is there anything else you could add for kind of how you expect to achieve those kinds of yields over the rest of the year? And if there's any other additional color you could give on the industrial property again, like how you sourced it, what made it unique for you guys? Yes, anything else on that?.

Yes. So the industrial deal that we sourced -- directly sourced internally from a personal relationship.

It was an opportunity that was brought to us because they were looking for someone that would provide surety of closing, ease of execution and the ability to cut a big check and provide a holistic solution for an acquisition that they were working on. We're very pleased with it. We'll have more detail on that in the future.

But again, it's an industrial campus in California. You're in the [ 7% ] cap range on that. That feels really good right now. Going into the future, to take the other part of your question, we are continuing to see some good opportunities, mid-market industrial in that [ 7% ] cap range. We're excited about those, so is everybody else.

If you look at what a lot of people are pursuing right now from public REIT buyers as well as private institutional buyers, they really like mid-cap industrial. So those are highly competitive. We're going to continue to exercise really strong discipline. We're not going to chase those to a place where the risk reward doesn't make sense anymore.

And if we lose them, we lose them, that's okay. Conversions are harder right now. But if we can find the right ones and the right relationships, and that's why the direct relationships and the off-market opportunities are so critical right now.

If you're trying to build the pipeline by going off and just bidding on the things that are showing up in the e-mail blast for the brokers, that's going to be pretty hard over the next little bit here.

So working on those, working on creative opportunities like the retail center and working on building out and laddering out that pipeline of build-to-suit transactions is where a lot of our focus is right now. .

The next question today comes from the line of Eric Borden from BMO Capital Markets. .

Just on that last point around laddering the potential development opportunities, how are you guys thinking about that just given the delay between the capital outlay and then when the NOI kind of comes online for you guys?.

Yes, there's a balance there. I think it's really attractive from a differentiated growth strategy, but you have to balance it with current rent paying new opportunities. One of the things that we want to spend time on is the pro forma leverage that we included this quarter for the first time. We are sitting on a low levered position already at 4.8.

But when you pro forma in the way that UNFI coming online, you get down to 4.6. So we've got a lot of room there, but it is a balance between these things with capitalized interest. There is some current benefit as we are funding these over time, but the real benefit is when they come online. So being able to ladder them, I think, is important.

If you've got these big, huge balloons and nothing in between, that gets a little bit more difficult. But if you've got them coming online in a more consistent basis, which is the hope that we have, we need to prove that out, then it starts to be a really attractive way to allocate capital. .

That's helpful. And then outside of traditional net lease transactions, some of your peers have had success in the sale leaseback financing market.

Just curious to hear your thoughts around what you're seeing today and if that is a potential solution for you guys to kind of grow externally?.

Yes, there's still some sale leasebacks that we're evaluating.

The key thing for us is why is the company pursuing it? Do they have a growth objective? Is there an acquisition that they're working on? We're not necessarily interested in solving a capital structure problem if it's not one that we feel really confident about going forward, if they've got limited access to alternative sources of capital, and so they're turning to the sale leaseback market.

But it's more limited now than it was.

I think there's a lot of corporate [ coffers ] that are pretty full of cash right now, and so they're not necessarily needing sale leasebacks in the same way that they used to, but we'll absolutely evaluate them when they come online and really hone into why -- what is the point, what's the purpose that they're driving for the funds that they're seeking.

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[Operator Instructions] The next question today comes from the line of Spenser Allaway from Green Street. .

Maybe just a bigger picture question.

Just given the more cautious cost of capital signal that's being provided by the market right now, how has your thinking changed, if at all, regarding redeploying the disposition proceeds into new investments versus buying back shares, bringing down leverage further or perhaps just sitting on dry powder until that cost of capital improves?.

Yes. So our job is to allocate capital advantageously possible. And so we're always evaluating all the alternatives that are in front of us. And the ones that you set out, Spenser, are really the ones that we're thinking about. We're in a great spot right now from a leverage standpoint. So we have looked at paying down some debt.

But where our debt currently sits relative to what we can get on a straight line yield basis from investing in new opportunities isn't necessarily that attractive, particularly given the additional cash proceeds that we have from the health care sales. But if you take share repurchases, we have that tool in the toolkit for a reason.

It's something that we'll evaluate and we'll think about given where our shares are trading currently and an implied cap rate north of 8%. The fact that we are in a low levered position, the fact that we have some additional dry powder relative to the health care sales, it makes it an interesting conversation.

So it's something that we'll evaluate and make sure that we're allocating capital to the most advantageous place possible. .

[Operator Instructions] There were no additional questions waiting at this time. So I would like to pass the call back over to John Moragne for any closing remarks. .

Thank you, and thanks, everybody, for joining us today. I hope you can hear the confidence and the conviction that we have and the execution we've had so far this year and where we believe we're headed over the course of the rest of the year. We look forward to talking with you more about it at the upcoming conference season.

Thanks all, and have a great day. .

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines..