Good morning, ladies and gentlemen, and welcome to the National Retail Properties Third Quarter 2021 Operating Results. It is now my pleasure to turn the floor over to your host, Jay Whitehurst. Sir, the floor is yours..

Thank you, Matthew. Good morning, and welcome to the National Retail Properties Third Quarter 2021 Earnings Call. Joining me on this call is Chief Financial Officer, Kevin Habicht; and Chief Operating Officer, Steve Horn.

And we're pleased to report another solid quarter for National Retail Properties with increasing acquisition volume, high occupancy and rent collections and a rock-solid balance sheet. We increased our common stock dividend in August, making 2021 our 32nd consecutive year of increased dividends. Only 86 other U.S.

public companies, including only 2 other REITs, can offer that impressive track record of consistent dividend growth to investors. And as our press release this morning indicates, we are again raising our guidance for 2021 core FFO per share to a range of $2.80 to $2.84 per share, which reflects an approximate 9% increase over 2020 performance.

We're also issuing guidance for 2022 core FFO per share of $2.90 to $2.97, reflecting approximately 4% growth over 2021 from midpoint to midpoint. Kevin will provide more details on the individual factors behind our guidance for both 2021 and 2022.

But the Reader's Digest version of the story is that National Retail Properties is humming on all cylinders. Turning to the highlights of our third quarter financial results. Our portfolio of 3,195 freestanding single-tenant retail properties continues to perform exceedingly well.

Occupancy ticked up slightly from the prior quarter to 98.6% and remains above our long-term average of 98%. We also announced collection of 99% of rents due for the third quarter. Collection of previously deferred rent remained at an equally high percentage, and we forgave no rent during the quarter.

These impressive collection results compare very favorably to other retail real estate companies, including those with a significantly higher percentage of investment-grade tenants.

Moreover, we believe these results validate our strategy of doing direct sale-leaseback transactions with large regional and national operators for well-located real estate parcels at low cost per property and reasonable rents.

Our acquisitions, which are sourced primarily from our portfolio of relationship tenants with which we do repeat programmatic long-term sale-leaseback transactions, continued to ramp up. During the third quarter, we invested $247 million in 49 new properties at an initial cash cap rate of 6.4% and with an average lease duration of 19 years.

Year-to-date, we've invested $455 million in 107 new properties at an initial cash cap rate of 6.5% and an average lease duration of 18 years. Our relationship tenants with which we do the majority of our business have returned to growth mode, and our transaction volume has ticked up accordingly.

We've increased our 2021 acquisition guidance to a range of $550 million to $600 million. And we've issued initial guidance for 2022 acquisitions in the range of $550 million to $650 million as we anticipate returning to our typical pre-pandemic run rate of acquisition volume.

During the third quarter, we also sold 27 properties, raising $30 million of proceeds to be reinvested into new acquisitions. Year-to-date, we've now raised over $70 million from the sale of 53 properties, divided roughly equally between leased properties and vacant properties.

Our balance sheet remains one of the strongest in our sector, highlight by -- highlighted by our issuance of $450 million of 3% interest-only 30-year notes in September.

With over $200 million of cash remaining after redemption of our 5.2% preferred in October, a 0 balance on our $1.1 billion line of credit, no material debt maturities until 2024 and a weighted average debt duration of almost 15 years, we have one of the strongest balance sheets in our sector and remain well positioned to fund future acquisitions and take advantage of opportunities that may present themselves.

On the personnel front, I want to once again say thank you to our talented and resilient associates for their hard work, flexibility, respect and professionalism. We reopened our office fully in July, and I'm absolutely certain that we are all better together under one roof.

I'm also proud of our company's recent recognition as a 2021 Cigna Well-Being Award recipient. Let me close by reiterating our long-term approach to all aspects of our business.

Although we will continue to review and refine our strategy, we believe that the right long-term approach for creating consistent per share growth on a multiyear basis is to own a broadly diversified portfolio of well-located real estate acquired at reasonable prices and leased to strong regional and national tenants at reasonable rents, all supported by a low-leveraged balance sheet and long-tenured staff of industry experts.

This strategy has once again proven to be resilient and durable during a period of upheaval and crisis and has put us in a great position to play offense as we look ahead to 2022 and beyond. With that, I'll turn the call over to Kevin for more details on our third quarter results and 2022 guidance..

Thanks, Jay. As usual, the cautionary statement. We will make certain statements that may be considered to be forward-looking statements under federal securities law.

The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to these forward-looking statements to reflect changes after the statements were made.

Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in this morning's press release.

With that, as Jay mentioned, headlines from this morning's press release report quarterly core FFO results of $0.71 per share for the third quarter of 2021. That's up $0.01 from the preceding second quarter $0.70 per share and up $0.09 from the prior year's $0.62 per share. Today, we also reported that AFFO was $0.75 per share for the third quarter.

That's down $0.02 from the preceding second quarter $0.77, and that's largely a result of scheduled deferral repayments beginning to taper off from the peak levels in the first half of 2021.

We did footnote this AFO -- this AFFO amount included $4.3 million of deferred rent payment in our accrued rental income adjustment for the third quarter, without which would have produced AFFO of $0.73 per share.

Excluding all deferral repayments, our AFFO dividend payout ratio for the first 9 months was 73.5%, and that's fairly consistent with prior year levels. As Jay noted, occupancy was 98.6% at quarter end. That's fairly consistent with recent quarters.

G&A expense was $11.1 million for the third quarter, and that increase for the quarter and the 9 months is really largely driven by incentive compensation. We ended the quarter with $706 million of annual base rent in place for all leases as of September 30, 2021.

As Jay mentioned, rent collections continue to remain strong in the third quarter with rent collections of approximately 99% for the third quarter. Collections from our cash-basis tenants, which represent about $50 million or 7.1% of our total annual base rent, improved to approximately 94% for the third quarter.

That's up from 92% in the second quarter and 80% previously reported in the first quarter of 2021.

We -- today, we did increase our 2021 core FFO per share guidance to a range of $2.75 to $2.80 per share, and that's up from a range -- I'm sorry, we increased it from a range of $2.75 to $2.80 to a new range of $2.80 to $2.84 per share and similarly increased the AFFO guidance to a range of $3 to $3.04 per share.

Notably, this guidance exceeds our 2019 results by approximately 2% to 2.5% despite the headwinds and reduced acquisition levels in 2020. Today's 2021 guidance incorporates the continued strong collections and increased acquisition activity. Some of the assumptions that -- for this guidance are noted on Page 7 in today's press release.

And they're largely unchanged from last quarter's guidance with the exception of the increased acquisition guidance of $550 million to $600 million of acquisitions versus the previous guidance of $400 million to $500 million. We expect to continue the high level of rent collection rates but have assumed a total of 1.5%, 1.5% of potential rent loss.

In time, we're optimistic that will drift back towards our usual 1.0% rent loss assumption in our guidance. Today, we also initiated 2022 core FFO per share guidance of $2.90 to $2.97 per share. That represents a 4.1% increase over 2021 results using the guidance midpoint for both years.

2022 AFFO guidance was set at $2.99 to $3.06 per share, and that reflects the scheduled slowdown and deferral repayments in 2022 as noted on Page 13 of the press release.

The supporting assumptions for the 2022 guidance on Page 7 of today's press release and includes G&A expense of $45 million to $47 million; real estate expenses net of tenant reimbursements of $10 million to $12 million; acquisition volume of $550 million to $650 million, skewed 40-60 between first half and second half of 2022; and disposition volume of $80 million to $100 million.

We've assumed rent collections remain at high levels and have assumed potential rent loss of 1.5% of annual base rent. Switching over to the balance sheet. Largely as a result of the $450 million, 30-year 3% debt offering we completed in September, we ended the third quarter with $543.5 million of cash on hand.

However, $345 million of that cash was used shortly after quarter end on October 15 to redeem our 5.2% preferred stock. So that would have left us with approximately $200 million of cash on a pro forma basis and no amounts outstanding on our $1.1 billion bank credit facility at quarter end. So our liquidity remains in excellent shape.

Weighted average debt maturity is now approximately 14.9 years with a 3.7% weighted average fixed interest rate. Our next debt maturity is $350 million of 3.9% coupon debt that's due in mid-2024. So with leverage and liquidity in very good shape, the balance sheet is well positioned for 2022.

A couple of leverage debt -- net debt to gross book assets was 39.8%. Net debt-to-EBITDA was 5.4x, and that's at September 30. And that's pro forma for the preferred redemption that we completed soon after quarter end. Interest coverage was 4.8x and fixed charge coverage was 4.2x for the third quarter of 2021.

That is not pro forma for the preferred redemption and the dividends on preferred. So 2021 looks to be another very solid year. We're well positioned to continue that performance into 2022. And as Jay noted, our focus remains on the long term as we continue to endeavor to grow per share results on a consistent basis.

So with that, Matthew, we will open it up to any questions..

Your first question is coming from Katy McConnell from Citi..

This is Parker Decraene on for Katy. I was just wondering if you guys could help bridge the gap between where your fourth quarter's implied acquisition volumes stand today. It's obviously a little light relative to what you're able to do at 3Q.

I know, Jay, in your opening remarks, you talked a little bit about sort of a comment about returning to pre-pandemic levels. But I'm just looking back at our model, and I'm seeing that back in 2019, you guys were running close to about $170 million, $175 million a quarter.

So if you could just sort of touch on that and how to think about that for '22 as well, if there's any potential for that to ramp up just as the year continues to grow, that would be great..

Parker, yes, I think if you look at 2022 guidance, the midpoint of that is $600 million, right, Kevin? That’s the midpoint. Yes. So I think that’s kind of the – that’s relatively consistent with our pre-pandemic run rate, bearing in mind that here it is November of 2021, and we don’t want to overpromise at this point.

And so the slightly elevated acquisition numbers for this last third quarter relative to that kind of run rate is really just a matter of timing. And it’s a matter of our relationship tenants getting back into their growth mode and having deals that closed in the third quarter.

So I wouldn’t read too much into any one particular quarter’s level of acquisition volume as it relates to that. In – at the macro level, we feel good about the relationship tenants that we have and their continued growth and expansion in 2022.

And Steve and the acquisitions folks in our company are also building new relationships in lines of trade that we do business with and in other lines of trade, all still in the world of retail properties, single-tenant retail properties.

But we feel good about the way we are building that pipeline of relationship tenants that ultimately results in acquisition volume. But I wouldn’t read too much into any particular quarter’s kind of ebb and flow off of that general kind of average run rate..

Your next question is coming from Brad Heffern from RBC Capital Markets..

Sticking with the acquisition theme, can you talk about the amount of the volume in the third quarter that came through the relationship channel?.

Steve, do you want to talk about that a little bit?.

Yes. Our historical being about 2/3 relationship. This third quarter was a little bit lower than that than historical norms. Now for the year-to-date, we'll be back up at that 2/3, 70% arena.

But we did one significant carwash portfolio that was out there that was -- it was a company we talked to for a while, but not good enough to call it a relationship. They had a fiduciary responsibility and took it to auction..

But I will tell you, Brad, that once we've done the first deal with someone who was not previously a relationship, our goal then is to do repeat business with those folks. And so while they -- there may not have been a relationship in the first transaction, our goal is to turn it into one..

Okay. Got it. And then on collections, effectively every sector's recovered. The one area that's still lagging a little bit would be full-service restaurants.

I'm curious, is that just one tenant? And then what's the path to getting that back to close to 100%?.

Yes. It's largely focused on one particular full-service restaurant tenant. And I think it will be drifting back to -- towards 100% in due course, but I think it's next year before that happens..

And that rent has been deferred, right, Kevin?.

Right. Right..

So it's scheduled for repayment just farther down the road..

It has a more extended deferral repayment schedule than most. So that will catch up in time..

Your next question is coming from David Toti from Collier Securities..

I just had 2 questions. The first one is if you could just talk a little bit about what you're seeing in the transaction markets relative to valuations.

Is there continued compression? What's the pace of that compression? And what's sort of the range of value that should -- of the assets that you're looking at?.

Sure, David. The cap rate -- just to step back, at the macro level, we would say that cap rates in the single-tenant retail sector have not bumped upward at all. I would say they're still continuing to trend. Steve, you'd say downward a little or flat? Steve's giving me a flat sign with his hand.

So let's say we're -- that cap rate's flat but at near historic lows and remaining flat. And we're continuing to see that. Our focus is on doing sale leaseback transactions with relationship tenants, with repeat business with these customers where we are -- build this relationship as their capital partner.

And in that instance, the cap rate is not the only driver of the value proposition. And so you'll see that our initial cash cap rates that we reported are generally a little bit higher than what you see a lot of other folks reporting who are acquiring properties in the one-off market as opposed to doing sale-leasebacks directly with retailers.

Also, when we do business directly with the retailers, they call out the properties that they're worried about signing a long-term lease on. So we get slightly better property, and we negotiate our own lease, and we get that long-term lease. So that -- I made note of that in my opening comments.

And I really want to emphasize how proud I am of our team for achieving -- at the year-to-date, I think our average lease duration is 18 years. And that's materially better than you will see from most real estate companies that are acquiring single-tenant properties like we are.

So -- and to us, all of that gets factored into the underwriting and the evaluation when it comes to -- along with cap rate when it comes to doing our underwriting. So I've given you a little bit of a long-winded answer about how we look at all of this.

But I just wanted to kind of differentiate the way we approach things versus other companies where they're really truly just focused on cap rate only..

Okay. I appreciate that detail. My last question is a very, very big picture.

I'm just wondering, are there any sectors or industry segments that you're seeing that you believe could be at risk for the advancement of AI and sort of the replacement of people with machinery? And does that impact any of your tenant categories, do you think? Is there something you're....

I think it impacts all kinds of areas in the economy. It’s a very good big picture question. We do business – a couple of points I want to make there. We do business with large regional and national operators. And they are figuring out a way to run their business and attract customers and take market share regardless of their line of trade.

That’s one of the attributes that has helped get us through the pandemic, and before that, got us through the recession of ‘08, ‘09 is doing business with big companies that have expertise and financial wherewithal and scale.

And those companies are all figuring out how to run their business, but perhaps with better automation, perhaps with AI, perhaps with fewer people. But they’re all trying to figure that out.

What they – but from – as it relates to the – to our portfolio, our focus is on having – owning good real estate locations along high-traffic roads at reasonable rents leased to these large operators.

And when you have that kind of real estate location, what we found is that it is in demand, and our tenants are indicating to us that it will continue to be in demand as they refine their business model.

There’s other property types that I would not want to own looking into the future of what’s going to be – how real estate is going to be utilized by operators. But when I look into the future, what I see is continued demand for small parcels along high-traffic roads that are convenient to where people live and work and shop..

Your next question is coming from Wes Golladay from Baird..

Since the pandemic, you guys have been averaging around $250 million of cash on the balance sheet. And you have a strong cash balance in this quarter even pro forma for the preferred redemption.

So I guess is that the plan next year, to carry a large cash balance throughout the year?.

Yes, thanks, Wes. This is Kevin. No, yes, typically, over the last 30 years, that's not been the case. But you are correct in saying over the last 18 months, that has been correct. And part of that was a matter of timing as we entered 2020 -- early in 2020, we did a debt offering.

And so that really gave us a lot of liquidity just on the eve -- literally on the eve of the pandemic. And so we kind of stuck with that without creating any net real usage of that liquidity as we worked our way through the pandemic.

And so -- but I think you'll see us revert back more to normal, which historically has involved some modest usage of our bank credit facility. So eliminating the cash balance and then call it a couple of hundred million dollars out on the bank line before we start thinking about longer-term capital.

So I think we'll -- you'll see us shifting back to more normal cash profile in the coming quarters..

Wes, I would say, too, that it's indicative of our long-term philosophy of raising capital when it is well priced and available and deploying it with discipline. And so we -- it was the right thing to do to raise that capital when it was available.

But our relationship tenants were taking a pause in their acquisitions, and so it made sense to us to just sit on it for the time being..

Yes. Makes sense. And then when you, I guess, look at this quarter's acquisition activity, you did more than what you did in the first half of the year.

Was this, I guess, driven by M&A transactions with your tenants doing the M&A? Or is it more organic growth on their part?.

Wes, this is Steve. This quarter wasn't as much about M&A. It was more sale-leaseback funding and then organic growth with the tenants. But there's really a couple of larger transactions, one I mentioned was kind of in the carwash industry, and that was part of an M&A. But the rest of them are all balance sheet reinforcement for the tenants..

Okay.

And then when we look at the guidance for next year, I guess, even this year as well, the 1.5% credit reserve, definitely higher than the typical NNN level, is there anything that is standing out to you in your current tenant roster? Or is it just general caution?.

Yes, general cautiousness. Yes, there’s nothing that we’re worried of note or communicating to investors that we have concerns about. That’s just a conservative assumption for now. And hopefully, in due course, we can, like I say, drift back to what we always have, about a 1% assumption in our guidance.

And frequently, that 1% isn’t realized, but we just think it’s prudent to do that..

Your next question is coming from Spenser Allaway from Green Street..

In regards to the disposition you guys have made here today, can you just remind us what industries they were comprised of? And then also in terms of pricing, what the cap rate on the occupied dispositions have been?.

Kevin, do you have that in front of you?.

The cap rate is 7%. And of the $30 million of dispositions, $10 million of that was vacant properties, and $20 million of that was 16 different occupied properties. There wasn't any real sector per se related to that. That was -- I'm just looking at the list here real quick.

A variety of our portfolio, a handful of convenience stores, a handful of restaurants and a couple miscellaneous, if you will. So nothing stands out of note. We really take -- it's really not a line of trade-driven decision generally.

It's a very bottom-up property-specific approach and so -- in terms of deciding what to sell as well as kind of what market pricing might bring for those assets. So that's the equation we're looking at for that. But it was 1/3 vacant, 2/3 occupied with a 7% cap on the occupied..

Great. And then just in terms of your existing customers, are there any particular industries that are -- you guys think are more kind of in growth mode versus others? I know you're still expecting probably about 2/3 of your guidance next year to be driven by relationship tenants. I'm just curious where you're seeing more growth than not..

Steve, let me -- Steve, I'll take a stab at this. And if I miss anything, you can add on. But Spenser, I'd say, really, if you just look across the top lines of trade in our portfolio, it's in those areas generally. I think we expect to be -- some convenience store business next year, some fast food QSR business, auto service business.

The carwash industry has a lot of consolidation and growth going on at the moment, also collision repair.

And then Steve and his team are working on building some new relationships in other lines of trade that we'll try to keep as proprietary as possible for as long as possible, but trying to, as always, continuing to grow our pool of relationship tenants.

Steve, did I miss anything?.

Yes, just kind of really expand. The auto service industry, we’re seeing a lot of private equity money coming into it trying to establish platform. So we’re seeing a lot of growth within that industry. And QSR, the larger franchisees are buying the smaller ones. We get a lot of second-, third-generation QSR owners.

They’re just looking to get out of the business and cash out. So we’re seeing a lot of activity in that sector..

Your next question is coming from from Bank of America..

I'm on for Josh Dennerlein. I was just wondering if you could comment more broadly on how you're addressing challenges from wage inflation and labor shortage, particularly to any specific industries that your tenants are in.

How are you thinking of combating that? It would be great to hear your thoughts around impacts from certain pressures to future fields being considered..

Sure. Let me -- I mean, I'll kind of deal with the strategic way we look at that, and then, Steve, maybe turn it over to you to talk about what you've heard from some of the tenants that you've been talking to.

But , at the strategic level, what we want to focus on is a good real estate location that's along a high-traffic road that we can acquire for as low a price as possible for what I often refer to as a reasonable price and what we can have leased at as low a rent as possible. And I often refer to that as reasonable rents.

But what we want are low-cost properties with low rents along high-traffic roads. Those -- that builds in a margin of safety that we think is more enduring than focusing on the tenant's balance sheet for your primary security or focusing even on store-level performance as your primary comfort and security.

And so regardless of the line of trade, that's what we're trying to find, are well-located properties at reasonable rents. And in situation where we have that, what you've seen through the recession and now through the pandemic is that those properties remain highly occupied.

And tenants want to be there and want to keep those locations, and it helps to build that stable income stream that allows us to have our long history of dividend increases and per share growth. But that's the macro level.

Steve, do you want to talk about what the tenants are telling you about labor and all of that?.

Yes. Specifically, the QSRs are restaurants -- full-serve and QSRs and the convenience stores. Early on when kind of the wage inflation or labor shortage, we'll start with, convenience stores were shutting down certain hours of the day, their low peak hours.

But now that's kind of coming back because they're becoming more efficient with fewer employees. What we're finding in the restaurant industry is the wage inflation, they have fewer employees, so their margins are actually up. But they're starting to be able to pass through the top line to the consumer slowly to combat the wage inflation..

Yes. Yes, , just to close on that, I'd say we deal with large regional and national tenants. We don't have mom-and-pop tenants. And so they are -- to the point of one of the earlier questions, they're focusing on automation and labor management.

And they're -- and I think they feel like across the different lines of trade that they can take some price, that they can pass some of this on to the consumer..

That's very helpful. And then for my second question, can you just remind us again what your mix of tenants in the portfolio has been like historically? I know you commented on areas of growth. Are there any plans to diversify exposure away from certain industries or perhaps maybe your largest tenant, 7-Eleven? If you could just provide....

good locations at reasonable rents and reasonable costs. And so you will see us continue to be very thoughtful and prudent in underwriting bigger boxes that have more special -- that are more special-purpose uses. The movie theater industry is one where we are still remaining very cautious. Our tenants are paying us rent right now.

AMC is our primary tenant in the movie theater sector. And they've done a great job of raising money, and they're right on track with us. But that's an area -- a line of trade that we still want to be cautious about going forward. So you're not likely to see us buy any or many movie theaters going forward.

And other than that, what -- regardless of the line of trade, we're going to continue to focus on keeping the cost down and keeping the rent down. And in that instance, we feel like we built a pretty durable rental income stream..

Yes. And just -- it's Kevin. One side note related to that is we don't -- from a macro standpoint, we don't sit back and say, "Let's buy $600 million worth of properties in these 4 lines of trade in the 9 states." We're very bottom up in terms of our approach to this.

We think about how it fits in the portfolio and make sure we have adequate diversification. But we don't start there. We start at the bottom and work our way up to decide if a property is reasonably priced and a good location and then move from there to decide whether it fits in the portfolio rather than a top-down approach..

And I guess maybe one last thing to add, , you mentioned 7-Eleven as our top tenant. We have done 0 business directly with 7-Eleven. All of our 7-Eleven exposure in the portfolio is – was originally transactions that we did with strong regional operators who grew and ultimately were acquired by 7-Eleven in one fashion or another.

And to the extent we have other operators who also get acquired by 7-Eleven in the future – I don’t know that, that will ever happen. But if it did happen, 7-Eleven would become an even bigger tenant of ours, but we would not worry about that. We keep an eye on it, but we would not lose sleep over that.

That – our 7-Eleven real estate is some of our best real estate at some of our best prices and yields of anything in the portfolio..

Your next question is coming from John Massocca from Ladenburg Thalmann..

Maybe just going back to the credit loss outlook.

I guess compared to the 1.5% you're baking into the remainder of 2021 and in 2022 guidance, what is the actual kind of credit loss result in for kind of the first 9 months of the current year?.

I need to think about that a little bit. I think the way I think about that is it's, call it, about 0.5% on the accrual basis tenants, and about 5 -- about 6% on the cash basis. So that's probably sub-1% all in, but probably 80 basis points, something like that, all in, at this point for the year, 9 months..

Okay. That's helpful. I'm just trying to -- kind of guidance versus maybe kind of historical outcomes. So that's helpful..

Yes. Fair question. I would point out kind of pre-pandemic, which I -- we think we're post-pandemic, but maybe we're late pandemic instead of post currently. But pre-pandemic, that number probably would have been less than 50 basis points on a given year.

And so it's a small number to the extent that you probably never pre-pandemic have heard us talk about that number. And we look forward to returning to those days, so -- which we think are in the not-too-distant future. So....

Okay. Understood. And then maybe switching gears a little bit. As we think about kind of particularly in the current inflationary environment, rent escalators. I guess where is -- with new transactions kind of -- you're leveraged if at all to maybe push additional escalators or tie them more to kind of free floating CPI.

I know there's a lot of CPI in your portfolio, but a lot of it is kind of capped in Florida, et cetera.

But kind of maybe any kind of leeway in terms of how you can kind of put those same-store rent drivers in new leases?.

Yes. John, I think for the size and sophistication of the tenants that we deal with, you should not expect us to do any better than our long-term average of kind of 1.5% per year rent increases. That is market for these large regional and national operators that we do business with.

And we don’t expect to do much better than that for – in our underwriting and our view of it, to the extent you can get a tenant that would give you uncapped CPI increases, that may not be a tenant you want to do business with.

That the – and so that’s just something that you get from smaller operators that we – that are not the core of our relationship building and the core of our strategy. So I think you should just kind of assume that, that’s going to continue to be the case, kind of 1.5% per year annual increases..

Your next question is coming from Chris Lucas from Capital One Securities..

Just a couple of quick follow-ups on the guidance assumptions.

Any change to cap rate expectations for next year relative to this year?.

Kevin, I think the next year's guidance, we bumped it down a little bit to the kind of 6.2, 6.3 range?.

Low 6 range. We're expecting to see some compression, the overall cap rate for 2022 compared to 2021..

Okay. And then I think when you laid out the 2021 guidance, you had mentioned that you expected acquisitions to sort of be 40% front end and 60% back end.

How is the cadence looking or how are you thinking about it for '22?.

Yes. We've assumed a similar cadence and pacing for 2022 as well, 40-60..

Okay. And then my last question is lease expirations for '22 are slightly elevated.

How should we be thinking about sort of your retention rate on that volume? What's sort of embedded in your guidance?.

I think our historical long-term rate is 80% to 85% of the time, the tenants renew the lease at the then current rent. And so I think you should assume something in that same ballpark going forward. Steve, the tenants that make up next year's expirations are really convenience stores..

Auto services and a little bit of the QSR. But primarily convenience store, auto service is the vast majority..

Yes. I think if you take the -- use the long-term assumption, Chris, it's not going to be off by much..

Your next question is coming from Linda Tsai from Jefferies..

You mentioned earlier in auto service, you're seeing consolidation.

Could you just talk a little bit about what's driving this?.

We classified it carwash. This is Steve. We classified carwash as an auto service. And I really think it was the success of Mister Car Wash and then kind of institutionalized carwash sale leaseback. And the success that Mister Car Wash has -- I think I've seen a lot of private equity money coming to this sector.

It's a highly fragmented sector, but that's the big driver as well as the private equity money went into Mavis auto service, it's a tire and light collision repair. There's been a lot of money flowing into that sector as well..

And then what's the best way to think about the timing of capital-raising activity in 2022? Do you anticipate seasonality given lumpiness between the first half and second half of acquisition volumes?.

Yes, this is Kevin. So yes, we don't give guidance on capital raising. I will say you should expect us to behave in a leverage-neutral manner. And so -- which has been the case for the last 20 or 30 years.

And I will say, too, that in our minds, we don't directly tie capital deployment with capital raising on a quarterly basis and sometimes not even quite on an annual basis. We want to get that connected over the long run.

But as we've talked about, we want to raise capital when it's available and well priced, somewhat irrespective of whether we have an immediate need. And we want to deploy capital when there's good opportunities and reasonable pricing, somewhat irrespective of whether the capital markets at the time are particularly friendly.

And so we -- those 2 things aren't always directly connected, particularly on a short-term basis. But you should think of us behaving in a leverage-neutral manner over the course of next year would be a good assumption..

Your next question is coming from Ronald Kamdem from Morgan Stanley..

Two quick questions from me. Just on the 1.5% basically of rent loss that's baked into it looks like 2021 and 2022. Obviously, you talked about some conservatism versus the usual 1% rent loss.

Just curious, what's driving that conservatism? Is it the conversations you're having with tenant? Is it just the Delta variant? Just trying to figure out what's causing that conservatism, what data points are you looking at today?.

Yes. It's Kevin. Besides the fact that I'm just a conservative guy....

Driven by Kevin's wiring, Ron..

In part it goes back to my comment earlier though, are we post-pandemic or are we late pandemic? And so just -- it's just a holdover of conservatism going forward. And we just are transparent with people. And if investors are more optimistic than our guidance, then that -- they can make that adjustment.

But there is no notable concern or worry that we have about particular issue or tenants, et cetera, behind that. It is a general conservatism rather than a particular one. So....

Great. That's helpful. And then just maybe asking Linda's question in a different way. As you're thinking about next year's acquisitions and the funding of it, I mean, the debt market is on fire. Is there a preference to maybe do more debt than equity? Obviously, keeping in mind that you're trying to maintain sort of a leverage-neutral.

But at this point, is there sort of a preference? Or how do we think about that?.

I’m not exactly certain where it will be next year, but I will say for this year, you have seen us take that position. I think we’ve done 2 debt offerings this year and raised 0 equity. Granted, we used a large portion of that raise to redeem some preferred, so maybe that’s – a chunk of that’s just a refinance is the way to think about it.

But you’ve not seen us issue any equity this year because we do think the debt markets have been very attractive when we can issue 3% 30-year debt, that’s of interest to us. And so that’s what we did. And so – but that’s not necessarily a good read on – we’ll see what next year holds for us in terms of pricing of capital.

And that will drive a good portion of our decision-making process going forward. But at the moment, we don’t have a strong preference one way or the other for debt versus equity..

There are no further questions in the queue. I will now hand the conference back over to our host for closing remarks. Please go ahead..

Thank you, Matthew, and thank you all for joining us today. We look forward to talking with many of you virtually at NAREIT and other conferences over the next few weeks. Have a good day..

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation..