Good day, and welcome to Spirit Realty Capital 3rd quarter 2022 earnings conference call. All participants will be in listen-only mode. If you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there'll be an opportunity to ask questions. Please note that this event is being recorded. Now I'd like to turn the conference over to Mr. Pierre Revol, Senior Vice President of Corporate Finance. Please go ahead, sir. Thank you, operator, and thanks everyone for joining us for Spirit's 3rd quarter 2022 earnings call. Presenting in today's call will be President and Chief Executive Officer, Jackson Hsieh, and Chief Financial Officer, Michael Hughes. Our Chief Investment Officer, Ken Heimlich, will be available for Q&A. Before we get started, I would like to remind everyone that this presentation contains forward-looking statements. Although we believe these forward-looking statements are based on reasonable assumptions, they are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from those currently anticipated due to a number of factors. I refer you to the safe harbor statements in our most recent filings with the SEC for a detailed discussions of the risk factors relating to these forward-looking statements. This presentation also contains certain non-GAAP measures. Reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are included in the exhibits furnished to the SEC under Form 8-K, which include our earnings release and supplemental investor presentation. These materials are also available on the investor relations page of our website. For our prepared remarks, I'm now pleased to introduce Jackson Hsieh. Jackson. Thanks, Pierre, and good morning, everyone. Our 3rd quarter results continued to demonstrate the validity of our underwriting approach, highlighted by low lost rent, stable property cost leakage, and occupancy over 99%. Our portfolio benefits from diversification across 346 tenants operating within 34 industries and 12 distinct sub-asset types, allowing us to produce a reliable stream of cash flow for our shareholders and once again increase our quarterly common dividend. During the quarter, we invested $268 million in capital expenditures at a weighted average cash capitalization rate of 6.86%. A 49 basis point increase over last quarter and a 133 basis point spread to the capital we raised to fund this capital deployment. Our capital deployment included 51 properties, which have approximately 15 years of weighted average lease term, average annual escalators of 1.8%, and a weighted average economic yield of 7.76%. These acquisitions consisted of 46% industrial and 54% retail and other. I'm pleased to announce that our other bucket was our first add-on acquisition with the Invited, formerly ClubCorp, since our initial transaction last year. We partially funded these acquisitions with $74 million of disposition proceeds, predominantly from the sale of leased retail assets with a weighted average cash capitalization rate of 5.7%, resulting in net capital deployment of $194 million at a blended cash yield of 7.29%. We sold five QSRs at The Goddard School in a low five cap area, two Mac Papers properties in the high four cap area, and two Smart & Final grocery stores, formerly Haggen properties, in the low six cap area. As you will notice, the percentage of industrial acquisitions rose meaningfully since last quarter from 18%- 46%, and I anticipate that percentage to rise materially higher in the 4th quarter as the industrial segment is where we are seeing attractive sale-leaseback opportunities with new and existing customers. Many of our customers that operate light manufacturing, distribution, and IOS facilities need funding to meet their growth objectives. With other forms of corporate financing becoming less available or attractive, sale-leasebacks as a financing alternative are becoming a more attractive option. Despite this favorable dynamic, we are being highly disciplined and selective in our pursuit of opportunities, and we believe pricing for these assets could become more attractive in the near to medium term. To help fund these opportunities, we continue to pursue prudent asset recycling by disposing of smaller retail assets where cap rates have proven stickier. This form of capital recycling will also help shape our portfolio as we dispose of retail properties and redeploy proceeds into the industrial segment under new long-term sale-leasebacks at current market terms with tenants who need our capital now. Finally, as we approach the end of 2022, I reflect on the goals we set three years ago at our Investor Day, including ABR, non-retail exposure, and AFFO per share. As we sit here today, I want to highlight that we are ahead of our Investor Day ABR goal by $61 million. Our industrial exposure is over 20% and growing, and the midpoint of our AFFO per share guidance is $0.14 higher than our original 2022 target. Looking back even farther, since the spin-off of SMTA in 2018, we have increased our ABR by 82% to $661 million, grown our industrial rents by $108 million, increased our WALTs to 10.4 years, and raised our public tenant exposure to 53%. Over the same period, we have meaningfully improved our balance sheet, liquidity, internal processes and technology systems. With this strong foundation, our portfolio and platform are well equipped to perform, take advantage of the opportunities we are seeing today, and increase shareholder value over time. With that, I'll turn the call over to Mike. Thanks, Jackson. During the 3rd quarter, our annualized base rent increased $13.8 million- $661 million, with $12.8 million driven by net acquisitions and $1 million from organic rent growth. We received $1.2 million of rent from the seven theaters re-leased in 2020 and 2021, representing 87% of their stabilized rent. As of October, only three theaters remain under variable rent arrangements as the rest have fully reverted to base rent. Other operating income was elevated this quarter to $2 million, which included approximately $1.5 million in non-recurring income, predominantly from a government taking for a highway expansion. On the expense side, cash interest increased to $3.3 million from last quarter, with approximately $2.8 million driven by a 145 basis point increase in the weighted average interest rate on our bank debt. During the quarter, we issued 1.1 million shares of common stock to settle existing outstanding forward contracts and issued an additional 2.2 million shares through our ATM, generating $141.9 million in net proceeds at an effective price of $42.72 per share. Additionally, we again raised our quarterly dividend to $0.663 per share, representing an annual growth rate of 3.9% while maintaining our AFFO per share payout ratio of 75%. After locking in $800 million in term loans during the quarter and effectively fixing their payments through well-timed interest rate swaps, we had no floating rate debt outstanding at quarter end. Subsequent to quarter end, we received commitments for a $500 million, 2.5-year delayed draw term loan facility, which will allow funds to be drawn up to July 2, 2023, and will mature on June 16, 2025. This new facility provides us with significant debt capacity to pursue attractive acquisition opportunities, allows us to be patient when determining when to access the unsecured bond market, and further demonstrates the strength of our banking relationships. We ended the quarter with $1.3 billion of liquidity, consisting of $1.2 billion in revolver capacity and $110 million of cash, which will further be enhanced by the new term loan facility that we expect to close in the coming weeks. Returning to guidance, we are narrowing our AFFO per share range to $3.55-$3.57, increasing our midpoint by a penny, which represents growth of 9.5% from the prior year. We are maintaining our capital deployment target of approximately $1.5 billion and narrowing our disposition range to $250 million-$300 million. When we announced our 2022 guidance on January tenth, inflation fears were much lower. The U.S. 10-year treasury yield was 1.75%. One-month SOFR was 0.05%, and our stock was trading at $48 per share. Despite these significant changes in the macro landscape and our cost of capital since that time, our portfolio strength, capital allocation strategy, and ability to timely source various forms of well-priced capital has allowed us to perform in line with the aggressive expectations we laid out in January and raise our quarterly dividend for the second consecutive year. We remain well capitalized and positioned to take advantage of future opportunities. With that, I will turn the call back over to the operator to open up for Q&A. Operator? Thank you. Now I'll begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble a roster. First question comes from Anthony Paolone, JP Morgan. Please go ahead. Thank you and good morning. Can you talk about just, you know, the ability to continue recycling capital the way you have been pretty accretively, just how deep that pool is to be able to do that? You know, how much growth do you think you could drive in the future by still buying with yields above the yields at which you're selling? Hey, good morning, Anthony. I'll try to take a go at that. You know, if you look at what we did this quarter, in terms of asset sales, you know, they were all relatively smaller transactions. Six of those asset sales that we did in the quarter were 1031 exchange buyers, that resulted in about 35% of the total sale volume of the quarter. If you compare that to the 2nd quarter, which was, you know, an equally large, relatively large disposition quarter, I think only three of those transactions in the second or four in the 2nd quarter, were 1031 buyers. I think as we look out, to try to think about our disposition plan, you know, we think smaller is better. Smaller granular assets are easier to finance right now because the other buyers, the non-1031 buyers, were generally the high net worth individuals that probably paid all cash for these properties. There were some small funds that we were able to engage with and sell property to. What I would describe to you today is we have a large number of properties on the market currently. You know, we're a very price-sensitive seller. I would describe all of these sales as generally non-investment grade sales. Like in the 3rd quarter, none of these were IG related tenants. That would be like QSRs, car washes, you know, small, smaller assets that are more bite-sized seem to have some attraction. That's gonna dictate the plan. It's really hard to project a target because I think you've heard some of the other commentary from our peers talk about declining 1031 depth out there. I think that is the case because, you know, the upper leg of these transactions are being affected by other non-retail, you know, real estate sales. We still believe that we'll be able to find a way to accretively recycle, and obviously that will in turn inform us, you know, what our acquisition appetite will be going into 2023. Okay. Just to follow up, if I look at your acquisitions in the quarter, the 6.9% yield, you know, is there any lag to the market adjusting cap rates higher here? Just trying to understand, like, if those were struck today, would there be any adjustment upwards? Just any comments on where, you know, cap rate adjustment is right now in your view? Yeah. I mean, I think if you were to look at, there was definitely lag effect in the 3rd quarter. I can tell you our 4th quarter is already in the low 7% cash cap range in terms of what we expect to close in the 4th quarter. What we're seeing today, just, you know, we're seeing things in the mid to high-7s to low-8s cap range for assets that a year ago were probably 150 basis points lower, just to give you some benchmarks. It's the same assets, just wider, 150 wider, especially in that industrial area. You know, on the retail side, Tony, we're seeing probably 50-75 basis point widening compared to a year ago. Yeah, you'll start to see it impacted in our go forward acquisition production. For us, you know, dispositions, free cash flow are really pretty critical for how we're looking at next year's plan. Obviously, given where our equity is trading right now, we're not interested in necessarily issuing at these current levels. Okay. Thank you. Okay. Thank you. Next question will be from RJ Milligan, Raymond James. Please go ahead. Hey, good morning. Just a question on leverage. You ended the quarter at 5.2x debt to EBITDA. Jackson, you mentioned that you're not interested in issuing equity at these levels. I'm just curious where you are comfortable taking leverage without tapping the equity markets? I mean, we've talked about in the past. Well, first of all, our ratings are really important to us. Whatever we do, we're not going to put that at risk. We've talked in the past, you know, 5.2 to mid-5s as kind of a range of leverage that we target. I think, you know, we're obviously set up with these additional term loan facilities to go past that if we found the right opportunities. But to be honest with you, we'd only do that if we were confident that we could get the balance sheet back to a more normalized 5.2-5.5 range. Does that make sense? Yes. Yep, that makes sense. It seems like you guys are leaning a little bit more into industrial, and you mentioned that the cap rates have probably expanded there 100 basis points. I'm just curious, you know, what the expectation is in terms of absolute levels of cap rates in industrial over the next several quarters. I mean, I guess I would say, like, if you remember from the last quarter, we talked about probably too much about high yield indexes and term loans and spreads widening. Well, that's continuing to persist for a lot of issuers. You know, if you look at our sale leaseback percentage this quarter, it's about 60%. Close to 60% of our acquisition volume was new sale leaseback oriented. In the 1st quarter, that was 45%. In the 2nd quarter, it was 56%. I can tell you in the 4th quarter, it's north of 80%. What that means is, you know, we are finding opportunities where companies really need the capital. There's good use of proceeds, and they're just evaluating a sale-leaseback versus, you know, accessing high-yield bond or bank debt or term loan. You know, we're focused on mission-critical assets in that segment. I think you're gonna see that sale-leaseback percentage continue to be very, very high as we move into the 4th quarter and beyond, because that's where we're finding the most attractive opportunities. You know, if you think about my comments earlier about the dispositions, you know, we have a large number of properties that are existing leased assets on the market. We're not a forced seller. If we don't get the right price, we're just not gonna sell it. What we can do is kind of line up where we think we're getting fair value for the asset and transact. Those that we're not getting fair value, we'll obviously not sell. We'll pull those assets from the market. Well, that's what's happening in the market today. You have a large number of existing leased assets for sale, retail, industrial, office. Most of those are probably not gonna sell. I mean, the volumes are way down. There will be a small number of sale leaseback transactions with companies that need to grow, need to go on with their business. That's why we believe that we're one of a very few number of companies that can kind of solve that capital need right now. A couple of our peers do it as well. Appreciate the color. Thank you. Sure. Thank you. Next question will be from Brad Heffern of RBC Capital Markets. Please go ahead. Hey, everyone. Lost rent stayed relatively low this quarter. It's at 30 basis points. I guess has that changed at all in October or November, and are there any signs of any tenant stress? Well, most of that lost rent was related to Regal. Maybe Mike, if you wanna talk about that. Yeah, I mean, definitely in the 3rd quarter, I mean, that bump up in lost rent was really Regal. You know, they didn't pay September rent. They were required to. They did pay October and November, however, so, you know, I would expect that to reverse itself. I mean, related to Regal, that would obviously reverse itself. Yeah. You know, all those leases are in effect and obviously we're talking to Regal, along with many other landlords that own Regal properties right now. Okay. Got it. I wasn't specifically asking about Regal. I was asking more broadly on just tenant stress in general. You know, we consistently evaluate our tenant base. Obviously, the fact that we're finding these opportunities for tenants that need capital, we're also very focused on our existing tenants, you know, in terms of where they sit and how they're performing. I would say the benefit of our portfolio, and we've talked about this in the past, is, you know, it's very diverse, from a tenancy revenue and industry and location standpoint across our 2,100 properties. More importantly, like, we have very large sophisticated operators. You know, they've got different access to capital that they generally do a really good job. Obviously we're very mindful and we're paying attention. Okay. Got it. Thanks for that. There was a decent-sized drop in investment-grade exposure quarter-over-quarter. It sounded like that was not due to disposition. Was that a downgrade, or can you talk about what was driving that? Yeah. Ken, you can take that. What happened, the biggest driver of that change during the quarter was the downgrade of Kohl's from investment grade. None of the dispositions, as Jackson mentioned, were investment grade. That's not a, you know, that's not a target for us on the disposition side. It was largely driven by the downgrade of Kohl's. You know, a little bit of it also was driven by the acquisitions that we're doing today tend to not be investment grade. You're adding more non-investment grade and you had the downgrade of Kohl's. Okay. Thank you. Sure. Thank you. Thank you. Next question will be from Joshua Dennerlein of Bank of America. Please go ahead. Yeah. Hey, guys. I'm curious, like on the dispositions, is it more about kind of optimizing portfolio, like how you want it to look? Or are the sales more about kind of optimizing capital raising? I'm I'm curious how you kind of balance those objectives. I would say it's both really. The optimizing of capital is probably for us currently, given our current publicly traded cost of capital, it's paramount. Because, you know, we have a very diverse, liquid, granular portfolio, so we have lots of opportunities to try to harvest those opportunities and reinvest in things where we have a lot of conviction around right now. But also, you know, it gives us an opportunity to continue to shape this portfolio. You know, we constantly are evaluating the different industries that we're in and trying to find kind of that sweet spot of balance, of diversification. I think for us, you know, adding more industrial we think is a wise thing to do, and we've consistently been doing that, and we'll try to do that going into 2023, obviously in the 4th quarter as well. The other thing it does, Josh, is it's very informative to have a lot of properties on the market for sale. We get to see, you know, the depth of the bidding universe, how different groups are coming in and out of the market. That's just extremely valuable information for where I sit when we think about, is this the right time to be investing for us relative to maybe it might get better later. There's just really as opposed to hearing it from brokers or other consultants anecdotally, like we know real time. I can tell you, like if you looked at the buyer list and bidding list between the 2nd quarter and 3rd quarter, it's very, very different. The depth, the number, the type of buyer is very, very different. We're seeing that in our current disposition pipeline that we have right now. It's very much happening in the moment. Okay. All right. We think it helps us. It informs us to be a better buyer. I guess, if nothing really changes on your cost of capital, should we kind of assume that your net acquisitions going forward are gonna be kind of smaller than in the past just 'cause you're gonna be doing more sales. Is that a good way to think about it? Yeah. Look, I mean, it's. I'm not excited about our cost of capital in terms of where our equity yield, you know, or AFFO yields right now. That being said, you know, we generate a decent amount of free cash flow. The portfolio is of a size right now where it's, you know, large. It's not super large, it's not super small, but it's large and diverse. I think what you can expect from us is we're gonna be extremely opportunistic on how we think we need to fund ourselves. I think if you look back since I think I've been at this company and this team, we've always been pretty thoughtful about how we raise capital to fund, you know, our business. Sometimes, you know, it's through ATMs, sometimes it's through larger offerings, sometimes it's through dispositions. I think we'll continue to do that. You know, I hate to sort of forecast what happens if this happens or that happens, but I said to you, we're not gonna raise capital that's diluted, number one, and we're gonna continue to push really hard on the dispositions. It's a core priority in the company. You know, if those things don't materialize, obviously, you know, you have leverage as a kind of a toggle if you wanna go that route. I said also ratings are really important. Look, we're gonna be really thoughtful as we come out with our 2023 plan. Look, we're not gonna be heroes or anything like that either. We'll just be very measured and try to find the best opportunity that matches up with what we believe are great opportunities to enhance this portfolio that we own. Thanks, Jackson. Thanks. Thanks, Josh. Thank you. Next question will be from Haendel St. Juste of Mizuho. Please go ahead. Hey, good morning. Good morning, Haendel. Jackson, I wanted to go back to investment spreads for a second, but more on a look-forward basis. Looks like your cost of capital today is somewhere in the, you know, call it high sixes. Curious what type of spread you think you can generate as you deploy incremental capital today. Some thoughts or maybe can you discuss the pipeline, what the cap rates in there look like? Thanks. Well, I'll do pipeline first. You know, we're being extremely picky on things that we're looking at right now because the number of opportunities is continuing to increase. I think I'd characterize it the buyer base for the things that we're looking at is relatively small. It's a couple handful of our public peers, you know, especially for some of these larger opportunities, larger being north of $20 million. The private buyers that need mortgage debt, I mean, they're not really able to do it, I don't think right now. The way we think about it is, look, we have free cash flow, we have disposition proceeds. That all goes into the cost of capital mix. We know what our AFFO multiple and yield is. You know, we were able to get stock sold last quarter, you know, in the low 40s. At these current levels, cap rates would have to be extremely high for us to consider that, I think. Right now I would say cap rates are still widening. I'm just not sure how wide they'll ultimately go, but at some point I think you kind of run into a ceiling. You know, high 7s to low 8s is kind of a reasonable area where we think we might be able to get things done next year. You know, mid-7s to low 8 cap rates for assets once again that were probably 150 basis points tighter a year ago. I t's not like we feel like we're buying low quality opportunities. These are very, very good opportunities. There's just not as much capital out there. Got it. Got it. That's helpful. Appreciate that. Another question I guess stepping back. You've typically given forward year guidance during 3rd quarter earnings. Sounds like the decision this year is probably a function of the macro uncertainty and needing more clarity on your sources and cost of capital. I think many of us are trying to get a sense if it's reasonable to think of the 3rd quarter, the $250 million-ish as a good run rate, given the elevated cost of capital and debt pricing and the shift in the market. I'm curious if that's fair. Then what type of growth do you think you can generate without issuing incremental equity capital and still operate within your leverage targets? Thanks. Yeah, I mean, we didn't put the guidance out particularly because of some of the challenges in the macro environment right now. You know, I wouldn't wanna even try to guess right now. You know, like I said, we have a large number of properties on the market. I'm not gonna tell you exactly how large, but when I say it's large, it's large. If we were able to execute at those levels, that would help us kinda drive a certain type of acquisition activity next year. If we're not able to achieve it, you know, it's probably gonna go down for next year, the volumes. It's hard to kinda answer that right now, to be honest with you. That's why we didn't wanna put it out there until we get a little more information, you know, through the close of this year and early, you know. I think we'll be better informed to give the market an idea about next year's earnings and growth and acquisition volume. Appreciate that. No, I understand. Just one last one, if I could. Just curious if you could kind of update your view on potential M&A, how that maybe has evolved or maybe been impacted by the change in the cost of capital, the contraction in the spreads. It seems that the spread investing equation here has changed pretty meaningfully and likely weighs on the growth and likely limits the upside for the stock. Just curious on the latest thinking from M&A here. Thanks. Yeah. I mean, I think one of the companies that was taken private, obviously, I think it was a unique situation. You know, I'm talking about STORE Capital, right? I think that for me, the positive sign for that is you had a global sovereign wealth fund that has sort of embraced this net lease asset class. That's wonderful. I think that's wonderful for all of us and for all of our peers. You know, that company had just very unique ABS facilities like we've had in the past that I think enabled them to to kind of be able to generate the kind of cash-on-cash yields that that investor required. I mean, for us, we're not necessarily set up that way. All of our debt's unsecured. You know, you can see how our bonds trade. More importantly, I think, it's hard to predict, like M&A in the future. I think, look, the environment's not great right now for it. You know, the macro environment is a little bit distasteful, and so usually that doesn't result in a lot of M&A, you know, unless it's maybe stock for stock, but also very difficult right now. I would say, like, for what we're focused on, the things that we can control, we wanna make this portfolio and company better, constantly improve it. We believe that this shift into a higher percentage of industrial assets, new sale-leasebacks, long-term leases, higher annual rent bumps, you know, the rent bumps are exceeding 2% now. We think that's gonna position this company better in the future. You know, whether we get the equity multiple or maybe we can attract, you know, sovereign wealth funds to do things with us, sure, that'd be great, but we just wanna make the company better, and that's what we're really trying to do right now, and we think what we're doing is doing that. That's in our control. But to answer your question, I don't think there's gonna be widespread M&A right now. The environment is just too uncertain for a lot of companies right now. Thank you. Sure. Thank you. Next, our question will be from Michael Goldsmith of UBS. Please go ahead. Good morning. Thanks a lot for taking my question. Can you remind us just how much prior rent you collected this year, how much you have remaining, for the 4th quarter, and then what you expect leading into next year? You're talking about deferred rent, is it? Yeah. We're talking about deferred rent, Michael? Yes, correct. I think we have about $9 million left to collect, and I believe we'll collect roughly 60% of that by the end of next year. I'd have to look back, and I think we've collected about that this year. You know, all of our deferred rent has been repaid, you know, per the obligations of the tenants on time. It's been moving along. I think that when we struck all the deferral agreements, that balance was well into the 20s initially, coming out of COVID. It's come down materially. We've even had several tenants, you know, prepay early. So it continues to drop. So yeah. Thanks for that. I messed it up. Then just on, you know, where the portfolio shifting from or at least the acquisition or investment is shifting to industrial from retail, but there's a big pickup in the home furnishing space and that's one that, you know, it may be facing a little bit more challenge in this current environment given that there was a lot of, you know, of furniture purchasing and home furnishing purchases through the pandemic. Just trying to get a better understanding of what you're seeing in this category and why the focus on it in the 3rd quarter. Yeah, Mike. The two home furnishings, we bought a La-Z-Boy and an Ashley. It was La-Z-Boy and an Ashley Furniture location. I mean, like I said, those were existing leases. They were not sale-leasebacks. You know, they made sense given at the time when we were looking at them on a relative basis. If you think about what we're doing now is just really shifting more to that sale-leaseback opportunity that I talked about. You'll see that shift in the 4th quarter, and it's gonna be predominantly industrial in that 4th quarter. I would say some of the assets that were acquired were probably earlier in the year committed that were rolling in. My comments on how we're moving forward is gonna be primarily industrial, long-term lease, sale-leaseback, new sale-leaseback. Got it. Thank you very much. Michael, to go back to your question on accrued rent real quick, just to make sure I'm clear. You know, all the deferred rent we've been collecting, that was all recognized in earnings last year. None of that's affecting our earnings, just to be clear. That's all that was recognized last year in the 2nd quarter. The rent that we have collected and continue to collect does not actually impact our earnings. Got it. You won't be facing. It's not like you have to lap that next year? Correct. That's right. Yeah, none of that rent we've collected this year was recognized in earnings for this year. It was all recognized last year in one quarter. Are there any, you know, as we look ahead, I know you're not providing guidance, but are there any one-time items from this year that you will have to lap or any potential benefits? Yeah, I mean, I talked about like the other income. That line got a little chunky this quarter, so you know, that tends to be more non-recurring. Got it. Thanks so much. Good luck in the 4th quarter. Okay. Thanks, Michael. Thank you. Next question comes from Ki Bin Kim of Truist. Please go ahead. Thanks. Good morning. Good morning, Ki Bin. When you talk to your tenants, what's your best sense of for them the cost of a lease versus alternative funding sources? Has it gotten wider, I guess more favorable or unfavorable as it pertains to doing a lease? Some of the companies that we've been targeting, especially the non-investment grade tenants, you know, a lot of these companies are sitting on SOFR + 400, 450 kinds of credit facilities. Like their secondary bonds might be trading at 11%, double digit. If you kind of focus, you know, I talked about this last quarter, but you know, the high yield issuance, new issuance volumes are way down. Part of that is that the new issue premium is so high right now for a new add-on bond, just because the secondary bond levels are trading so wide. I think that's just a function of. We have a longer discussion on why spreads are so wide right now. Obviously, a lot of global crosscurrents, the U.K. There's just a lot of things right now that are creating extremely wide spreads. You know, for us as a sale leaseback alternative, you know, if we can lock in at 8.25%, numerically it's lower, right, than what they can issue at bank debt right now, even new bonds. You know, where the tenants kind of push back on us, and it makes sense. You know, if they issue a, you know, a bond or term loan at those higher rates, they can always prepay that debt. There's either prepayment or yield maintenance or defeasance. They can actually prepay it. You know, the minute they enter into a sale leaseback on a mission-critical asset with us, you know, it's a 20-year obligation. Can't get out of it. It has certain inflexibility sometimes for them. When they look at doing a sale leaseback versus just issuing corporate debt, it just has to be probably a little bit lower, just given some of this elevated spreads and where absolute corporate rates are right now. That's why I've said that, like, we're not gonna do 10% sale leasebacks right now. I don't see right now in the current environment. We are seeing that 150 basis point widening. I think it's just a function of supply and demand of capital that's willing to do it, i.e. us and some of our peers. These companies, they need to move on. Some of them are growing, some of them are expanding, some of them are doing mergers, and they need the financing. We're kind of trying to thread that sweet spot. Really good credits that we believe good industries, really good real estate, great leases at what we believe are wide pricing from a historical standpoint. We think that in the future, spreads will normalize from where they are today, eventually. That's kind of the lens that we're looking at, Ki Bin. Okay. When you look at your 2023 lease expirations, you have about 3.2% rolling. Any early thoughts on how lease negotiations are progressing and, broadly what we should expect in terms of retention rates or spreads? Yeah. Hey, this is Ken. You know, the lease expiration is, to be frank with you, just the basic blocking and tackling that we're doing every day. We're not only addressing 2023, we're addressing 2024, 2025, and even in some cases 2026. But we're very happy with the way the progress that we're making. You can see in that, you know, in the lease expiration schedule. It's interesting if you look at the leases that are expiring in 2023 or 2033 and beyond, in that thereafter line item, we've managed to move that up for several quarters in a row. You know, we're very happy with the progress we're making. I guess, let me ask you a different way. Any reason to expect the retention rates to be any different from what we've seen from you guys for the past, like year or so? We don't see anything materially different. Okay. Thank you. Thank you. Next question will be from Wes Golladay of Baird. Please go ahead. Hey. Good morning, everyone. When I take a look at the sale leaseback activity that you're doing, are you seeing better value at a particular price point? How has competition changed throughout the year? I think, Wes, the way I would answer it, there's a lot of sale-leaseback opportunities that won't get done. They just don't make sense. They don't make sense for us. I don't think they make sense for anyone. That's one sort of bucket. What I would tell you is that larger dollar size deals, there are just less people that can actually do those right now. That's an area that we're looking at very carefully right now. I would just say, like, there's a lot of companies that need capital, and they're obviously kind of like, "Oh, I'll do a sale-leaseback." I just don't think a lot of them are gonna get done. I don't think it's hard for me to overgeneralize, you know, and answer your question. All I can tell you from our lens, we're seeing lots of interesting stuff at very wide pricing relative to what we saw a year ago. We do have to be mindful that, you know, we don't have infinite sources of capital right now that are accretive. We're trying to be very measured and methodical as we move forward from here. Got it. When you look at your cost of capital, I mean, there's all kinds of ways that you measure cost of equity. You know, this looks like it's adjusted for the 150 basis points change you've seen in cap rates. Is it the debt side that you're more concerned about on the cost of capital at the moment that will keep you from, you know, dialing up more volume at this point? Mike, you could. Yeah. No, well, actually, we're much more comfortable on the debt side. You know, we have, we did the $800 million term loan that we fixed. We have today our $1.2 billion line is completely undrawn. You know, we had $100 million of cash on the balance sheet. Then we have this new $500 million term loan coming in. If you think about just our, you know, our liquidity from a debt capacity standpoint with this new term loan, I mean, that will carry us all the way through next year, probably into 2024, without having to access any of the debt market. From a debt standpoint, I feel pretty set. I think it's more of the equity side that we're focused on. Okay. Got that. Revenue-producing CapEx, there's a lot of stuff that goes into that. That picked up this year. You mentioned about, you know, funding a lot of the acquisitions with dispositions and free cash flow. Just curious how you see the revenue-producing CapEx trending next year. Yeah, I think that's something that I think will continue to be a part of our investment structure. It's generally related to existing tenants, and we think that it's important for existing tenants that we're prioritizing to kind of be constructive with them. Obviously, we have to adjust for the current pricing environment with them if we decide to do that. But I would say, like, we'll have a mix of revenue-producing capital as well as, you know, straight up acquisitions that are new sale-leasebacks that are industrial next year. I just can't give you the percentage of the volume right now. Got it. Okay, thanks. Yep. Thank you. Next question will be from Greg McGinniss, Scotiabank. Please go ahead. Hey, good morning. Jackson, as we head into a maybe more challenging economic environment, how are you evaluating these non-investment grade industrial sale leaseback tenants to determine those with good uses for the capital that you're providing them versus those maybe looking for a cash out? Yeah. I would say we're not focusing at all on cash outs. You know, it's the normal blocking and tackling you would want us to be focused on. You know, starts with, you know, what type of industry they're in, how are they positioned, what does their balance sheet look like? How much floating rate debt exposure do they have? How much concentration do they have from their revenue sources? How reliant are they on FX changes? How are they. You know, just, it's just a variety of different things that you go through on Credit 101. I think for us, the key thing is how mission critical is this real estate that we're looking at? What is the rent relative to what we believe market? What would be the potential reuse for this facility? How critical, you know, is this industry? Like, you know, if God forbid, there had to be a restructuring, what would that look like? Is it a seven or eleven? How valuable would these properties be? All of that kind of goes into our calculus before we kind of make a decision to move forward. What I would tell you, what we're not doing is high rent, high levered, over-rented sale leasebacks. That's not what we're talking about here. I think, you know, if you look back, you know, I've kind of specifically referenced the sale of that Haggen property. You know, if you kind of roll the tape, if you remember that situation, you know, it was a $224 million acquisition, you know, back in the day. Obviously, the company filed for bankruptcy, but you know, we were able to obviously restructure leases with new operators. Obviously that was done with kind of the prior regime here. What we've been committed to do is continue to sell those. If you sort of look at the tape, we've sold all but one of those properties at this point and generated sale proceeds of $249 million, as well as generated another $75 million in total rents and settlement fees, you know, since the acquisition of that portfolio. It's been, you know, almost $100 million dollars net gain over purchase price and 50% on the investment. It just goes back to, you know, why was that? Good real estate, generally locations that operators wanted to go into and very granular and liquid, like those two Smart & Final that we sold. We've continued to take on that thesis on everything that we buy, everything that we've bought since I've been here. It's important. It's not just the lease. You know, there's a lot of factors that go into these decisions that we make when we're sort of deploying capital. Yeah, thank you. Appreciate the color there. Mike, just a quick one. Are there any plans to swap the new term loan? If you did, what might that all-in rate look like? Yeah. That's something we're gonna evaluate. We have, you know, time before we would draw that down. We have until July. I mean, if I look at today, I think that we'd be looking at swapping into the mid-fours. I think that's probably a little steep. The short end of the curve is a little elevated, and it's a 2.5-year term loan, so you're looking at the shorter end of the curve. I think if you look at we did the last swap. We timed that pretty well. You know, we did it, actually well before we even closed that term loan because rates dipped, and so we took advantage of that. I think you'll look at the same playbook here. If we see the rates, you know, dive where we think there's an attractive price, we'll swap, and we're gonna have six months to do that. You know, we've got to take the view that, you know, there's gonna be a lot of data that's gonna come out between now and July with the Fed, and that could affect the trajectory of rates and the curve. We could take the view that we wanna stay floating. You know, we have a conviction that rates are actually gonna come down over the life of that term loan, and we use it. If we have that conviction, we'll leave it floating. Like I said, it's too early to tell, but we obviously prefer to be fixed where we can. We're gonna evaluate that and try to be optimistic with how we approach that. Great. Thank you. Thank you. Next, our question will be from John Massocca of Ladenburg Thalmann. Please go ahead. Good morning. Morning. John. Maybe just digging into the kind of industrial acquisition pipeline a little deeper, what's the bifurcation in there between maybe manufacturing and warehouse distribution assets? Has the cap rate and kind of cap rate expansion you've seen over the last six months differed between those two kind of specific tenant industries? I'll let Ken. Hey, John See that one. What I would say is there's not a bright line, but we tend to look at more of the light manufacturing opportunities. I would submit that when you're looking at a light manufacturing facility or a, you know, a pool of facilities in a transaction, they typically have a distribution component. It's very common to have that component within the facility. You know, as far as pure light manufacturing versus pure distribution, I would suggest it's gonna be more on the light manufacturing side. You know, there might be a little more yield expectation for those types of assets, but it's not some, you know, huge divide. Okay. Maybe sticking with Ken, if you think about your theater assets, is there any kind of read-through, I guess, in terms of tenant credit health from what's going on with Regal, or is that kind of a very isolated situation in your mind? Yeah. You know, we clearly view theaters as kind of in their own bucket. They've got their own industry. Here's what I will tell you. We tend to have a lot of regional theater operators within our theater bucket. They're doing phenomenal. They're solid. They came out of COVID extremely well-capitalized. I would submit that in some cases, better capitalized, you know, through the SVOG program than they've ever been. You know, Regal's got its, you know, its own path. You know, we're gonna deal with that. Interestingly, not only our regional theater operators, but others that we don't deal with today, we do get inbounds on the Regal assets, you know, about interest in them. You know, theaters are definitely different, but we're comfortable, especially with our regional operators. All right. That's it for me. Thank you very much. Thanks, John. Thanks, John. Thank you. Next question will be from Spenser Allaway of Green Street Advisors. Please go ahead. Thank you. Maybe just sticking on the tenant health topic for a second. Just given the high inflationary environment, can you guys comment broadly on rent coverage in the portfolio and how that may have changed in the last six months? It's actually been very stable, Spenser. I guess I'll just tell you the way I think about it. You know, 20% of our tenant base is investment grade. That has a certain kind of obviously risk profile as we go into this more uncertain macro environment. You know, 53% are public. Some are investment grades, some I mean, some are non-investment grade, some are just, you know, have no rating. Then we've got a 29% PE bucket. You know, it's generally you should expect more non-investment grade debt facilities, you know, in their capital structure on their portfolio companies. Then we've got sort of another 19% that, you know, are individual operators, which, by the way, some of those are really large, you know, especially on the restaurant side. Pretty good credits. You know, I sometimes see people look at us as, "Oh, you're a high yield portfolio." It's not really true. I mean, statistically, it's not true. It's also very diverse. I think what we're trying to really ascertain as we go through working with our credit team, especially on the non-investment grade, you know, tenant base, you know, where are those sources of revenue coming from? You know, are there things on the horizon that could change their prospects? Obviously, during COVID, a lot of tenants were impacted by transportation costs, you know, and just because of logistical issues that were happening. Now, some of that's burning off, right? You read about what's happening with ports and the cost of moving goods, containers and freight, it's coming down. There's other issues. You know, there's, you know, companies that have global FX exposure are being impacted. I think for us is we try to really understand what that concentration of revenue looks like and how it could be impacted. Obviously, as I said earlier, on balance sheet, you know, where these companies are with floating rate debt. You know, where are they with maturities? How is your lender base looking at them? Because I do think it's gonna be different this time. COVID put a lot of pressure on lenders, but there was a lot of forbearance. I think, you know, this time I'm not sure. You know, it depends on how long and deep this economic kinda environment that we're going into persists. I can tell you that we spend tremendous amount of time looking at it, you know, with the team. Okay. That's really helpful color. Just one more. You know, with new acquisitions being heavily industrial focused, can you just give us a sense, maybe directionally of how coverage for that particular property type compares to the portfolio average? You know, what's interesting about industrial, you know, there are a fair amount of them where the unit level coverage is not applicable obviously, but we're gonna look at corporate coverage. We certainly, t hat's an ingredient when we do the underwriting. I would say as we evolve into heavier industrial, there's gonna be a lot of occasions where unit level's not a factor. We, you know, look at other things. You know, in industrial, the rent on a facility tends to be a very minor line item, and they're in the expenses. There are things that we're looking at rather than unit level coverage that make more sense for the asset. We certainly aren't gonna be looking at opportunities that are, quote, dilutive to the coverage, at least at the corporate level. Okay. Yes. I was talking about corporate. Okay. Well, thank you guys. Appreciate the color. All right. Thanks, Spenser. Thank you. Next question will be from Linda Tsai of Jefferies. Please go ahead. Hi. Good morning. When you do sale-leasebacks, how much discretion do you have in terms of deciding which assets go into the deal and, you know, what do those conversations look like? I can tell you a year ago they were really hard. You know, there was a lot of people. It was more of a seller's market. You know, it was a kind of take it or leave it or take it this way or that way. Terms were really tough from a buyer standpoint, like tenant had a lot of leverage. I would describe it to you as completely flipped. The money has a better ability to determine what is what. Like, what goes in, what goes out, and what the terms are and what the rates are. It's really flipped just because my earlier comment, there are a lot of sale-leasebacks that are both in the market or being, you know, trying to be sought after that will not get funded. I think it's a great time right now, not just for pricing, but for sort of terms that we're able to get. Assignment language. You know, back in the day, you used to have covenants on sale-leasebacks. I'm not sure we're there yet, but used to be like financial covenants on some of these things. If you looked, you know, a long time ago, back before all these companies were as public and as active. Right now the sale-leaseback is really solving an important part of a corporate capital structure right now for companies that wanna grow. You know, obviously PE companies that wanna take out equity are trying to do that as well. I would suspect most, hopefully most people aren't pursuing those kinds of opportunities. Thanks. In terms of the types of assets you're disposing to recycle capital out of your asset mix, you have retail, industrial, office. You know, which assets are you seeing reach fair value the fastest to the point where you're, you know, willing to sell? Yeah. Well, I mean, I think, if you look in the 2nd quarter, Linda, like we got a lot of traction on like, for instance, a Bank of America building. We've got really great pricing. We sold some of our, you know, industrial assets because once again, it's very, very attractive pricing. And also we wanted to, believe it or not, have kind of proof of concept. You know, we've been buying a lot of industrial property since this team got here. And I think we've been successful at it. And we're trying to demonstrate, you know, an ability to show people we can buy things that make sense and see compression in yield on the sale. If you looked at this quarter, you know, it was all, you know, small assets, Taco Bell, you know, little restaurants, you know, a couple, you know, grocery stores. I think as you look at the pipeline going forward, it's probably looking more like that. Smaller bite size opportunities, you know, not really larger assets. That could really change, you know, as we go into the new calendar year. You know, you just sort of never know how fund flows work, you know, if spreads tighten. There's obviously a lot of appetite. It's just that where people are trying to discover pricing. We can pivot our disposition plan to do larger retail assets, you know, larger department store opportunities or retail opportunities. If we were not successful there, we'd consider selling industrial as well. Right now, I would say to answer your question, it's a lot of small granular restaurants, car washes, things that we believe, you know, $3 million-$5 million size deals that we think can clear right now. Got it. Thanks for the color. Sure. Thank you. Next question will be from Chris Lucas, Capital One. Please go ahead. Hey, good morning, guys. Actually, Jackson, just following up on that granular portfolio. How much of your aggregate portfolio do you think is comprised of sort of those more liquid, better valued, smaller assets? Well, I would say in terms of number of properties, we have 2,100 properties. I would say, just gonna guess, definitely the majority fall in that bucket of small and granular. You know, drugstores, you know, auto repair shops, Caliber Collision, that sort of thing. You know, we do have larger assets as well, right? Some of these industrial properties we're buying are bigger. They're probably not as liquid today, just given they need mortgage financing and probably don't appeal to the 1031 universe. I would say the large majority of assets we have fit in that sort of $3-$6 million, $7 million sized assets. I mean, it's 2,100 properties, right? Yeah, there's no shortage. I think what we, Chris, focus on is, you know, y ou know, when we sell a property, you know, what's the tax impact to us? What's the lease duration? You know, there's a certain type of asset that has a certain minimum wallet on it that makes sense for the buyer base out there to get the pricing that we're focused on. Like this quarter, you might see more drugstore sold, for instance. Okay, great. Thank you for that. Mike, I just wanted to, there's a sort of a detail I wanted to iron out. In the capital deployment activity spreadsheet that you have in the deck, it's showing average annual escalators in the 1.5-1.9 sort of through the trailing eight quarters. If I go forward, there's a forward sort of average rent increase number that you guys postulate is 2%. I guess, are the numbers comparable? Am I missing something between the two slides? Yeah. The forward number is basically a point in time number. Now or the next 12 months, kind of point to point, how much do we expect our rent to escalate organically? You know, I've talked about this before, but you know, one thing that is elevating that number a little bit is, you know, those movie theaters that we relet. They had some pretty big escalations as they stepped up from the base rents when they were put in to their final base rent, right? We had some runway built in as those things ramped up with the new operators. That's gonna be done by the end of this year. I'd say, you know, pro forma, if you pro forma those out of that number, you're probably closer to our historical average of about 1.7%. That is adding a little bit of extra growth this year. As we flip into next year, I expect that number to come down a little bit, probably around that 1.7% range. That being said, as we think farther out, if we continue to, you know, buy more industrial and sell more of the granular assets, which tend to have lower escalators than the industrial that we're putting in, which tend to be more of the 2%-3% escalators, then you'll see that number kind of start to creep up over the longer term. I think in the near term, you will see that kind of come down a little bit as those movie theaters kind of stabilize. Okay. Just one more for you, Mike. Just on Regal, can you just remind us sort of how you accounted for their deferred rent? Did you? You know, is there anything that you guys will need to write off based on their filing, or were you on a cash basis, or can you just kind of give us a quick history there? Yeah. They were not on a cash basis. They are today, obviously. We only had $135,000 of cash rent that was deferred and recognized in revenue, which we reserved for in the 3rd quarter. That is now fully reserved. Obviously, the September rent they didn't pay is also fully reserved because, again, they are on a cash basis. That's all been reserved for in the 3rd quarter. There's nothing else, no other impact, with Regal other than, you know, wherever we get to with their leases if that changes. Okay, great. Thank you. That's all I had this morning. Appreciate the time. All right. Thanks, Chris. Again, if you have a question, please press star then one. Next question will be from Ronald Kamdem, Morgan Stanley. Please go ahead. Hey, just a couple quick ones from me. Just going back to the acquisitions, obviously the cap rates moving up this quarter. As you're sort of thinking about sort of next year, right? There's a trade-off between volumes and cap rates. So is the thinking that you know, should we be expecting sort of more higher cap rate deals given sort of the cost of capital, or would you be willing to sort of you know, step back on the acquisition volume? Just trying to. How are you guys thinking about that? Hey, thanks, Ron. Thinking about both of those alternatives, to be honest with you. You know, we haven't committed just to sell and buy. I mean, I think what we're doing is taking very measured steps. As I said, we have a lot of properties on the market currently. That's gonna inform us, you know, not just on proceeds but cap rate. You know, we have another tranche that we're prepared to move forward on. And we don't have to sell these once again, right? It's only if we get what we believe is kind of the right price for what's being offered. And I think we're equally being measured on the investments that we're committing to or evaluating. Really we are not getting ahead of ourselves one way or the other. We're not gonna oversell without a pipeline, and we're not gonna build a big pipeline and try to sell down. We're moving very much in lockstep, which is why I keep referencing a large number of properties on the market. If the market improves where we think we can sell kind of larger either pools or assets, you know, we'll obviously pursue that. That's why we don't wanna give guidance because it's really hard to tell, right? We're looking at all sorts of different alternative scenarios here. We'll be in a better position to do that in the early part of next year after getting a lot of feedback from, you know, the assets that we have in the market. Also what we're seeing, as I said, you know, on the cap rate side for acquisitions. We think we're being as smart as we can about giving us maximum optionality, 'cause we could easily just sit and do nothing. Obviously we're not gonna sit and do nothing, but we just sit and just collect rent. What we wanna do right now is take an advantage to try to improve this portfolio as we move into 2023, given all the things I described to you on the investment opportunity with sale-leasebacks with industrial companies. That's kind of the plan right now. Great. Then my last one was just taking a step back, just trying to get a sense of where your head's at, just strategically with sort of the cost of capital environment today, right. That markets are, you know, very high and, you know, the equity is still down. You know, you guys got a forward done this year, which looked really smart, and so forth. As you're sort of thinking about the next 2-3 years, what other sort of tools, options or can you sort of draw on in these periods when cost of capital is maybe not there? Is it JV capital? Is it trying to time more? Just trying to get your sense strategically, you know, how do you sort of operate in, when the cost of capital is not there? Thanks. I think for me it starts with, you know, execution, operations, you know, doing what we're supposed to do. You know, monitor credit, stay close to our tenants, collect rent. You know, our performance, if you look across lost rent, property cost leakage, very low default rates, you know, getting through COVID, in my opinion, it's been very, really strong. We're gonna have another opportunity, I believe, during this very uncertain time, to be able to prove out same level of execution. That's really first priority for this organization that we're focused on. You know, if you kind of are able to do that, I believe, well, like the markets kind of come, they ebb and flow. You know, high yield indexes are really out of favor right now. In my experience, that's not forever and not permanent, and I believe you'll start to see a rotation at some point where high-yield indexes really start to compress, maybe faster than investment-grade indexes. My suspicion is that's when we're gonna probably outperform as the macro environment starts to loosen up, then we'll be in a great position to move forward based on that. I don't think we're gonna try to do things that would be distracting right now from what I just described, just primary blocking and tackling execution day-to-day for our 300+ tenants, you know, across this 2,100 portfolio company. Because we spent all this effort the last three years building this fortress balance sheet, you know, I wanna take advantage of that at the right time, and I think we'll get that opportunity sometime in the next couple of years. Great. Thanks so much. Thanks, Ron. Thank you. That concludes our question and answer session. I'll turn the conference back over to Mr. Jackson Hsieh for closing remarks. Okay. Thank you, operator. Appreciate all of your interest in participating in this call this morning, and we really look forward to seeing many of you out at NAREIT in San Francisco next week. Thank you. Thank you. Conference is now concluded. Thank you for attending today's presentation.