Spirit Realty Capital Inc (SRC) 2022 Q1 法說會逐字稿

Greetings, and welcome to the Spirit Realty Capital First Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Pierre Revol. Please go ahead, sir.

Thank you, operator, and thank you, everyone, for joining us for Spirit's first quarter 2022 earnings call. Presenting on today's call will be President and Chief Executive Officer, Jackson Hsieh; and Chief Financial Officer, Michael Hughes; Ken Heimlich, Chief Investment Officer, will be available for Q&A.

Before we get started, I would like to remind everyone that this presentation contains forward-looking statements. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those currently anticipated due to a number of factors. I'd refer you to the safe harbor statement in our most recent filing with the SEC for a detailed discussion of the risk factors relating to these forward-looking statements.

This presentation also contains certain non-GAAP measures. Reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are included in the exhibits furnished to the SEC on a Form 8-K, which include our earnings release, supplemental information and investor presentation. These materials are also available on the Investor Relations page of our website.

For our prepared remarks, I'm now pleased to introduce Mr. Jackson Hsieh. Jack?

Thank you, Pierre, and good morning, everyone. As I've stated in the past, Spirit had great tenants, a pristine balance sheet and a fully integrated asset management and acquisition platform that is producing results. Our underwriting approach focused on industry relevance, in-depth credit analysis and real estate fundamentals allows us to pursue a wider opportunity set which we believe generates more value for our stockholders.

If you look on Page 13 of our investor presentation, you'll see that our strategy is being validated with many of our recently acquired tenants going public, being acquired, receiving credit upgrades or recapitalizing their balance sheets. Our intensive underwriting capabilities have consistently allowed us to identify opportunities that are underappreciated or mispriced in the market, resulting in strong yields and asset value accretion over time. The most recent example of this success is Main Event. During the first quarter, we added 3 Main Events, raising them to our #7 tenant. Just a few weeks ago, Dave & Buster's, our #72 tenant, announced plans to acquire Main Event, with Main Event's CEO assuming leadership of the combined entity. We view Main Event's absorption into a strong public tenant as a significant credit upgrade that will result in further cap rate compression for one of our largest tenants, making this merger yet another example of our ability to identify and underwrite strong operators in relevant industries that will continue to improve.

During the quarter, we deployed $511.4 million in investment capital at a weighted average cash capitalization rate of 6.42%, including the acquisition of 41 properties across 29 transactions. Approximately 62% of this transaction volume was relationship-driven, and 72% of the acquired rents were from publicly listed tenants. We expanded our relationships with our top 20 tenants, including Life Time, BJ's Wholesale and Main Event. We also continued to increase our industrial exposure, which accounted for 37% of our first quarter acquisition volume with a mix of 66% distribution, 29% manufacturing and 5% flex. Our industrial exposure now stands at 19.8%, a 120 basis point increase over last quarter.

As you can see on Page 14 of our investor presentation, since the spinoff, we added $4.3 billion of assets comprised of 54% retail, 33% industrial, 9% other and 4% office. Our retained portfolio largely included public retail tenants that fit our strategy. At quarter end, our ABR was $623.3 million, surpassing one of the key milestones identified at our 2019 Investor Day of reaching a pre-spinoff rent of $600 million.

Given the strong performance of our tenants, coupled with the strength of our real estate and leases, we have seen increased demand for our properties. To capitalize on that demand, we are increasing our disposition guidance from $100 million to a range of $200 million to $300 million. We expect these dispositions will generate attractive returns and be accretive to our AFFO per share growth, while reducing exposure to office, flat leases and certain tenant concentrations. The increased disposition plan, combined with our outstanding forward equity and upsized credit facility places us in a very strong liquidity position to achieve our acquisition guidance and benefit from the impact of capital market disruptions on undercapitalized market participants.

One disruption we're paying close attention to is the impact of higher borrowing spreads for asset-backed debt, which is negatively impacting private net lease acquirers, IRRs and ability to push aggressive pricing. This dynamic helps Spirit in 2 important ways: first, it heightens the importance of relationships and certainty of execution, which aids us as a trusted, well-capitalized counterpart that follows through our commitments; second, it allows us to be more competitive on opportunities as risk is being more fairly priced today than just a few months ago.

Based on what we're seeing today, I anticipate that in the back half of the year, we will be able to find the investment opportunities 25 to 50 basis points higher than where they have priced over the last few quarters.

Finally, before I turn the call over to Mike, I want to highlight our ESG accomplishments as laid out in our first sustainability report. Our 89-member team is making meaningful impacts to the community through our Women's Leadership Council, DEI, Think Green, Young Professionals and Spirit One Committees. Most recently, our employees supported the humanitarian relief efforts in the Ukraine, donating $25,000 in total to UNICEF, World Central Kitchen and Doctors Without Borders, which Spirit matched dollar for dollar.

Our company has developed a great culture and attracts and retains talent. Notably, we have had no voluntary departures this year, several promotions and a few former Spirit employees recently rejoined. As I've said before, we have one of the best teams in place, functioning at a very high level and well equipped to move quickly to uncover the best risk-adjusted return opportunities.

With that, I'll pass the call over to Mike. Mike?

Thanks, Jack, and good morning. We had a very strong start to the year. Our annualized base rent increased by $35.2 million compared to last quarter, with $30.3 million driven by net acquisitions, and $4.9 million driven by organic rent growth. We originated $112.7 million of loan this quarter and recognized interest income of $319,000, which we expect to increase to a little over $500,000 next quarter. Also during the quarter, we received $875,000 of rent from the new theater leases, of which $275,000 was recognized as base cash rent and is reflected in our ABR, with the remaining $600,000 recognized as contingent or variable rent.

Our cash interest expense increased by $1 million from last quarter to $24.2 million and cash G&A increased by $1.1 million. The G&A increase was driven by internal promotions and new hires predominantly in our acquisitions, asset management, credit and closing departments as well as employer taxes on bonus payments and stock grant vesting that occurs during the first quarter.

For the year, we expect cash G&A will be approximately $40 million to $43 million. For the second quarter in a row, we had virtually no loss rent and our deferred rent receivable balance declined by $2.3 million to $13 million. Our occupancy remains at 99.8% with forward same-store sales of 2.1% and portfolio WALT of 10.4 years. Due to the strong portfolio performance, coupled with accretive acquisitions, our AFFO per share increased to $0.88 compared to $0.85 last quarter.

Turning to the balance sheet. In January, we completed a follow-on offering, entering into forward contracts to issue 9.4 million shares of common stock. During the quarter, we issued 6.6 million shares to settle certain forward contracts, generating net proceeds of $299.8 million. As of quarter end, we have unsold forward contracts for 3.1 million shares, leverage of 5.2x or 5x inclusive of our remaining forward equity contracts outstanding and a fixed charge coverage ratio of 5.8x.

In March, we closed on a $1.2 billion revolving credit facility, amending our previous $800 million facility, which includes an accordion feature to increase capacity to $1.7 billion and matures in 2026. Notably, our pricing grid improved meaningfully to 77.5 basis points over an adjusted SOFR rate versus 90 basis points over 1-month LIBOR, and our facility fee tightened by 5 basis points. We ended the quarter with total corporate liquidity of $846.6 million, including unused line capacity, cash and outstanding forward equity.

Turning to guidance. Given first quarter capital deployment results and the visibility we have into the second quarter, we are increasing our acquisition guidance to approximately $1.5 billion. As Jackson mentioned, we are also increasing our disposition guidance to $200 million to $300 million to take advantage of the strong demand we are seeing for our assets.

Finally, we are maintaining our AFFO per share range of $3.52 to $3.58. Again, we've had a very strong start to the year and with our low leverage, increased disposition plan, expanded line of credit and outstanding forward equity, we are in a great position to execute on our strategy.

With that, I will turn the call over to the operator to open it up for Q&A. Operator?

(Operator Instructions) Our first question is from Nate Crossett from Berenberg.

Just a question on the guidance, I guess. Per share was maintained, is it just a function of higher disposed offsetting, higher acquisition volumes? I'm sure there's nothing else in there that's, I guess, preventing the guidance from being raised.

And then maybe you can just comment on what you're seeing in terms of pricing? And what your outlook is? I know you mentioned that the leverage buyers have pulled back a little bit, so I appreciate your comments there.

Yes. Nate, I'll start with the guidance question. I mean, first of all, it's good to point out that we did come out with the year with pretty robust guidance at 9.2% AFFO per share growth at the midpoint, so I think we put forward a pretty good number there, just the highest in the space. And we put that guidance out in January, obviously, the interest rate environment was a little different.

Keep in mind, that was actually -- we raised guidance in January. The first time we put out this guidance is back in 2019, if you remember. Interest rates has certainly gone up. The curve is higher. We are borrowing money to fund acquisitions. And so that it's not really a disposition that are affecting guidance as we're going to be accretive. So it's really just the forward curve that we're looking at in our model has certainly peeled off some of the other good things that we've done on operations, on capital deployment. I'd say, probably the impact of about $0.04 to our forecast on the rise in rates.

Said another way, we would be increasing guidance, had it not gotten so aggressive. So we're happy we can maintain a very aggressive guide where we are, but this is really just interest rates in the back half of the year that we're seeing that's just keeping our numbers where they are.

And Nate, I'll get the question -- yes, my comments on cap rates rising. I think if you sort of look around between rate hikes and what's going on in Ukraine with the Russian prices has had a pretty profound impact in the fixed income market. So if you look at mortgage, CMBS, SASB loans, AAA CMBS, all that stuff has gapped out meaningfully since the beginning of the year as compared to year-end last year.

So for instance, like AAA CMBS spreads for like a 75% LTV loan are probably 180 basis points wider today than where they were at the end of last year. If you look at larger financings like something larger like over $1.5 billion in secured lending right now, I mean that is really probably -- you start paying pretty meaningful premiums over SOFR to get financing in that kind of range. So all that said is there's a lot of pressure on people that are looking to finance in the mortgage market today -- commercial mortgage market. So like 5% is probably 5% plus is like the new, new for people that want to borrow there.

So I think what that's doing is it's having obviously a reduction in potential bidders. I think some people are just sitting it out right now to see where prices settle. What we're seeing is some deals are coming back around that didn't perform. And of course, the way we fund ourselves using bank term loans and unsecured bonds. Well, unsecured bonds are not that great right now, as you know. But there is some opportunity in the bank market that has not largely widened across the board like all these other fixed income opportunities where we could borrow.

So bottom line is that, in my mind, is having a real impact on pricing. So I think if I were just to do rough guess, probably had a 5% to 10% impact in prices today. And so when we look at our pipeline, which I can address it later, we're sort of factoring that into our strategy as it relates to investment in the back half of this year.

The next question we have is from Greg McGinniss from Scotiabank.

Jackson, I guess I will give you the opportunity to talk a bit more about the investment pipeline and what you guys are seeing, and maybe why there's a potential expectation for the slowdown versus the strong flat $10 million, $11 million you were able to achieve in Q1.

Okay. I'll take that. I guess what I'd maybe have you think about is if you go back to our last quarterly call, we talked about this concept that there were portfolio premiums out there like hard to compete because financing was so aggressive, and that was -- they're just putting a lot of pressure on cap rates for us. And so we've made a pivot, as you know, in the fourth quarter of 2021. We said, "Hey, we're going to start buying granularly. We're going to focus on 30 transactions small to control cap rate that we thought we'd have a better chance of accomplishing what we wanted to accomplish." And that largely flips, as you can see, is what we saw in the first quarter of this year. High number of transactions, $500 million.

If you look on our 10-Q in Note 6 on where we have purchased our capital commitments outstanding, there's $300 million sitting there. So if you do the math, half of our expected pipeline is already spoken for because it's all granular, very small and probably larger looks the same as what we just did in the first quarter.

What we're seeing in our pipeline going forward in the third and fourth quarter is probably pricing near 7%. That's our target. So when we look at investment performance in the year, we don't kind of look at it on a quarter-by-quarter basis. We target an annual kind of production. And we talked about 6.5% earlier in the year. I think it's going to be higher when we get all said and done for this year, it will be closer to somewhere in the 6.5% to 7% range, the entire $1.5 billion.

So I think that's one of the benefits of kind of feeling what we did was we raised capital efficiently earlier this year, equity, obviously. We've got it match funded for the pipeline that we've got committed. Between our $100 million of free cash flow, $140 million of unused equity, plus our dispositions that we've got targeted, I mean we're largely trying to basically say we can fund ourselves the rest of the year without going back to the equity markets.

Now you didn't ask but it will probably come up on dispose. We've made a decision at the -- as the quarter progressed through the first quarter that we wanted to be able to self-fund ourselves. So when we put that guidance out there of $200 million to $300 million, you should expect that we have a lot more property for sale. We are being very opportunistic and very price-driven. So like a 5-cap asset is the equivalent of us issuing stock at $55 a share. So we're not going to sell off -- we're not going to sell all those assets, we're very price conscious.

But there's good property being marketed right now, but in the home improvement, industrial, restaurant, grocery area. And we'll see where we get. It's not portfolio of sales, it's one-off. And there's still 1031 buyers out there. There are still people buying all equity. So that was kind of the logic there.

And then one last on your question. I forgot to mention. I think I wouldn't be surprised in the third and fourth quarter. If you saw the number of transactions that we closed start to look more similar to what we did like in previous quarters. I mean we're really focusing on more yield. So that probably means maybe there's a larger transaction in there or 2, maybe not as many, really focused on good credit, really high risk-adjusted returns. That's kind of what we're focused on. And we obviously know how to do it. We've done it in the past.

And Mike, in regards to the $520 million on the line of credit, potential capacity there for another $1.2 billion, do you anticipate raising unsecured notes? Or maybe something in the bank market, as mentioned in the prior answer? And if so, what rate feels achievable?

Yes. I mean, we'll see. I mean, right now as the bond market is still little bit disrupted, so now we didn't got an issue bond today. But that market, I mean, if you look at it, it can move up and down pretty quickly, so it's too early to tell. I think if the bond market's more favorable, we look at that. If the bank market is more favorable, we look at that. Nice thing about being an investment-grade issuer is we have options for different pockets of capital.

So as we get a little later in the year, we do have a nice sized revolver now. So that gives us time. And I think one thing you should expect from this team, as you've seen, I think, time again, we're pretty optimistic about when we issue to get good pricing, and we'll pick our spot and we'll pick the right -- the right I need to go to maximize our cost of capital. So still too early to tell, but I think there'll be options to choose throughout the year.

The next question we have is from Michael Goldsmith from UBS.

You acquire in a lot of different markets with varying cap rates. And given rising interest rates and steady cap rates, are you seeing fewer bidders in kind of the lower cap rate products given the smaller spread? And given that forefront, how do you think of acquisition allocation going forward?

Look, I mean, we have some experience just in our disposition effort because these are high-quality properties that are -- that we have in the market. I would say it's certainly from what we can tell right now, like I'm not sure sellers have really kind of woken up to this is the real deal. So like if you're a -- our bread and butter is like a single B rated credit, $500 million of revenues, preferably public. That stuff got really aggressive in the back half of last year.

I can tell you right now, for us to do stuff in that zone, it's a higher cap rate. And so I'm not sure everyone has sort of come to that realization yet. So it always takes time between buyers and sellers. But some of the things that we're putting out there are really, really high quality. And it will be interesting to see if we can demonstrate low cap rates for what I'll call trophy-like properties in some of the areas that we're looking at.

And I think the number of bidders, I would say, I think for larger transactions, larger being portfolio, I mean I feel like those got really sought after last year. And the fact that some of these deals are coming back around and then coming around to people like us that can just draw up a check and then figure out how to finance it later. I think that's probably going to help companies like ourselves right now. So I don't know if that's a trend for the rest of the year or not, but I think there's some price discovery happening out there in the market today. And if you talk to brokers, they'll probably tell you that. If they're being honest.

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

I mean we -- I don't think we're changing what I'll call our lines of trade that we invest in. We like golf courses, have not able to find any, unfortunately, but soon enough. We like industrial, light manufacturing. We like certain retail, nondiscretionary service retail top opportunities like auto service is still a big focus.

You'll probably see us slowdown in car washes for the time being. But there are other things that we see that are interesting for us. We did an interesting deal that was related to a defense sector player. That was interesting. We'd like to do more in that area. They make fuel tanks, inflatable bladders for military use. Obviously, people need that kind of stuff right now.

So there are things that we feel like we can execute on especially given how strong our current pipeline is. It's very identified. So what we've instructed our teams to do is, hey, we want yield, we want to get paid for risk. That might mean that we can't do a relationship deal if it's not in the right zone for us, might take a pass for the time being. So yes, I'd say not huge changes to the mix of business, but just more driven towards yield. This is what we're focused on right now.

(Operator Instructions) The next question we have is from Anthony Paolone from JPMorgan.

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

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

Okay. And just you have a multicurrency line, can you just talk about just your geographic buybacks? And how to read that?

Yes. I mean, look, one thing I said is we have a wide opportunity set. We play in a wide sandbox. We look at everything. And I think when I think about the company over the next 4 or 5 years and when you put a new revolver in place, that's really the idea is that's for the next 4 or 5 years growth of the company, you want to set that up to handle whatever opportunities arise. And we're not actively pursuing international today as we are a bigger company, and we find the right opportunity, I would not take international off the table in the future. And so when you're doing it, it's a free option to put that in there. And it was just good to go ahead and just gear it to be able to handle that kind of capacity, you should see an opportunity rise in the future.

Okay. Got it. And then just last one I had. You're ramping up the dispositions, and it sounds like there is an opportunity to sell things in the 5s perhaps. And does that give you any appetite to revisit the stock in at these levels from a buyback point of view?

We -- as I say on the buyback, we've done that before. Maybe as we look at it, but probably not. I mean I think we can be a better -- I don't know. If you look at that, there's a table we put in, the team put in titled underwriting value. It goes through examples of different tenants that we've acquired, where they were upgraded or there was an M&A or refinancing or recap really solid real estate, solid industries.

I mean 20% it's 20% of our ABR, but the real story is it's 1/3 of the $4.3 billion that's been acquired by this team since we got -- all got here. So I mean, I think we make more money for shareholders doing that than just a onetime buy stock back. We've done that before. I'd rather -- this is a great time to be investing, honestly, right now for companies like ourselves.

There's a couple of other people private that have a lot of money too that have access to unique capital. I mean we're supposed to be investing now, in my opinion. That's what we're supposed to do. If you want to buy back stock, you can always do that, but I think that doesn't really create a really long-term sustain value. I'd rather lay the ships down in credits because you're actually getting paid for risk now appropriately. I'd rather continue to unearth those unique credit opportunities, which we time and time again, do, and we have a good track record of it. So I think it's kind of -- it's underappreciated, to be honest with you, but we're just going to keep doing it. And so we find something else to do.

The next question comes is from Rob Stevenson from Janney.

Jackson, you talked about the up rates and recaps and specifically Main Event being bought by Dave & Buster's, how much does that change the value of a Main Event asset in the market? Obviously, WALT and location, other factors are important here. But is there a tangible value creation that you can point to, say, 25 basis points or whatever from a cap rate perspective from some sort of combination like this?

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

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

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

I'll tell you like from my personal standpoint, it's interesting once you ask, if there were no change to our cost of capital, i.e., if rates were still low, one of the things that was kind of interesting for me, as it relates to our pipeline process, acquisition pipeline process, is I think sometimes we can get a little bit isolated from the market.

I mean we're constantly buying, we're constantly doing things, but we're not really selling. So one thing that really struck me last year was go back to the third quarter. It was kind of light with the exception of ClubCorp. The reason why was we were just getting blown away by bidders coming over the top. You'd start -- get into a process, you think you have something, someone knocks you out by 5% to 10%, and we're just -- we're not even close to that price.

So I felt like we need to be kind of buying and selling and maybe we're selling in smaller amounts, just so we kind of have a good feel for where the buyer market really is. So I'd say if there were no change in the treasury, we'd still be selling, it just be a lot less, but we'd still -- just to kind of be in the flow to understand market dynamics.

I would say when we ramped it up, it was really just -- I just wanted to have not beholden to go back to the equity markets. I didn't know when we started this, it would be where we are today. I'm glad we started this exercise pretty robustly. Candidly, I wish I did it in the fourth quarter, but at least we started. So -- but I think you'll see us always selling premium assets. I think you're always going to see it to a small degree because I kind of want to know where the market really is. It's one thing when you're buying and competing is that another one you're actually selling sort of better feel for things.

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

Yes. Yes, if we get there, yes, for sure. I mean it would inform us on how we attack the third and fourth quarter. Like I said, we've already -- we've kind of already funded the front half of our $1.5 billion. Like I said, we have free cash flow, the unused $140 million of equity we raised [partially] dispose. So if we sold more, we end up buying more. I mean in terms of kind of increasing that spread.

The next question we have is from Ki Bin Kim from Truist.

So if I take a step back and think about how your company has progressed over the years, you guys have done a lot of right things and your earnings are up, your leverage looks fine, yet your stock price continues to trade at a pretty big discount. I know that's something you always highlight. And then I combine that with your past, Jackson, of going kind of Smart Creatives M&As spin-off type of transactions. Just given the current situation, how I lay things out, does that spark other kind of creative juices in your mind to do something different with the Spirit here?

Well, I would tell you, Kim, and it's a good question. We talk about it at the Board quite a bit. It's not just now, we actually talk about strategy and what's the best thing we can do. In some ways, personally, I think there's going to be some amazing investment opportunities this year. I hope, that's my -- hope is not a great strategy, but I believe that there will be as the year progresses, just because it's so difficult, given what's going on in the fixed income market.

So in some ways, you hate to like just step out of the room when you have that opportunity. And we did all this as a company, heavy lifting, like one of the things -- if you think back to Investor Day, I remember you were there, right? December 2019, we said, "Hey, we're going to do $3 to -- $3.32 to $3.52 in 2022. We said that back in December of 2019. Now we think about what happened, COVID, lockdowns, market volatility, guess what, we're doing more than $3.52, that's our guidance at least.

So we totally did what we said, in spite of having a not so great cost of capital. So there you go. I hope that people will look at us and say, "Hey, look, look on this. We have this little chart that says strong growth at a reasonable price." There's (inaudible) public net lease peers on that page that we put out there. We're #2 in 2022 AFFO per share growth. We're #2 in the last 3-year TSR, out of the 9. Our AFFO growth from 2019 to 2022 is #3. And yet if you look at our multiple, we're #9, we're at the back half. So it totally doesn't make sense.

So in some ways, yes, should we do something different strategically? Always can do that. Always available. Portfolio is tight and clean. But there's this amazing opportunity to make money right now. So we hate to get off that, so I don't know, you guys got to write more or do stuff because we know what we're doing. We're performing. But sometimes, we're sort of not getting a fair shake right now there. So I appreciate you asking the question there. But to answer your question is, yes, we do look at it all time.

But if there weren't this -- like right now, like there's less competition, you can actually really make some money now. So like why jump off right now? Always jump off at a premium.

The next question we have from Wesley Golladay from Baird.

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

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

Yes, yes. On the dispose, one thing I would say is I think some folks tend to think of it as either it's an opportunistic or it's a risk mitigant. And what I would tell you is they're not mutually exclusive. We have some of the assets that we do have in the bespoke plan. We view as both opportunistic and risk mitigant, whether it's a flat lease, a shorter term, it could be -- there's a lot of different characteristics. But each one of those assets has something about it that we feel it just makes sense to go ahead and put it in a dispo plan. But -- so that's, of course, those dispose, we feel, are going to be accretive.

And when you think about that, are we talking like a 25 basis point spread if -- can you give us maybe a ballpark range when we model this up?

Well, I mean I hate to give it -- it's like -- just -- if it's accretive, let's just say 150 to 200 basis points spread right now. So what we think we can sell out or we invest it, yes, I think that's a fair ratio.

That's a lot more than I thought. (inaudible) for that.

Yes. I mean, look, look, I went through that last answer with Ki Bin. Look, we're ranked #9 out of 9 peers with the weakest equity multiple. So we've got to figure out other ways to portfolio is worth a lot more than that I guess. So we're just going to -- it's going to keep doing good spreads and eventually, hopefully, people wake up and even if this is sustainable.

And then one quick one on the balance sheet, I think at the beginning of the year, there were some potential thoughts about taking out the preferred. Is that still in the game plan this year?

I think we'll have to see. That's going to be TBD. I mean, certainly, we'll have that option come in November, but we'll see if that's a good use of capital at time.

The next question we have is from Joshua Dennerlein from Bank of America.

Jackson, just curious what your guidance assumes as far as cap rate. I believe, last quarter, I think you said 6.5%, it sounds like maybe you're speaking to acquire a 7% yield going forward.

I mean look, I think you should assume that we're going to target trying to end the year overall somewhere in the range of 6.5% to 7%. This is going to be a function of the weighted average of what we're able to do in the third and fourth quarter. So I mean, if you want to be safe, 6.75% is not crazy target for the year. And we think and we think we can accomplish that or close to it.

Okay. Awesome. And then on -- just curious on the 2023 exploration, it looks like 3.9% of ABR is growing. What's your visibility there on renewing those leases? Or what are your expectations are?

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

(Operator Instructions) The next question we have is from (inaudible)

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

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

Okay. And then maybe some...

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

Got it. Okay. That's helpful. And maybe, I don't know if you mentioned anything in the second quarter here. Anything you have perhaps under contract or that you bought already. Any color or comment willing to provide on what's already kind of been maybe agreed to year-end early second quarter? Any color on maybe asset types that include any portfolios?

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

Okay, fair enough. And then I guess one more, maybe it's an unfair question to ask, but I'm curious why 25 to 50 basis points perhaps is the expectation for the cap rate moving in the back half of the year? Maybe that has to do with some of the what you already have or close to agreeing upon in terms of cap rates under negotiation. But obviously, the moving rates has been far more significant. So maybe perhaps help us understand how 25 to 50 -- you're thinking there on the 25 to 50 basis points.

I mean it's just what we're seeing and right now. I mean just we have we're pricing deals every week. We're evaluating deals every week. And the things that are coming into our pipeline now are just -- they're just wider for the same things that we were looking at before. And I just think this is just a function of -- I think it's a function, as I said earlier, of what's happening in the debt markets. We, unfortunately, I wish we had more luxury just to stop, take a pause. Our private equity, Brother and Adidas, family offices, they can stop. They don't have to do stuff. We put these earnings guidance out there. We have to kind of keep investing.

Sometimes it's not a bad idea just to slow down a little bit, but we don't have that luxury. But what I can tell you is we're putting that number out there because it's things that we're seeing that we're getting under agreement right now in terms of just like-for-like, things that are wider in cap rate versus last year.

The next question, we have Mr. Ronald Kamdem from Morgan Stanley.

Just two quick ones, and we've touched on some of these already. But if I can just go back to the guidance. I think you just sort of mentioned that sort of the interest rate assumptions obviously have changed with the rate move. And I was just wondering if you could sort of help us build back for what that interest rate assumptions dead on the negative side? And what was the positive offset that got you back to even if that makes sense? Just trying to get a sense of the 2 or 3 moving pieces, both to the good and to the bad that got you back to even.

Yes. I mean when we set our guidance in January, obviously, we always used the forward curve back then, that's did incorporate the [Hawkish Fed stands] today. We fund in the short term, a lot of acquisitions using our revolver, that's tied [to solvers those] We look forward with the projected Fed news that directly impacts that borrowing rate. So that would be the negative.

And then obviously, the positives are we have pretty strong acquisition volume in both the fourth quarter and the first quarter. So remember, when we do in the fourth quarter of '21, you don't close all that at the very beginning of the quarter. So some of that earnings does bleed into an effective growth rate in AFFO in '22. And then of course, we had strong acquisition volume in Q1. And then so that large volume of the year really has a big impact at your AFFO much more than, say, what you do in fourth quarter of '22, that would just affect '23.

And then finally, we've got really clean operations. We obviously project some lost rent, and we haven't had any. So those are the good guys that are offsetting the high rates.

Great. Makes a lot of sense. Then if I could just piggyback on the dispositions. I think your comments are really interesting. I think you mentioned that you're going to be putting on more on the market than just the amount that you put out. I think I heard office in the opening comments. Just trying to get a sense of what is being put on the [margin], is it all the office? Is there some industrials or some retail? - just what are you putting out in the market and bidding right now? Or is it all of the above?

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

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

Yes. Maybe I'm going to answer that question, but just give me a minute to a couple of points. What people have to understand about this company, Spirit, is just go back to 2017, right? We had to spin off and get rid of a lot of properties that we believe we needed to get rid of. We got rid of them. We're successful doing that, that were acquired by other management teams.

We started with $3.9 billion, right, post spin-off, good, high-quality properties retail credits. We acquired $4.3 billion since that period, over 30% for industrial properties. 1/3 of them are related to this kind of unique credit upgrade that occurred within that $4.3 billion. So what you end up with, if you look at 2017 to where we are today, we have this little chart on page in the deck, if you look at public tenants as a percentage of our ABR, industrial as a percentage of our ABR, our top 10 concentration are investment-grade tenancy, unreimbursed property expenses, lost rent, all of that stuff is going positive, like, i.e., getting better and meaningfully better. You can see it.

So when we come back and talk to you about tenant health, tenant health is great. Our credit watch list right now, those meetings are pretty noneventful because we've been able to really have so much intention on our investment process.

Now to answer your question, Ron, on where we have concern, because we talk about this every week with our head of credit. I would say labor has been more manageable from a lot of our tenants. That was a huge issue at the beginning of kind of when the reopening started to happen after the COVID lockdowns. Labor was a major, major issue. A lot of our tenants have seem to be able to deal with that. That doesn't come up to be an issue. They've managed around supply chains. And things are surprisingly good. I hate to say it. But that doesn't mean we don't lose sleep.

So I look at our -- our public tenants are obviously very sophisticated, that's over 50% of our ABR. We're looking at our private equity portfolio because a lot of those guys are working with floating rate debt in some cases and looking at -- and so we do focus on those tenants.

But right now, they're all performing. Part of it is because of the industries that they're in, the way their credit was underwritten and the nature of the real estate or the lease structure. So the results are not by accident, but that's just my point. So -- and we feel really good about whatever kind of curve balls are coming down in terms of the future recession or whatever, rate changes.

Our final question is from John Massocca from Ladenburg Thalmann.

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

Absolutely. It goes into it. I mean, look, we are small tenants get impacted by credit markets and liquidity. Bigger public tenants probably have a better ability to access capital like we can. Like we can access the bank market, which is very, very advantageous for us right now. If you're a small private company, not so easy, right? Not as much access to liquidity.

So you'll see stronger operators access the bank market. So what we're looking at a sale leaseback today, we're looking at a potential investment opportunity, we're looking in the same way, like do they have access to liquidity? What are their -- where they're -- how are they sourcing their merchandise or their operations. Do they have the ability to pass on cost to the consumer? All those things are going to our calculus as to, is this the right investment to make? And are we being paid appropriately for it? And the answer is, yes, today. It was harder last year, to be honest with you. So.

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

Yes. Look, I mean, unsecured debt is disrupted right now, I'm not even asking for quotes at this point. But I mean, in the bank market, you're seeing [silver plus 95], probably swap that into the high 30s today. So it's pretty attractive.

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

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

Thank you. This concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation.