Broadstone Net Lease - Earnings Call - Q1 2021

Transcript

Speaker 0

Hello, and welcome to Broadstone Net Leases first quarter twenty twenty one earnings conference call. My name is Andrew, and I will be your operator today. Please note that today's call is being recorded. I will now turn the call over to Mike Caruso, senior vice president of corporate finance and Investor Relations at Broadstone. Please go ahead.

Speaker 1

Thank you for joining us today for Broadstone Net Lease's first quarter twenty twenty one earnings call. On today's call, you will hear from our CEO, Chris Zarnecki and our CFO, Ryan Albano. Before we begin, we want to remind everyone that the following presentation contains forward looking statements, which are subject to risks and uncertainties, including,

Speaker 2

but

Speaker 1

not limited to, those related to the ongoing COVID-nineteen pandemic. Should one or more of these risks or uncertainties materialize, actual results may differ materially. We caution you not to place undue reliance on these forward looking statements and refer you to our SEC filings, including our Form 10 ks for the year ended 12/31/2020, for a more detailed discussion of the risk factors that may cause such differences. Any forward looking statements provided during this conference call are only made as of the date of this call. I will now turn the call over to our CEO, Chris Sarnecki.

Speaker 3

Thank you, Mike, and welcome to everyone joining our Q1 twenty twenty one earnings call. As always, I would first like to wish our listeners continued good health and safety. In reflecting on the time since our IPO, I'm incredibly proud of our team, how they have executed our strategy, managed the portfolio and the results they've delivered. Our diversified strategy has produced predictable results and provided significant downside protection during this rapidly changing economic environment. Our best in class geographic, property type and tenant diversification has yielded rent collections among the best in the equity space over the past year, and the 2021 was no exception.

Our portfolio operating metrics continue to reflect pre pandemic levels, a trend that has continued for several quarters. During the first quarter, we collected 99.8% of rent, and the portfolio was 99.7% leased as of quarter end. All deferral and abatement periods have concluded, and we are currently scheduled to receive less than $500,000 of remaining deferred rent, which is immaterial in comparison to our annualized base rent of more than $3.00 $2,000,000 With widespread vaccine distribution efforts well underway, significant reductions in case counts across the country, and all of our tenants currently open for business, we believe our normalized pre pandemic operating profile exhibited during Q1 should continue throughout 2021. While most of our tenants have seen limited disruption over the past twelve months, we expect macroeconomic tailwinds to continue to strengthen for certain property types more directly impacted by the pandemic, namely casual dining. In areas of the country that may experience a slower recovery, we believe that our granular diversification will continue to provide downside protection and position us for continued success.

What we love about our diversified strategy is that it not only provides for a differentiated advantage during challenging economic environments, but it also positions us to excel and be nimble during periods of growth. It is no surprise that the net lease space has returned to external growth following a temporary pandemic induced pause during 2020. An increase in capital pursuing net lease opportunities, coupled with the pandemic's creation of have and have not asset types, has resulted in a competitive acquisition environment in 2021. Despite heightened levels of competition, our flexible capital allocation strategy continues to translate into a robust pipeline of attractive acquisition opportunities. Our diversified approach to investing gives us flexibility and allows us to selectively pursue attractive risk adjusted opportunities across a variety of asset types despite changes in sector specific dynamics.

We've embraced the strategic flexibility throughout our fifteen years of operating history, and our investment activity during Q1 twenty twenty one was no different. During the first quarter, we closed five transactions comprising 28 properties for a total investment of $87,300,000 The weighted average going in cash cap rate for acquisitions completed during the quarter was 6.4%. Leases include 1.4% weighted average rent escalations and a fifteen point three year weighted average remaining lease term. Although we've seen heightened competition in some of our core property types, such as industrial and quick service restaurants, we were able to source and close acquisitions that possess risk adjusted profiles complementary to our existing portfolio. Acquisitions completed during the quarter were more heavily weighted towards select retail and health care property types, which we believe is a testament to the benefits of our diversified acquisition strategy.

During the quarter, we acquired 24 select retail properties in two transactions for a total investment of $68,200,000 The properties primarily include car washes and dollar store sites located in geographically diverse markets. The leases are subject to a weighted average rent escalation of 1.1% and have a weighted average lease term of approximately sixteen point three years. Acquiring strong performing sites under long term leases with experienced operators is an exciting addition to the retail segment of our portfolio. We've also added four healthcare properties as part of two transactions for a total investment of $19,000,000 during the quarter. The properties include several plasma collection centers and a newly constructed eye care facility leased to an existing tenant.

The leases are subject to a weighted average rent escalation of 2% and have weighted average lease terms of approximately eleven point five years. We continue to view health care as a unique differentiator for us, and we intend to remain focused on adding attractive assets leased to tenants affiliated with large health systems or significant regional physicians groups. Expanding on the health care transactions completed during the quarter, the acquisition of the newly constructed eye care facility demonstrates our ability to work with our existing tenant base to drive new growth opportunities. Additionally, through our work on the property management side of the business, we also successfully identified and released a previously vacant health care property during Q1 under a new fifteen year lease with the same tenant. Building strong relationships that lead to new acquisition opportunities with existing tenants has been and will continue to be a key strategic focus.

Although the acquisitions we completed during the first quarter were more heavily weighted towards select retail and healthcare properties, we continue to source and evaluate opportunities across all of our core property types. Despite some minor seasonality in volume, typical of the first quarter of the year, we are very pleased with our current pipeline and have $206,500,000 of additional transactions under our control, which we define as either under contract or executed letter of intent. These opportunities are well diversified across industrial, health care and select retail assets. With nearly $300,000,000 of acquisitions either closed during the first quarter or currently under our control and a robust underwriting pipeline of Q2 and 2021 opportunities, I'd reiterate our confidence in our initial full year acquisitions guidance range of $450,000,000 to $550,000,000 Ryan will provide a more complete update on our 2021 full year guidance in just a few moments. During the quarter, we sold eight properties for $23,000,000 at a weighted average cap rate of 7%, representing a $3,500,000 gain over original purchase price.

These sales continue to reflect our disposition strategy focused on risk mitigation and included several noncore health care assets and weaker performing casual dining locations. We continue to closely monitor and assess the long term impacts to segments of the portfolio that have been more directly impacted by the COVID-nineteen pandemic, namely casual dining and office properties. Granular tenant diversification, long term leases and strong tenant credit affords us the opportunity to patiently assess all available options to preserve and enhance long term shareholder value. As of March 31, our portfolio included six sixty net leased properties located across 41 U. S.

States and one property in Canberra. The portfolio had a weighted average remaining lease term of ten point six years with 2.1% in place contractual annual rent escalators. Occupancy increased 50 basis points quarter over quarter to 99.7% as we successfully re tenanted three properties during the first quarter, leaving only six of our six sixty one total properties vacant at quarter end. Our forward lease maturities continue to be negligible and represent just 0.3% of ABR in 2021 and a total of 2.7% of ABR through 2023. Lastly, I'd like to highlight some exciting governance related news that was announced earlier in the quarter.

During Q1, our Board of Directors nominated Denise Brooks Williams and Michael Koch for election to the Board at our Annual Meeting, which will be held this month. I look forward to welcoming both nominees to the Board of Directors as each brings a wealth of experience in their respective industries. Ms. Brooks Williams currently serves as the Senior Vice President and CEO of the North Market for the Henry Ford Health System, a leading not for profit health care and medical services provider in Michigan. Denise has more than thirty years of experience in the health care industry and will contribute immensely as we seek to expand our health care portfolio.

Mr. Koch is the co founder and current President of Torreno Realty Corporation, a publicly traded REIT focusing on infill industrial properties in six major coastal markets and has over thirty years' experience in the industrial real estate sector as well as significant experience as a Director and Executive of publicly traded REITs. With that, I'll now turn the call over to Ryan to provide additional detail on our Q1 results and our full year 2021 outlook.

Speaker 4

Thanks, Chris, and thank you all for joining us today. I'll begin with an update regarding the strength of our balance sheet and liquidity profile as well as some exciting developments that occurred during the first quarter of the year. We are committed to maintaining significant liquidity and financial flexibility as we continue to make progress towards our 2021 growth objectives. As of March 31, we had approximately $885,000,000 or 98% available capacity on our revolving credit facility. Our net debt at quarter end was approximately $1,500,000,000 resulting in a net debt to adjusted EBITDAre of 5.25x.

Coupled with limited near term debt maturities, our substantial liquidity allows us to be strategic in accessing the capital markets and positions us well to execute on our growth objectives. As we discussed during our Q4 earnings call, we received an initial credit rating of BBB with stable outlook from S and P in January. We have already begun to reap the benefits of this credit rating in the form of interest savings as the interest rate on our existing unsecured bank term loans and revolving credit facility were reduced by 25 basis points in February. The second credit rating further diversifies our potential available funding sources by providing us access to the investment grade bond market. In addition, Moody's reaffirmed our Baa3 credit rating and updated its outlook from stable to positive during the quarter.

These two actions further validate the strength of our diversified strategy and our commitment to conservative balance sheet management. On March 12, we amended our $450,000,000 $20.26 unsecured term loan, reducing the applicable margin by 60 basis points. In connection with the amendment, we elected to repay $50,000,000 in outstanding principal, bringing the outstanding balance to $400,000,000 as of March 31. The interest rate savings associated with both the S and P credit rating and term loan amendment will have positive impact on our 2021 full year earnings and our cost of debt in future years. Now turning to our Q1 twenty twenty one financial results.

We reported AFFO of $49,400,000 during the first quarter of the year, representing $0.31 per diluted share. These results are in line with expectations and represent a $01 or 3.3% increase on a per share basis when compared to Q4 twenty twenty. The increase quarter over quarter was primarily driven by the impact of late Q4 acquisition closings and a partial quarter of interest savings associated with the S and P rating. We expect our late quarter acquisition closings in March, the repricing of our bank facilities following the S and P rating in February and the amendment to the 2026 term loan in March will all serve as tailwinds for our upcoming second quarter earnings. During the quarter, we incurred total G and A expenses of $10,600,000 which includes onetime separation costs associated with the departure of an executive officer during Q1.

After adjusting for these onetime costs as well as $900,000 of routine stock based compensation expense, we incurred $7,600,000 of cash G and A during the quarter, which is slightly better than the low end of our initial guidance range when annualized. Following the completion of the first quarter of the year, we refined our 2021 AFFO per share guidance upward to reflect our confidence in the strength of our current acquisition pipeline as well as the various expense savings measures achieved during Q1. For fiscal year twenty twenty one, we currently expect to report total AFFO per diluted share between $1.28 and $1.34 which represents an implied growth rate of 9.2% at the midpoint over our annualized Q4 twenty twenty results of $1.2 This guidance is based on the following key assumptions: acquisition volume between $450,000,000 and $550,000,000 disposition volume between $50,000,000 and $100,000,000 and total cash G and A between 32,000,000 and $35,000,000 As we discussed during our Q4 earnings call, our per share results for the year are sensitive to both the timing and amount of acquisition, disposition and capital markets activity that occur throughout the year. Finally, based on our performance to date and strong acquisition pipeline, we are pleased to announce that our Board meeting held on April 30, our Board declared a $0.02 $55 distribution per common share and OP unit to holders of record as of June 30, payable on or before July 15.

The $05 increase represents 2% growth in the quarterly distribution rate per share. We will continue to evaluate future increases to our dividend with our Board as we continue to grow our earnings base and intend to target a long term AFFO payout ratio of approximately 80%. With that, I will turn it back over to Chris for closing remarks.

Speaker 3

Thanks, Ryan. Our team is excited to continue to demonstrate the strategic advantages of our diversified strategy, not only as it relates to risk mitigation, but also in our ability to grow through accretive acquisitions. Q1 was another excellent example of the benefits of our approach to net lease investing and portfolio construction. I'm encouraged by our normalized operating profile exhibited during the first quarter and feel confident that we have positioned ourselves to create meaningful shareholder value in both the near and long term. This concludes our prepared remarks.

Thank you for your time and attention this afternoon. Operator, you can now open the line for questions.

Speaker 0

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. The The first question comes from John Kim with BMO Capital Markets. Please go ahead.

Speaker 5

Thanks. Good afternoon. There was an announced M and A transaction which indicated in the industrial sector sub-five cap rate for net lease industrial assets. Can you just describe what you're seeing as far as assets that you're looking at in industrial? What cap rates are today versus where they were maybe a few months ago?

Speaker 3

Sure. Thanks, John. Yes, definitely saw that transaction and understood where pricing was for that. I would say, for us, we are working on a number of industrial transactions. And frankly, with our diversified approach, we're looking at a spectrum of cap rates.

And so probably just going more broadly for a second, Definitely are seeing and working on industrial acquisitions in the low 6% cap rate range. Still seeing some good opportunities with respect to term there and maybe the ten to fifteen year range and annual bumps being north of 1.5%. Certainly, things have traded past that range as well for certain instances, and we were not as inclined to follow that just given the risk reward trade off there and whatnot. And then maybe just to carry that through since pricing is always a popular discussion point. You know, on the health care side, seeing our opportunity set probably in the mid 6% cap rate zone.

They're having maybe a little bit of a shorter lease term, say, seven to ten, eleven years in that zone. Still strong annual rent escalations in that one and a half to 2% or greater zone. And then on the select retail side, maybe mid to upper sixes, more term, longer term, and correspondingly potentially lower annual rent increases as well. So that's sort of the broad spectrum of what we're seeing, but for sure, the industrial segment would be on the lower end of the going in cap rate range.

Speaker 5

So when you heard about the transaction last night or this morning and then also discussions that in the market, they're seeing cap rates in the mid-4s, does that surprise you?

Speaker 3

I would say there are certain transactions that we've seen go that low as well. I think it just depends on on facts and circumstances and and the tenant credit profile and and a whole host of other factors and lease term as well. So I I would probably characterize more of the transactions going in the 5% zone, but, you know, the mid four, I guess, it doesn't strike me as as completely off the mark at the same time. I think it depends on whether you're talking about investment grade tenants or noninvestment grade tenants as well. And to my knowledge, the FedEx component of that portfolio is is heavily investment grade, which could drive that.

And, you know, then there's a pretty diversified mix of tenants underneath of the FedEx piece as well. So there's probably facts and circumstances that drove some of that pricing as well.

Speaker 5

Okay. And Chris, on the 206,500,000.0 assets you have under control, can you provide some more color on your typical closing rate when you have something under letters of intent or under contract, the timing of closing as well as the asset mix?

Speaker 3

Sure. Maybe I'll start backwards going forward. I'd say the asset mix in that $2.00 $6,000,000 is a pretty nicely balanced mix between industrial, a couple of health care transactions, and then a couple of select retail transactions as well. Probably the only thing that isn't in there is is is QSR assets right now. So, you know, pretty pretty healthy balance across the board there and obviously evolving by the day.

I would characterize from a timing perspective, I'd say the vast majority of it or the bulk of it, at least, we would expect to be q two closings subject, of course, to ongoing diligence. There are certain things that will be a q three acquisition within that number as well. But at the same time, we're also working on transactions, and and we're and that could be q two closes that haven't been awarded yet as well. So but bulk of it would still be anticipated for Q2 subject to our diligent efforts wrapping up. And then on the closing front, John, one of the things we talked a lot about or in the early days of the IPO and and I think still holds true today is we tend to overload our front end efforts on diligence and really wanting to stand behind all the LOIs and contracts we signed.

So that doesn't mean we're shortchanging this process, but it probably means we have a pretty elevated closure rate around what we actually report out there. And I think that's why we were feeling confident in being able to talk to you about those numbers today.

Speaker 5

Okay, great. I just have one more question. During the quarter, you eliminated the CIO role at the company. How does that impact your investment position process? And is there any impact to to g and a because of this?

Speaker 3

Sure. So it hasn't really changed our our investment process at all. The only thing that has is is a little bit different is we've expanded our investment committee to include some of our senior vice presidents who are sector lead experts in on the AM and PM side and whatnot. We haven't made any corresponding adjustments to G and A. We would anticipate continuing to look at adding some personnel to the investments team over the course of the year, and so didn't really make any adjustments on the on the G and A guidance there.

At the same time, I'd also point out that our acquisitions team today is larger than when we did the IPO. We had added a few folks in the in the subsequent quarters. So feel really good about where they're performing, I think it shows through in the forward pipeline that I just talked about.

Speaker 5

Great. Thank you.

Speaker 0

The next question comes from Anthony Paolone of JPMorgan. Please go ahead.

Speaker 6

Great. Thank you. I may have missed this, but did you comment on the yields on your pipeline overall in terms of the $2.00 $6,000,000 And also just contractual rent bumps given the first quarter, I think it was a little on the lighter side versus your portfolio average?

Speaker 3

I'm sorry, would you repeat the second piece, Antonio? I just couldn't hear you for one second.

Speaker 6

Yes, the contractual bumps. Because I think in the first quarter, they were a little bit inside of where your portfolio average generally is. Yes. I'm sorry. Thank you.

Speaker 3

So in terms of the the yields for the under control assets is is kind of exactly what I what I said from a underwriting perspective. So it's that's probably that six to seven not probably. Was the six to 7% cap rate range and and, you know, having a waiting, or an individual property type, you know, drive where some of those yields fall. I didn't we didn't talk about the specific weightings there. In terms of the annual rent bumps, I would say that there's range that's fairly characteristic of of the property types we're underwriting, but, you know, a number of the the medical and industrial still being in the 2% zone, one and a half to 2% zone depending on on each individual transaction.

Speaker 6

Okay. As you're out in the market looking at transactions, are there any particular types of bidders that you're going up against more frequently or not that are cutting you out of certain areas? Or any trends on that side in terms of who's showing up to transact?

Speaker 3

Not dramatically different than prior quarters. I'd say it again, because we are so diversified in the spectrum of opportunities, really, it it varies by varies by asset class. You know, some of the more retail oriented peers in the space would would, you know, certainly be interested in some of the the select retail assets we're doing, and we have seen them in the in the last six months or so being being competitors. On the medical side or the health care side, it varies. Again, having a a more niche focus there, We tend to see more private buyers and a little bit more private equity oriented buyer there.

And then on the industrial side, again, you see certain net lease REITs being active there, and they've stayed fairly consistent and a few more institutional buyers as well. So I don't think the competition landscape has changed. I think it just varies by product type, and we've seen that hang pretty consistently over the last quarter.

Speaker 6

Okay. And last question, just on the Art Van boxes. Think you mentioned the vacant or the occupancy pickup related to maybe health care in the quarter. So does that leave you still with the with some Art Van to to backfill, or what's the update there?

Speaker 3

Sort of yes and no. So we highlighted the health care box acquisition because it was a really nice tie together with both continuing to grow with that tenant as they looked at build to suit opportunities plus them leasing some of our space. We did lease two Art Van boxes during the quarter as well, which accounted for a good which accounted for the other two sites releasing this quarter. And so then that leaves us with just fairly for two very small assets left, I think it's around 10% of the original ABR portfolio ABR of the Art Van portfolio, and and we're either looking at selling or releasing those. So more progress on that front.

So eight of 10 have been released at this point.

Speaker 0

The next question comes from Caitlin Burrows with Goldman Sachs.

Speaker 7

Hi, good afternoon. I was wondering maybe if you could just go through you talked about the expected cap rates for the different categories going forward. But even without industrial, the cap rate in 1Q was relatively lower. So just wondering if you could go through kind of what contributed to the cap rates of acquisitions in the first quarter and just the expectation for that to pick up going forward.

Speaker 3

Sure. Yeah. So I think, again, fairly you know, it's it's always facts and circumstances relative to any acquisition we do, and so trying to to give some degree of of, you know, general framework is what I was was searching for there, Caitlin. You know, during the quarter, there was a pretty pretty good band of of cap rates as well. I think one of the lower cap rate transactions we did was was the trade off was having a new twenty year master lease with the leading car wash operator.

So that maybe took that cap rate a little bit lower than than, you know, you might have expected for a select retail asset, and and so that was a component of it. But, otherwise, I think most the entire quarter was fairly well boxed in the mid six zone. So

Speaker 7

Got it. Okay. And then for the transactions in the quarter, I think you said that they were four or five. Just wondering if you could go through how those were sourced mix of existing tenants or otherwise.

Speaker 3

Yep. Absolutely. So the health care deal I highlighted, which had the releasing and the acquisition during the quarter was was obviously an existing tenant that we've known and have done repeat transactions with. One of the retail opportunities was through regular way brokerage, and then one of the other select retails that that had a good chunk of dollar stores in it was with a developer that we have worked with on multiple transactions over the years as well. So that was a repeat developer relationship there.

Speaker 7

Got it. Okay. And then maybe on oh, yep.

Speaker 3

No. I was gonna say just to take away is is, you know, the way I think about it is is is that our existing tenant base, our existing portfolio, the relationships on either the developer or direct side we have, plus the broker's network are all important to us, and and, you know, we're we're trying to pull from each one of those, and and it certainly ebbs and flows at different times, but that's the principal set of of deal sourcing we're looking at.

Speaker 7

Yeah. That makes sense. And then maybe moving on to the, dividend to increase. It was a little sooner than we were expecting. So I was just wondering if you could go through the decision to increase the dividend now versus waiting a little bit and what factors were taken into consideration?

Speaker 3

Sure. So absolutely. You know, I think and Ryan's welcome to jump in here with me as well. We're obviously looking to be in the 80% zone for a payout ratio component. Considerations that we took through at the board discussion were obviously the the performance of the portfolio and being fairly or completely back to normal at this point in in in pretty much every circumstance and and seeing good good collections trends and and not having any tenant issues to speak of.

Certainly, the acquisition pace increasing and the confidence we had in in where the pipeline was going, and and hopefully, you saw that through the the discussions we've had today so far. Also factoring in the term loan savings that Ryan highlighted, that wasn't in our initial guidance. And so wanted to you know, we've been enjoying some significant benefits from that. And so all those factors together were you know, what it gave us the confidence and felt like it was the right time to to make a a first adjustment upward.

Speaker 0

The next question comes from Chris Lucas with Capital One. Please go ahead.

Speaker 8

Hey, just a quick one for me. Ryan, on the guidance you provided for us and some of the assumptions in, the fourth quarter earnings call, you had noted that, G and A would be between 32,000,000 and 35,000,000 I guess I'm just trying to make sure that I understand how that number relates to the first quarter result, which included severance and then you had some accelerated, vesting as well. So it came in, you know, a bit hot. And and just curious as to should we be thinking about the the aggregate number? Or should we be adjusting that for the sort of onetime items in the first quarter to get to that sort of 32,000,000 to 35,000,000 number?

Speaker 4

Sure. The way that I'm thinking about it right now, if I look at that $32,000,000 to $34,000,000 I'd say that it I think I've also stated before, say, call it, about $8,000,000 give or take of cash G and A on a run rate basis. On a comparable basis, I'd call this quarter about $7,600,000 And the way that I'm thinking about that is the $10,100,000 of total G and A, adjusting out for some of the onetime related items on severance and then some acceleration of stock based comp associated with that same departure and then as well as our regular routine stock based comp being adjusted out brings you basically from the 10.6% down to the 7.6%, which is really the comparable number to our guidance.

Speaker 5

The

Speaker 0

next question comes from Michael Gorman with BTIG.

Speaker 2

Chris, sorry if I missed it, but could you just talk a little bit about the office portfolio and how you're thinking about it strategically and what kind of deal flow and competition you're seeing in the marketplace? Obviously, with the announced transaction activity last week, there's going to be a strategic spin off dedicated to the office space. We've seen one or two peers talk about disposing of their office portfolio. So I'm interested how you're thinking about it and what kind of investment opportunities you're seeing in the market right now.

Speaker 3

Sure. I I think, you know, first and foremost, we we've been, you know, pretty pretty hard on a on a hard pause with respect to office. We continue to monitor the existing portfolio, which performance wise has been strong, and we've seen a diversity of of utilization amongst the tenants as they continue to think through their their return to work component, and and it's a pretty active dialogue with the tenant base there. And I've said on a couple different calls before, the term and the credit and the and the duration of the term we have gives us a lot of opportunity to be patient and thoughtful. So, you know, not actively pursuing any new office acquisitions at this moment.

It's certainly possible that we could, you know, see one in a diversified portfolio or something. So I don't wanna draw a completely bright line there for you. You know, for us, there hasn't been, at least from a pipeline perspective, a huge amount of of new office opportunities that have have would have fit our traditional box. But, you know, I've certainly filed the spin off, and and I think we're just in a wait and see and continue to engage with our tenant base before making any any further pronouncements one way or the other there. And that would probably persist for another quarter, so it would be my guess.

Speaker 2

Okay. Great. Thanks. That's helpful.

Speaker 0

The next question comes from Ronald Kamdem with Morgan Stanley.

Speaker 9

Just the first one I have was just when you're taking a step back and looking at the having the benefit of being involved in different asset classes, where is sort of the best risk adjusted return for the incremental dollar in your mind today? And maybe how has that changed for versus six to twelve months ago? So said it another way, you know, is there a a a subsector or or an industry or or or anywhere that that you really see an opportunity today versus, call it, six to twelve months ago? Thanks.

Speaker 3

Yeah. Absolutely. I I I think, you know, the the spectrum I walked through to me has has, you know, some interesting puts and takes to it. So while you might be giving up or having a slightly lower going in industrial cap rate, you are still able to acquire some some assets that are long term and strategic in nature, have a good long term lease, and have good, you know, annual bumps associated with them. And just maybe to contrast it on the spectrum, you know, feel good about the investments we're making on the select retail side with a little bit of a higher cap rate and and, again, a long term, but maybe giving up a little bit on the annual bump.

So it's just weighing those things against each other and and, you know, thinking about where we're most effective. So to us, we're honestly balancing each one of those and then against individual tenant financial considerations and how strong of a tenant they are and how you know, what's their profile in the background. So I think you've you've seen the or or what we're trying to communicate here is is that, you know, we have the benefit to to move amongst these asset classes as as the conditions change. And so we've we've been doing a little bit of that during the first quarter with with health care, with a little bit more health care and a little bit more select retail Even though the portfolio is or excuse me, the pipeline is diversified going into q two, we we, you know, are are still continuing to look at health care and and some of those select retail opportunities because we are seeing a nice complement to what's going on in the industrial side. And to us, that's sort of the bigger that's sort of the bigger picture is is being able to to flex between those situations and and be thoughtful on all of them.

Speaker 9

Great. And if I could just follow-up on on sort of the health care space given sort of it's an asset class where a lot of your competitors don't have a exposure lot to. Maybe can just talk about when you take a step back and looking at sort of the the health care opportunity, why do you think that most of your competitors have not looked at it? Is it just, you know, you guys are niche? You guys have built the platform?

You know, what what's the opportunity there that you think others may be missing?

Speaker 3

Yeah. No. It's an interesting question. Thank you. I I think it it's been something that we've been in for, goodness, fifteen years now.

It's it's, you know, even before I got to the company. And to me, it it it's a spot where we've been able to carve out a a niche that has been really differentiated, and we've been we've been, you know, following it for a long time. You know, for us, I I think it's such a significant part of the economy that it only continues to grow and has continued to provide new product. And and, frankly, the interplay between hospital systems and and some of the larger regional physicians regroup groups have also been pretty dynamic, and we've been able to to acquire on both of those. I think it does require some expertise and some getting up the learning curve, and, you know, that's a never ending process for us as we continue to think about growing our team and using our experience there.

And, you know, frankly, we we took a step another step forward to continue to expand our views on that by asking Denise to join the board. She has a great background with thirty years in the Henry Ford health system, and her views on on on on real estate health care is is has been, you know, aligned with what we've we've thought of from the space and and fascinating to think about where it could be going as well. So I, you know, think it's been a a really good differentiator for us, and and the triple net lease model works as well as it does in other components there. So we've we've we continue to favor it and want to do more there.

Speaker 9

Great. That's all my questions. Thank you.

Speaker 3

Thank you, Ron.

Speaker 0

This concludes our question and answer session. I would like to turn the conference back over to Chris Czarnecki for any closing remarks.

Speaker 3

Thank you all for joining us today. We are, again, continuing to be very grateful for all of your support and are appreciative for all of our investors. We wish you an excellent summer. We're very excited about our pipeline, and we'll be excited to be back in front of you come August with the q two call and give you the next update along the way. Have a great afternoon.

Speaker 0

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.