Broadstone Net Lease, Inc. Q3 FY2020 Earnings Call

Hello. Welcome to Broadstone Net Lease's Third Quarter 2020 Earnings Conference Call. My name is Kate, and I will be your operator today. Please note that today's call is being recorded. I would now like to turn the call over to Kevin Fennell, Senior Vice President of Capital Markets at Broadstone. Please go ahead.

Thank you for joining us today for Broadstone Net Lease's Third Quarter 2020 Earnings Call. On today's call, you will hear from our CEO, Chris Czarnecki; 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 but not limited to those related to the ongoing COVID-19 pandemic. If one or more of these risks or uncertainties materialize, our 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-K for the year ended December 31, 2019, Form 10-Q for the quarter ended June 30, 2020, and other filings with the SEC 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 Czarnecki.

Thank you, Kevin, and welcome, everyone, to Broadstone Net Lease's first earnings call as a publicly traded company. After our recently completed IPO, we are excited to have an expanded shareholder base, lower leverage and enhanced liquidity, which we believe positions us to grow our portfolio through attractive and accretive property acquisition opportunities. Our team intends to continue executing on our proven, diversified investment strategy and remains focused on creating long-term value for all of our shareholders. I also want to take a moment to recognize all of the employees of Broadstone that have done such a tremendous job running the business during a very challenging period. The team has continued to execute at a high level and is very excited about the future of the company. Our corporate accomplishments and portfolio performance results are a testament to the strength of our established platform, experienced management team and differentiated investment strategy. Our initial public offering closed on September 21, raising net proceeds of $588.2 million after accounting for the underwriter's election to issue 3.5 million additional shares on October 20. We used the proceeds to repay $456.7 million of debt and related accrued interest, thus significantly reducing our leverage ratio and placed roughly $132 million of cash on the balance sheet. In conjunction with the IPO, we also closed on a new $900 million unsecured revolving credit facility. All these factors further solidify our investment-grade balance sheet and position the company with ample liquidity to pursue attractive growth opportunities, which I'll discuss more in a moment. Aside from the IPO, business activity in the quarter was relatively muted, which is a positive assessment given the market backdrop created by the ongoing pandemic. As a result of our thoughtfully constructed and highly diversified portfolio, we collected approximately 97.9% of third quarter rents and 98.5% of rents to date for October. We also collected 100% of the deferred rent that was owed to us during the third quarter. During the quarter, we also sold 5 assets for net proceeds of $9.4 million, bringing total year-to-date dispositions to 18 assets for net proceeds of $54.8 million. For the properties that were leased, the weighted average disposition cap rate was 6.8%. Sales during the quarter included 3 vacant properties and 2 occupied quick service restaurants. On the leasing front, in Q3, we completed 2 lease extensions on health care assets for 5 and 3 years on leases that were previously expiring at the end of 2020 and mid-2021, respectively. Rents for these properties continue at the same scheduled rates and increase annually during the extension period. After quarter end, we also executed separate 10-year lease extensions at 2 of our properties leased to Tractor Supply, who continues to be one of our top 20 tenants. A quick note on Tractor Supply. In October, Moody's and S&P assigned the company investment-grade ratings of Baa1 and BBB, respectively. While we do not place particular emphasis on investment-grade credit ratings, it is nice to see third-party validation of a business model that we've been investing in since 2016. While we are not actively acquiring properties during the quarter, we invested $3.5 million in meaningful expansions and improvements for existing tenants in exchange for additional rent. This brings our year-to-date total of other investment activity to $7.2 million, on which we will generate a 7.4% weighted average return. We continue to work with our tenants on additional expansions and improvements to our assets and view this as an accretive way to deploy capital into Q4 and 2021. As of September 30, our portfolio includes 627 properties across 41 states and 1 province of Canada. The portfolio maintained 99.6% occupancy and has a weighted average remaining lease term of 10.8 years with 2.1% in-place annual rent escalators. Our portfolio is and will continue to be diversified across multiple asset types, which primarily include industrial, health care, restaurant, retail and office properties. We believe our strategy delivers attractive risk-adjusted returns, multiple avenues for growth and defensive attributes afforded through portfolio diversification that help provide stability in an ever-changing world. Leading up to the IPO, our acquisitions team began advancing their actionable pipeline, sourcing investment opportunities across multiple channels and asset types. I'm happy with the progress that we have made. And as of today, we have entered into 2 purchase contracts for $33 million of investments with an initial weighted average cash capitalization rate of 7%. We expect both transactions to close during the fourth quarter. The properties will have an expected weighted average remaining lease term of approximately 18.2 years and weighted average annual rent increases of approximately 1.9%. We also have $64 million of other properties under letter of intent, which, if successfully brought to conclusion, represent attractive acquisition opportunities likely to close in Q4 or Q1 2021. The team has done a great job quickly building a pipeline of attractive investments after the IPO, and our momentum continues to build heading into 2021. As we continue to pursue additional investment opportunities, we do remain cautious on certain asset types that we believe could be more negatively affected by the ongoing pandemic, notably office and casual dining. We hold the same cautious views on assets within our existing portfolio, where we maintained a heightened level of attention on these assets and tenants. Importantly, our diversified strategy and experienced team ensure that we have the flexibility to pursue growth where we find attractive risk-adjusted returns while also limiting the negative effects of disruption occurring within any single sector or tenant. This quarter has been one of great significance for Broadstone Net Lease, and I'm proud of what our team has accomplished during these unprecedented times and excited for the opportunities we have ahead of us. We remain focused on generating attractive risk-adjusted returns while creating long-term value for our shareholders. I would now like to turn the call over to Ryan to go over the results of the quarter in greater detail.

Thanks, Chris. I'd like to first echo your comments and recognize everybody on the Broadstone team for their countless efforts and ability to adapt to near constant change during this year. In addition to seamlessly running the business remotely, we completed a major milestone with the IPO, and I know everyone is focused on continuing to execute on our proven strategy moving forward. Before diving into activities in the quarter, I'd like to provide additional details on our financial profile after the IPO. As Chris indicated, we significantly reduced leverage and strengthened our balance sheet using IPO proceeds. After accounting for the partial overallotment, we reduced our leverage ratio as measured by net debt to adjusted EBITDA for real estate from 7.2x as of Q2 2020 to 5x. We also increased our revolving credit facility to $900 million with a new 3-year term plus an additional year available at our option, resulting in a weighted average debt maturity of approximately 5 years with no significant debt maturities until 2023. Given over $150 million of cash available to deploy, a $0 balance on our revolver and a target leverage ratio of less than 6x, we believe we have sufficient liquidity and financial flexibility to pursue our growth objectives in the near term. Moving to our quarterly performance update. I'd like to first give an update on our collection activity and the rent relief request we granted during Q2 at the onset of the pandemic. As Chris mentioned, as of today, we collected 97.9% of third quarter rent, which compares favorably to the already strong collection results we saw in Q2 of 95.5%. This trend continued into October, for which we collected 98.5% of base rent owed. As a reminder, we granted 14 short-term partial deferrals in Q2. And as of September 30, the deferral periods for each of those agreements have expired. During the third quarter, in addition to collecting 100% of base rent owed from each of these tenants, we also received 100% of previously deferred rent that was scheduled for repayment in the quarter. As of September 30, we are scheduled to receive approximately $1.8 million of remaining deferred rent over a weighted average period of 4.2 months. In exchange for 3 additional years of lease term, we also entered into a partial rent abatement agreement in Q2 with a casual dining tenant that runs through January of 2021 before returning to previously scheduled rent. The tenant is required to pay a minimum amount of base rent, which increases during the abatement period, as well as additional base rent based upon sales if certain thresholds are met or exceeded. The additional base rent clause became effective in August, and we have received approximately $0.2 million of additional rent pursuant to that clause for August and September combined. One final point on collection activity during the quarter relates to Art Van Furniture. We resolved our claim in the Art Van bankruptcy proceedings and received $2.35 million, representing approximately 78% of our total post-petition claim or 86.5% of the total post-petition base rent owed. As we have previously discussed, we retained 6 of our 10 former Art Van locations under long-term leases with American Signature, who operates the Value City Furniture brand. In addition to those 6 properties, we retained 1 of the remaining 4 properties under a long-term lease earlier this week. We continue to market for re-lease and evaluate various alternatives for the 3 remaining locations. During the quarter, we recognized an aggregate $14.7 million impairment provision on 3 properties. 2 of the properties are former Art Van locations and 1 property was a vacant medical office building that we sold during the quarter. The length and severity of the pandemic has resulted in negative adjustments to our re-leasing and potential sale assumptions. The remaining carrying value on the 2 Art Van locations is approximately $9.4 million as of September 30, and as I previously mentioned, we continue to market and evaluate the most optimal solutions for these assets going forward. Moving to our earnings results. We reported AFFO of $47.1 million in the third quarter, representing a 21% increase over the same period in 2019. The increase was primarily a result of the contribution from a large acquisition that we closed in late August of 2019. On a per-share basis, AFFO was $0.38 per diluted share, an increase of 2.7% as compared to Q3 of 2019. Per-share results were lower than headline AFFO growth given the impact of additional shares. For the third quarter, we incurred $7.2 million of G&A expense. While we will likely incur incremental public company costs in the near term, we expect to achieve economies of scale with respect to G&A expenses over time as our portfolio growth outpaces our cost structure. Finally, I'd like to provide an update on our dividend. We previously declared a dividend of $0.135 on August 4 that was paid to shareholders and OP unitholders of record as of September 30 in October. At our November 5, 2020, Board meeting, our Board of Directors set a $0.25 distribution per common share in OP unit to holders of record as of December 31, 2020, payable on or before January 15, 2021.

Thank you, Ryan. Our portfolio has proven its resiliency in the face of unprecedented uncertainty. And after completing the IPO, we're excited to turn our attention to the attractive opportunity set that we believe exists in the net lease market. We continue to advance opportunities through our investment process, and we believe we are well positioned to exceed our initial Q4 acquisition expectations in the same diversified manner as we have employed historically. This concludes our prepared remarks, and we'll now open up the line for questions.

Our first question is from John Kim from BMO Capital Markets.

I guess as of today, it looks like there's going to be a Biden presidency with a split government. And I was just wondering if you had any comments as far as what you think this means in terms of the transaction market with the likelihood that 1031 will remain intact.

Sure. John, it's great to talk to you. Thank you for the question. In general, the transaction market has been strong throughout the fourth quarter. I don't think this is particularly influenced by any single view of the market or the election. From the perspective of 1031 exchanges, we have been keeping a close eye on it and have noted some positive insights from Green Street earlier this year. This might result in a slight decrease in smaller asset sales from those looking to trade properties. However, an important factor for us is the ability to engage in unit deals and tax-deferred OP transactions, which we have utilized frequently over the years. This gives us opportunities to execute transactions that may not have been possible before. While we do engage in disposition activities, they are not central to our business, averaging around 2% to 3% of the portfolio annually. Overall, we haven't observed significant changes in the transaction market related to shifts in the political landscape.

Okay. And then you mentioned, Chris, there is $64 million of assets you have under letters of intent. Can you just remind us what your typical success rate is on closing on transactions when it goes into that stage? And any commentary you could provide on property type or yield expectations on these assets?

Certainly. Our success rate from letters of intent to final execution is generally quite high. However, I always want to caution that there are factors such as due diligence and contract structuring that can occasionally alter or delay the process. We approach acquisitions by conducting thorough work upfront to support our letters of intent, and the team has excelled in this area. This leads to a high closure rate regarding our letters of intent. Currently, we have around $97 million in properties under our control, maintaining an initial cash cap rate in the high 6% range. Our portfolio includes a good mix of industrial and healthcare assets, as well as some quick-service restaurants and niche retail, which aligns well with our strategy over the last five years. These assets are very complementary and should be easily integrated into our existing portfolio.

Okay. And then final question for me is on the dispositions. They included 3 vacant assets. And I think Ryan mentioned one of them was an MOB. But can you just talk about disposition strategy going forward? If you do see an upcoming or current vacancy, is the strategy or your preference more to sell the asset rather than retenant it at a high CapEx or just how you think about managing vacancy in your portfolio?

Yes, absolutely. I think it's asset-by-asset dependent. And as Ryan talked about, we did re-lease just another one of the vacant Art Van sites this week with relatively no issue. And so I think we'd take each one individually. The one vacant MOB we had was one that we had worked on both leasing strategies and sales strategies and ultimately decided to move forward with the sale component of it. So we take it piece by piece and look towards what the best outcome is based on each of the assets. And again, we also did a reasonable amount of re-leasing for those other MOBs during the quarter plus the Tractor Supply. So I think it very much just depends on where we are relative to market rents, where we are with the tenant and their desire to stay. And the great thing is we have very little near-term lease maturities coming, and so it's a manageable process, and we're always thinking 5 years out on that front. So...

I realize you have very little upcoming expirations. But should we think about re-leasing CapEx rising, particularly in certain asset classes like office and MOBs and, to a lesser extent, industrial?

I don't think anything specific there to guide towards. The health care assets that we re-leased didn't have any CapEx exposure or any CapEx increases, and then the other ones were fairly nominal, almost nothing. So I don't know if there's anything particular to guide towards on heavy CapEx for any of the particular asset classes based upon what we're seeing today.

Our next question is from Vikram Malhotra from Morgan Stanley.

Just going back to the acquisition, you mentioned the pipeline, the composition, and the closure rate. I'm wondering, from a broader perspective, if you could provide more insight into the funnel and the overall opportunities you're considering so we can understand what the run rate might look like in the fourth quarter as we move into 2021.

Sure, Vikram. As we've progressed and the acquisitions team has worked on making their pipeline actionable, we have observed our volumes remaining fairly consistent with previous years. This year, in terms of run rate acquisition sourcing, we've exceeded $17 billion. The team has considered various acquisitions and conducted thorough evaluations. With the IPO proceeds, we have been able to start finalizing these deals. From our perspective, the market shows a strong pipeline and numerous opportunities. Assuming that current market conditions remain stable, we anticipate executing near or above historical levels in 2021, excluding the exceptional year of 2019, and aligning more closely with historical averages from the past five years. This is the overall outlook we have at this point. We are also on track to surpass our Q4 projections, which were set coming out of the IPO, and we feel very optimistic about our direction for 2021 based on the wider opportunities and our active pipeline.

That's helpful. In terms of the current state of the economy, especially following the election results and the ongoing situation with COVID, particularly in the restaurant and retail sectors, could you share your insights on occupancy trends for the upcoming months?

Sure. You've touched on some key areas we're focused on. As I mentioned in the prepared remarks, we're keeping a close eye on our casual dining portfolio, which has remained resilient despite some industry-wide sales declines. Most of our casual dining locations are managed by strong national operators and corporate tenants, providing us with added stability and credit strength. We're also closely monitoring our quick service restaurant (QSR) component, which has performed according to expectations and shown consistent year-over-year results. Our portfolio is primarily invested in industrial and healthcare sectors. Generally speaking, the cold storage, food processing, and packaged goods segments of our industrial business have shown solid performance in recent months. Regarding healthcare, as the ability to defer elective procedures diminished, we’ve seen a positive rebound in their operations. Predicting occupancy can be challenging, especially with caution in the restaurant space during the winter months due to expected factors. However, we feel confident about our overall leased status, which remains around 99%.

Okay. Great. And then just last one on the G&A. Can you maybe remind us sort of what sort of run rate costs may carry on into '21 and maybe what may go away? Just sort of looking for, as we model things out, what's sort of the good run rate heading into '21.

Absolutely, Vikram. I'm going to kick it to Ryan to talk about that for you.

Sure. Vikram, regarding our run rate, we're currently observing a slight increase in our G&A due to the costs associated with being a public company. Consistent with our earlier estimates, the run rate for G&A, excluding stock-based compensation, is approximately $8 million per quarter, give or take.

Our next question is from Anthony Paolone from JPMorgan.

So your deal pipeline has become more robust and it sounds like pretty comparable to what a number of your peers are saying, too. So just wondering, like who are the sellers? Are you seeing more sale leasebacks? Or are these more existing net leases that folks are selling?

Yes. Good question, Tony. Thank you for that. I think when we were talking with you guys earlier this year and talking on the road show, we highlighted a number of channels we source from. And honestly, in addition to having a robust pipeline that sort of matches our underlying portfolio, I think we've been sourcing through a number of those same channels into Q4 and for 2021. And so we have certain transactions going with developers that we've had long relationships with. We have 2 or actually maybe 3 existing tenants we're doing additional transactions with as well and then obviously working through the broader market and looking at a few sale-leaseback transactions there as well. And then we highlighted, while not a huge number, continuing to invest in our own assets through tenant improvements. And we have a few opportunities, as I alluded to during the prepared remarks, for Q4 and into 2021 there. So we're really executing on our broad funnel to bring a number of different opportunities into the pipeline. So we're sort of checking all the boxes of things we talked about earlier in the fall.

Okay. It sounds like a bit more skewed towards sale leasebacks or new leases as opposed to buying an existing. Is that what you see?

I could double-check it, but I believe it's currently a balance between the two. There are a few sale-leasebacks and some existing leases as well, so it's just a mix.

Okay. Got it. And then the last point or 2 of non-collections, how should we think about that over the next few quarters? Or is that a bit of a moving target because maybe it's not the same group of tenants based on sort of that occupancy discussion you had with Vikram?

Yes. It's more of a moving target. The last little bit there is simply deferred rent and then one small tenant who has a partial amount left for October. I don't know, Ryan, is there anything else you'd throw in there?

No, I don't think so. I mean I think it's been strong, continues to remain strong and, overall, I would say that right in line with what we're seeing today.

Okay. And then last question, just to roll the run rate on NOI forward. The $1.7 million that you added back with capital improvement/reserves, what was that? And how should we think about that as a run rate matter?

Yes. I'll kick it to Ryan for that.

Sure. I'd say that's one sort of one-time item, to describe it a little bit better, there was no impact historically to AFFO or today to AFFO. What it really relates to is a tenant-funded capital reserve item that they would fund every period since 2010. The number that you see there of the 1.6, is sort of the cumulative amount since 2010. We reclassified during this period that amount to the balance sheet as a liability. And net-net to AFFO, it was 0, given that there was sort of an offset to top line during this period. So overall, it's not something that we need to think about going forward from a modeling perspective.

Our next question is from Ki Bin Kim from Truist.

Can you just talk a little bit more about your industrial acquisition strategy? I'm still curious if that is predominantly where you want to deploy capital, and if you can provide some details on like what type of assets, what type of markets are you looking at and the yields, obviously.

Sure. We're concentrating on secondary markets for industrial properties and slightly smaller assets compared to large distribution facilities or those in gateway markets. Currently, our portfolio consists of about one-third manufacturing, one-third distribution, and the remaining assets in food processing, cold storage, and some flexible space, including research and development. Our average asset size is approximately 200,000 square feet. Our largest industrial markets are Chicago and Dallas, followed by Wisconsin and Phoenix, which are considered more secondary markets. The assets we are currently sourcing are similar, focusing on secondary markets and mid-sized properties with a variety of property types. Once those transactions are finalized, we'll share further details. We see a reasonable range for cap rates in the mid- to high 6% area for the industrial opportunities we are considering today.

Okay. And generally speaking, what is the reserve level that you're carrying right now?

Sure. I'll pass that one to Ryan, but good question.

Sure. We're typically looking at about 75 bps. And as we look at that reserve level, I think there are 2 things playing into it. I think historically, we've operated inside of that. But just given some of the uncertainty related to the environment and having an uptick recently in the number of cases and so on, I think that we could see the other side of that. So I think today, looking at a 75 bp assumption or so generally makes sense to me.

Okay. Just one quick question. I'm not sure if this has been addressed yet, but can you clarify the reversal of the $1.62 million in reserves or capital improvements? Was that discussed during the call?

Yes. That's what I was describing earlier as the item had no AFFO impact previously or today, and it was the reclass to the balance sheet as liability for the cumulative amount this period.

Our next question is from Caitlin Burrows from Goldman Sachs.

Could you discuss the current competitiveness of the acquisition landscape and how you manage to make acquisitions at the target cap rates you desire, particularly for property types like industrial or healthcare?

The acquisition environment remains competitive, a trend we've experienced for quite some time. Our ongoing focus is on our core strategy, as well as smaller assets and secondary markets within the industrial space. We've built strong relationships over the years, particularly with developers, which has helped us establish our brand. Additionally, our ability to effectively work with existing tenants plays a crucial role. While we track numerous transactions, we often choose not to pursue many due to factors like competitive pricing. However, our reputation, our relationships in collections, and our dedicated team have demonstrated resilience. We continue to see a healthy flow of potential deals that align with our acquisition criteria, and we are committed to growing this successful portion of our portfolio.

Could you provide more details on the restaurant rent coverage you report at 3x? Specifically, what time frame of sales does this cover, and is it from before or during the pandemic? Additionally, how frequently do you receive the restaurant sales results?

Sure. We receive, I believe, it's 99% or high 90% of four-wall reporting from the restaurant portfolio. It is through the end of Q2 at this point. Now some folks may report only once per year or some do quarterly as well. But it's the most up-to-date data we have through the end of the second quarter and even into third quarter reporting for some that might report more quickly than 30 days after the quarter it's under or whatnot.

Our next question is from Christopher Lucas from Capital One.

Chris, just on the investment side. You talked a lot about the industrial properties that you're interested in. But maybe if you could rank order sort of where your comfort level is from sort of focus and best opportunity to sort of where things are less attractive for you right now from a risk-adjusted basis across the different kinds of lines of business that you invest in.

Yes, I completely agree. As you mentioned, there is significant interest in industrial properties, which is where much of our focus lies. Those businesses have performed well. We are also keen on further expanding our health care portfolio. We have a few health care transactions involving existing tenants in our pipeline, as well as some new opportunities. Cap rates in this sector have been appealing, typically in the upper 6% range, and we've seen growth in our off-campus, hospital-affiliated assets, particularly smaller medical office buildings that support the wider health system. Additionally, we are engaging with large regional physician groups that specialize in their markets, with plans for repeat transactions there. The cap rates and lease terms have been attractive to us. Regarding the restaurant sector, casual dining currently requires a cautious approach, and we are not actively pursuing transactions there. However, we are exploring some quick-service restaurant (QSR) opportunities with familiar partners. The broader QSR market is highly competitive and priced in a way that makes regular purchases unlikely for us. While I'm eager to bring in new assets if available, it's not an area with many large sale leasebacks or well-priced opportunities. Our niche retail assets have typically been reasonably priced, and we expect to have one or two coming this quarter with cap rates around 7%. I am pleased to consider these on the margin, but I'm not looking to make significant expansions there. In summary, our priorities are ranked with industrial and health care at the top, followed by an interest in QSR, although current pricing is less favorable, and a bit of incremental niche retail.

I have a couple of questions for Ryan regarding rent collection. Can you provide any insights on timing? Is it typical to have collected 100% of rent pre-COVID, except for issues related to credit? Were you consistently able to collect all of the rent, or should we be aware of any timing issues?

Yes, historically, we have collected 99% to 100% of rent. Apart from the disruptions caused by COVID, that has been the typical performance of the portfolio.

I wanted to follow up on the G&A guidance. If I understood correctly, you reported $7.2 million in total G&A this quarter, with approximately $800,000 being noncash compensation, which leaves about $6.4 million on a cash basis. Could you provide insight on what the cash G&A run rate should be or clarify what I'm trying to connect with what was previously mentioned, considering what we observed in the third quarter?

Sure. As we look ahead to 2021 and beyond, I believe that the cash G&A component, along with G&A related to stock compensation, is approximately $8 million, which translates to around $1 million per quarter. Some factors contributing to this figure include the additional costs associated with operating as a public company, such as increased D&O insurance. As we resume more deal activity, I anticipate an increase in travel and entertainment expenses as well. There are various small elements that contribute to this total. Overall, I believe that $8 million is a reasonable estimate for our ongoing run rate as we plan for the future.

Our next question is from Michael Gorman from BTIG.

Chris, could you discuss your thoughts and current conversations with your office tenants regarding potential office acquisitions? What discussions are influencing your interest in that sector within the portfolio?

Sure. We have always approached the office sector with caution, and since our office spaces are primarily suburban, this is advantageous during the current period. We include office properties in our portfolio to differentiate ourselves in certain transactions and sale leasebacks that may involve a corporate office alongside various industrial facilities. We've assessed our office exposure, which is about 10% of our portfolio, as a reasonable position. Currently, we’re engaging in regular discussions with our office tenants. While not all tenants have returned to full capacity, we believe our long-term leases with tenants of strong credit are solid. However, there are still many uncertainties regarding the future of office space needs and whether there will be a shift to hybrid models. Consequently, we prefer to hold off on making long-term commitments of 15 to 20 years until we have a clearer understanding of how businesses will operate post-pandemic. Our focus is on monitoring how this situation evolves while ensuring our portfolio remains robust, as our collections have been strong and our tenants are reliable.

That's helpful. And obviously, it hasn't been much of an issue for you all with your portfolio given the collections and the occupancy. But as you think about the footprint and think about making new investments, how much maybe increased focus are you putting on local responses and local governments as we see greater differentiation in how people are opening up and what kind of regulations they're putting in place for different businesses? Is local governance playing a bigger role in your underwriting process?

It's an interesting question. I think it has been a part of certain asset classes for us over time. On the health care side and in states with certificate of need regulations and the imposed restrictions, while perhaps not at the local level, but certainly at the state level, we've always taken these factors into account. Many of our current acquisition opportunities give us a better understanding of the impact on future tenants when we visit properties. Since we started acquiring, we've benefited from the last six months by learning how people have reconfigured their spaces. This understanding is advantageous as we move into these Q4 acquisitions. Ultimately, when considering local restrictions and components of the portfolio for future acquisitions, I appreciate the cross-diversification within our portfolio. Specifically, in Texas, we have a wide range of industries, property types, and tenants. Even within a populous municipality or a state of that size, we don't have excessive concentration in any one area. Therefore, if there were changes to some local or county regulations, it shouldn’t significantly affect the entire portfolio. This aspect is a positive for me as well.

Great. As you consider the pipeline, did you mention if it includes any expansion into new property types, similar to the growth in cold storage or life sciences? Are there any new property types being evaluated in that pipeline?

No, not specifically today. It's the core industrial, health care and QSR business mostly in the pipeline today. So...

Our next question is from Frank Lee from BMO.

How should we think about funding for the acquisitions that are under LOI right now? Is the expectation these deals will be initially funded with cash, on the line versus establishing an ATM?

Yes. Frank, I'm going to let Ryan take that one, but...

We have a substantial amount of cash on our balance sheet that we're prepared to use. Initially, we will deploy that cash and then utilize the revolver, which we recently increased to $900 million along with the IPO. The funding for acquisitions in the upcoming quarters will primarily follow this order.

Okay. Great. And then what are your current thoughts on providing 2021 guidance with 4Q earnings?

Sure. Today, we've aimed to provide an outlook on how our acquisitions are developing, particularly concerning Q4 and the pipeline ahead, as well as our thoughts on the potential for next year. As we progress through Q4, we will continue to assess best practices, and moving forward, we will focus on what those practices entail. However, if you're inquiring about specific AFFO guidance or AFFO per share predictions for next year, we are not making any specific commitments at this time.

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

Thank you so much. I will close by, again, continuing to both thank all of our investors and our employees for their diligent work in helping make Broadstone at least so successful. We are very excited to continue to execute on our growth plan in Q4 and into 2021, and we very much look forward to sharing updates with everyone, as appropriate, through the back half of the year and into the first quarter. Thank you all very much, and have a great afternoon and weekend.

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