Earnings Call Transcript - BNL Q1 2024

Operator, Operator

Hello, and welcome to the Broadstone Net Lease's First Quarter 2024 Earnings Conference Call. My name is Bailey, 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 Brent Maedl, Director of Corporate Finance and Investor Relations at Broadstone. Please go ahead.

Brent Maedl, Director of Corporate Finance and Investor Relations

Thank you, operator, and thank you, everyone, for joining us today for Broadstone Net Lease's First Quarter 2024 Earnings Call. On today's call, you will hear prepared remarks from CEO, John Moragne; President and COO, Ryan Albano; and CFO, Kevin Fennell. All three will be available for the Q&A portion of this call. As a reminder, the following discussion and answers to your questions contain forward-looking statements which are subject to risks and uncertainties that can cause actual results to differ materially due to a variety of factors. 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, 2023, 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. With that, I'll turn the call over to John.

John Moragne, CEO

Thank you, Brent, and good morning, everyone. As we discussed during our call last quarter, the largest variable in establishing guidance this year was the timing of our healthcare dispositions and the subsequent redeployment of proceeds generated from the portfolio sales. With our team's ability to execute at scale on both fronts early in the year, I am pleased to announce that we are increasing our per share AFFO guidance and establishing a range of $1.41 to $1.43. Before opening the line for questions, we'd like to provide context for this update and our perspectives on the overall operating environment. As we have been emphasizing since February of last year, the macroeconomic backdrop and interest rate environment have had a considerable impact on commercial real estate markets, and in particular the net lease transaction market. While the net effect has resulted in historically significant declines in transaction levels, this environment has also presented opportunities to think creatively and differently while continuing to lean heavily on our existing relationships, disciplined underwriting, and operational expertise. Our actions over the last 18 to 24 months have provided us the flexibility to continue making decisions we want to make in this environment, not decisions we were forced to make. With the capital, talent, and experience we have at BNL, we are primed to drive long-term value creation and earnings growth. I am extremely proud of what our team has accomplished so far this year, including the sale of 37 clinically oriented healthcare assets in connection with our healthcare portfolio simplification strategy, generating gross proceeds of $251.7 million. The closing of these 37 assets along with an additional disposition completed after quarter-end accounts for approximately 50% of the assets we have identified as part of our healthcare simplification strategy. And we remain in various stages of marketing and negotiation for an additional 20% of our clinical assets that we anticipate concluding later in 2024. The remainder will likely take additional time to achieve optimal disposition outcomes. As part of this effort, we continue to work through a final resolution for Green Valley Medical Center. Completed dispositions have successfully reduced our healthcare exposure to approximately 13% of our ABR as of March 31. Our near-term goal is to reduce our healthcare exposure below 10% of our ABR, at which point it will naturally become a less emphasized portion of our portfolio, similar to office. Turning to our investment activity. The first quarter transaction market represented the lowest single-tenant net lease transaction volume in at least 15 years, highlighting the continued misalignment between buyers and sellers, with a recently reignited rate environment further exacerbating the disconnect. We still believe that a higher degree of selectivity is required as we navigate this environment. And we are focused on sourcing off-market investments and unique capital allocation opportunities where we can partner with developers and tenants seeking capital solutions as the constraints on traditional commercial real estate lending persist. Despite the challenging environment, our team was able to invest $202 million year-to-date with an additional $122 million of investments currently under control. We navigated the transaction environment by leveraging existing relationships, sourcing nearly $150 million of our year-to-date investments through direct off-market deals that closed shortly after quarter-end, including an $84.5 million investment in retail assets located in one of the most highly trafficked trade areas in St. Louis. This unique opportunity stems from an existing relationship that resulted from our ongoing UNFI build-to-suit. It includes a $32.5 million investment in seven individual triple net outparcel assets, leading to strong national and regional concepts, including Bass Pro Shops, Chick-fil-A, LongHorn Steakhouse, and Burger King, to name a few. The remaining $52 million is transitional capital, with a portion designed to convert to a long-term ground lease subject to tenant consents. The $52 million covers the inline portion of the retail center that is currently more than 95% leased. This was a unique opportunity in which we were able to step in as a holistic capital provider for the entire center and acquire seven triple net retail assets with strong real estate fundamentals and tenants at above-market cap rates. The other significant direct transaction we closed after quarter-end was a $65 million single-tenant industrial campus in California occupied by a leading candy manufacturer. While we will normally wait until Q2 earnings to provide additional details on transactions closing in the quarter, we wanted to provide investors a sense of what we are working on in this environment, particularly given the proximity of these investments closing to Q1. We look forward to discussing these and other Q2 investments in more detail during second quarter earnings. As we execute on our healthcare portfolio simplification strategy, our overall portfolio composition is increasingly weighted toward industrial and defensive retail and restaurant tenants. And it continued to perform well in the first quarter as evidenced by 99.9% rent collections, excluding Green Valley and 99.2% occupancy as of March 31, 2024. While our overall operating results remain strong, we are seeing incremental pockets of credit risk as the broader impact from the duration of higher interest rates appears to be having an effect. We remain vigilant in our tenant monitoring efforts and maintain great confidence in our portfolio due to its highly diversified construction, which limits the impact of any potential individual credit event and our proven ability to manage through any such situation that may arise. In this higher-for-longer environment where financial conditions are less conducive to the type of interest rate-fueled growth that the net lease sector had grown accustomed to in the post-GFC world, net lease REITs will need to focus on operational expertise and finding creative ways to generate deal flow and creative growth. In a historically low transaction environment like this, we could choose to run up the risk spectrum in exchange for yield. But I don't believe that would be prudent due to potential credit risk in our view of the continuing risk-reward balance on higher cap rate deals. Now is the time to be creative and opportunistic while maintaining underwriting discipline to position BNL as an alternative capital provider, to take advantage of the commercial real estate lending pullback, and to double down on the things that have made BNL successful over the last 16 years: solid portfolio and balance sheet fundamentals, operational expertise, and a growth-focused mindset. With our industrial-focused but diversified investment strategy, I believe BNL presents investors with a differentiated approach to net lease investing and growth, with the increased role we can play in development and build-to-suit transactions as a compelling additional building block to our growth strategy. We view these types of opportunities as part of our core building blocks for sustainable long-term growth, which includes best-in-class fixed rent escalations, investments in our existing tenants and assets, traditional external growth, and development funding opportunities. While the combination of these building blocks will vary based on market conditions, they provide a compelling path to near and medium-term value creation and earnings growth. With that, I'll turn the call over to Ryan, who will provide additional details on our transaction efforts, our building blocks for growth, and portfolio updates.

Ryan Albano, President and COO

Thanks, John, and thank you all for joining us today. As John mentioned, during the first quarter, we were able to execute on a key piece of our healthcare portfolio simplification strategy through the completion of a portfolio sale comprised of 37 assets for $251.7 million and a cap rate of 7.9%. These dispositions reduced our medium-term lease maturities and improved our overall WALE to 10.6 years. Additionally, the incremental proceeds from the sale add to our existing dry powder, placing us in a position of strength as we actively pursue high-quality investment opportunities. As we step through this disposition effort and begin focusing on the remaining properties identified, we anticipate various transaction timelines that comfortably extend into 2025 given the need to address some combination of shorter lease duration, space utilization rates, and elevated credit risk. As John and I have communicated in the past, we are intently focused on the tactical execution of our healthcare property sales and maximizing value for our shareholders. Alongside our disposition efforts, we once again demonstrated our high degree of selectivity during the first quarter, funding revenue-generating capital expenditures of $3 million, and incremental unified development fundings of $36.9 million. In total, we have funded approximately $130.7 million toward the UNFI build-to-suit development through March 31. And the project remains on track for delivery and rent commencement no later than October of this year. Now turning our attention to new investment activity. While our standards remain very high for allocating capital to new investments, our sourcing efforts have yielded several positive outcomes, as John highlighted in his comments. We favor opportunities to support growth for stable and healthy companies or situations where we can provide solutions to transactions that are disrupted by the current market environment. This has resulted in our evaluation of more opportunities for build-to-suit transactions, forward commitments of completed developments, and other directly sourced opportunities in addition to selective regular way marketed transactions. These transaction formats allow us to access high-quality opportunities today through a differentiated sourcing model and create embedded AFFO growth for future periods, which when coupled with our in-place portfolio rent escalations produce a compelling run-rate growth profile before even considering contributions from external growth opportunities. While facing a historically difficult transaction environment, our pipeline remains robust given an influx of these types of opportunities. Our focus on achieving appropriate risk-adjusted returns and creating long-term value for our business and its shareholders is resolute. The balance of real estate fundamentals and underlying credits support against prevailing market pricing on investments remains front and center. In an environment where the traditional net lease growth model and transaction environment is constrained, we feel confident in our ability to drive meaningful near and medium-term growth through our capacity to leverage opportunities arising from our other core building blocks: investments in our existing assets and development funding opportunities in addition to our best-in-class fixed rent escalations. Moving toward our in-place portfolio, as we highlighted last quarter, we remain cautious and continue to pay extra attention to industries that are sensitive to discretionary consumer spending, including some tenants that have been included in recent headlines. The RoomPlace, a home furnishings operator occupying one asset and accounting for 0.2% of ABR remains in Chapter 11 bankruptcy, during which time we continue receiving rent. At the end of the bankruptcy proceedings, which we anticipate occurring later this summer, the tenant will vacate the property. In the meantime, our team is focused on determining the optimal next step for this asset. Red Lobster, representing 1.6% of ABR, has notably been in recent headlines. Our 18 master lease assets maintain relatively healthy site-level performance, and we continue to monitor the situation as it unfolds. We are comfortable with our exposure which we have reduced over the last several years, remain cautiously optimistic about Red Lobster's future, and know the quality of the underlying real estate represents a compelling value proposition to both Red Lobster and other potential users. Lastly, we only had three vacant properties as of March 31, including one that went vacant during the quarter upon the conclusion of our tenant's lease term. This property received significant interest, and we have executed an LOI with a new tenant and are in the process of negotiating a lease, anticipating the tenant taking possession in late Q3 or early Q4. Beyond these properties, there is one additional tenant, Shutterfly, that will be vacating its space when their lease expires on June 30. We have already executed an LOI and are in the process of negotiating a lease with the new tenant for this location. Our new tenant is currently targeting lease commencement during the fourth quarter, resulting in minimal downtime at the property. In summary, the broader market environment for new investments is certainly challenging, and higher interest rates and sustained uncertainty are increasingly adding risk to the macroeconomic equation. Despite the difficult backdrop, we continue to demonstrate a differentiated ability to allocate capital to investments that enhance the value of our highly diversified portfolio and execute on assets and portfolio management objectives to drive strong operating performance. With that, I'll turn the call over to Kevin to provide an update on our financial results for the quarter.

Kevin Fennell, CFO

Thank you, Ryan. During the quarter, we generated AFFO of $71 million or $0.36 per share, an increase of 5.9% in per share results year over year. Results were largely driven by lower interest and G&A expenses. Bad debt in the quarter excluding Green Valley was 15 basis points, driven by a small gap in rent from The RoomPlace. We incurred $7.8 million of cash G&A during the quarter, which tracks in line to slightly better than guidance. We once again ended the quarter in a strong and flexible financial position despite not engaging in any capital markets activity. From a leverage perspective, we ended the quarter in a position of strength at 4.8x net debt, down slightly from 5x at the end of 2023, driven largely by disposition proceeds from progress on our healthcare portfolio simplification strategy. We retain a multi-fixed rate debt capital structure with $30 million in existing swaps rolling in the fourth quarter. And we routinely evaluate alternatives as we approach incremental floating rate exposure into 2025. At our quarterly meeting, our Board of Directors approved a $0.29 dividend for common shares and OP units. This is a 1.8% increase from last quarter and a 3.6% increase over the dividend declared in the first quarter of 2023. This quarter's increase marks our seventh consecutive semi-annual dividend increase since our IPO and is payable to holders as of June 28, 2024, on or before July 15. Our dividend remains well-covered and represents a highly attractive yield in this market environment. Finally, as John previously mentioned, we are raising our per share guidance from $1.41 to a range of $1.41 to $1.43 as our team's ability to execute on both our healthcare portfolio simplification strategy and growth objectives provides additional clarity on estimated per share results for 2024. Our revised per share guidance reflects the following key assumptions which remain unchanged: investment volume between $350 million and $700 million, disposition volume between $300 million and $500 million with ongoing healthcare sales accounting for the substantial majority. And finally, cash G&A between $32 million and $34 million. With that, we will now open the call for questions.

Michael Gorman, Analyst

I was wondering if you could spend a little bit of time as you talk about how you think about the investment environment right now? And John, you talked about being a little bit more innovative and focusing on your skill set. And Ryan, you talked about some of the opportunities you're seeing. Maybe talk about how you're thinking about stratifying the opportunities and the returns required as you think about additional build-to-suits or kind of innovative transactions like the retail center that closed after the quarter ended?

John Moragne, CEO

Thanks, Mike. As we mentioned earlier, these are the lowest transaction volumes we've seen in at least 15 years. Conversions are much more challenging right now, which means more effort is needed to find deals. The environment for net lease isn't the same as it was for the 15 years following the GFC. We're concentrating on finding direct deals and leveraging our relationships. We're proud of the $150 million we have closed so far this year through direct partnerships with Sansone, our collaborator on UNFI and the retail center, and with direct relationships on the industrial campus we acquired in California. Building on that, we believe one important aspect of our growth strategy in net lease is the potential for more build-to-suits. Currently, we're exploring opportunities in mid-market industrial, straightforward deals, and some retail, but many of the best opportunities we see now are build-to-suits for commitments. The disruption we've experienced in commercial real estate lending over the last year and a half continues and is likely to persist for a while. Therefore, acting as a holistic capital provider, as an alternative capital source, is very appealing to us. We’re seeing yields solidly in the sevens. While there's an opportunity to take on more risk for higher yield, we have not been comfortable with that approach historically and feel the same way today. We're firmly positioned in the sevens and believe there are excellent opportunities in both typical acquisitions and build-to-suits, contributing to our core strategy.

Michael Gorman, Analyst

That's helpful, John. And I guess, maybe it's just kind of self-evident, but as you get closer to the rent commencement on the UNFI, I assume the appetite to take on new build-to-suits goes up. Can you just give a sense of kind of where that appetite sits in terms of as a percentage of the total business to have a development pipeline underway?

John Moragne, CEO

Yes, there's a strong appetite for it. And UNFI is progressing really, really nicely right now. We're expecting to come online at the end of Q3 or the beginning of Q4. As we talked about before, it has an absolute rent commencement date of October 15 at the latest, but we believe it's going to come online earlier than that. And so, as we are winding down our remaining commitment there to fund, that starts to open up the opportunity for us to look at additional build-to-suits. And when we look at our core building blocks, having a ladder build-to-suit structure out into the future over the next 12 to 18 to 24 months, we think is really attractive growth for investors to look at. As you roll from one year to the next, already having a built-in investment pipeline that you know is going to come online from those build-to-suits, we think should provide a differentiated approach to growth that you don't see in the same material way across our industry that we're able to do with these larger industrial build-to-suits. So it's a key focus for us right now. As a percentage, it's pretty significant in terms of the pipeline, and not all of those work out, but we're actively pursuing a handful of them and are excited about a few of them coming online and that '25 timeline.

Michael Gorman, Analyst

And maybe just last one from me. I know it's not directly comparable, but obviously, a lot of headlines lately in the pharmacy space and with Walmart with its health clinics. And I'm just curious, you had good execution on the healthcare properties year-to-date. Have you seen any change in the tone or the tenor of the discussions you're having in the last month or so, just in terms of how investors are thinking about the healthcare space and the healthcare real estate space specifically?

John Moragne, CEO

Yes, I believe people are comfortable with the approach we're taking. We're pleased to have already achieved roughly 50% of our goal. In the near term, our plan is to reduce our overall healthcare allocation below 10%. Once we reach single-digit ABR, it will naturally become a less emphasized part of the portfolio. That is our goal. We have a clear outlook for the next 20% to 25% and expect to close that in the second half of 2024, although the final 25% may take a bit longer. In healthcare, there are significant disparities; some areas are well-structured, leading to investor sentiment that can be very positive and enthusiastic about our efforts, while other areas are facing challenges. Our execution of the strategic plan aligns well with reducing that complexity and divesting from an asset class that is not central to our long-term growth strategy. We are excited to continue this execution over the next year or two.

Caitlin Burrows, Analyst

Just as a follow-up to that last one. So, you mentioned how about 50% of what you want to sell in the healthcare portfolio is now done and you're in talks on another 20% to 25% and the rest TBD. So could you talk a little bit more about the differences between the properties that you expect will take longer versus those that you've already closed or are in talks on?

John Moragne, CEO

Sure. So the ones that will take a little longer are likely to be one-off transactions. They were not ones that were viewed as being a fit for larger portfolio deals. Larger portfolio deals, if you're looking at private institutions or public REITs that are evaluating healthcare assets that are on the market right now, need to fit a certain playbook for them. And not everything that we've owned and acquired is going to do that. As a reminder, we've been acquiring healthcare since 2009, 2010, going back to some of the earliest years of our 16-year operating history. So there's a lot in there. And so these one-off transactions in that last little bit, our focus is optimal disposition outcomes. We're not looking to sell these at just any price, and we are good asset managers. We have really strong operational expertise. We're in the real estate business. And so our plan is to look at each of those individually, not rush through a decision on them. And if it takes a little bit of effort for us to work with the tenant on a lease extension or maybe we need to invest some TI dollars into it to get the asset repositioned where it's going to be attractive for somebody to buy on a one-off basis, that's what we're going to do. So it will take a little bit more time to work through those, but that's okay.

Caitlin Burrows, Analyst

And just for the additional healthcare asset sales that you expect to happen in 2024, would you expect those would be in a single transaction or multiple?

John Moragne, CEO

We're currently working on one single transaction, but it would have stage closings. So we would try to time it out in a couple of different tranches over the course of the second half of the year.

Caitlin Burrows, Analyst

I have a follow-up regarding the build-to-suit opportunities. Will these be on land that you already own? You mentioned a potential 12 to 24 month outlook for impact, but it seems like it could take longer if you need to acquire the land and obtain the necessary permits. Can you discuss this further and clarify how it might affect your timeline?

John Moragne, CEO

No. We're not buying land for spec development purposes. These are deals that are already in place. We would acquire the land on the front end in connection with funding the deal, but these are opportunities we're looking at where the land has already been identified and the partners have already been identified. And so there's no risk that you would traditionally see in sort of spec industrial development.

Caitlin Burrows, Analyst

It seems that someone else has already worked on getting it set up, and from what we hear on the industrial side, there is some time involved between initially discussing a project with a potential partner and actually starting construction. Has that process already taken place, or are you able to move forward more quickly?

John Moragne, CEO

No, the process has already happened. Think of this as the same sort of scenario we've been seeing in the last 12 months starting for us with UNFI. The dislocation you're seeing in commercial real estate lending where they haven't been able to find a capital provider, but they've already got a project in mind. They've got the land secured. They've got the permits they need. They're ready to break ground, but they don't have the funding to do it, and we can step in and provide them with the funding.

Mitch Germain, Analyst

John, do you have a dedicated team working on these development opportunities, or is this just part of the overall skill set of your acquisitions team?

John Moragne, CEO

Yes. So we're leveraging existing experience and expertise. Our head of acquisitions has done a significant number of build-to-suits over the course of his career. We have a 25-year licensed architect on staff. It's able to come in and provide us with really strong expertise in working through the build structure and the construction over the course of the period of time. And we've got a team that has gone through this with UNFI as well as a handful of retail sites during 2023 that is continuing to grow their expertise. So it's built into the fabric of our acquisitions and investment team, and we're very excited about the types of opportunities that they're seeing.

Mitch Germain, Analyst

And I think you had said you're looking at yields in the mid-7% area, give or take right now. Is that consistent with one of these development transactions or do these transactions maybe skew a little bit higher versus what you could be acquiring a similar asset for?

John Moragne, CEO

Mid-7s is really on a blended basis. We're considering a few options in the low 7% to 7% cap range, as well as some in the higher cap range. We continue to gain significant benefits from build-to-suits in the industrial sector and regular acquisitions, particularly in terms of the straight-line yield when incorporating long lease terms with rent increases. Currently, rent increases are consistently above 2%, at levels of 2.5%, 2.75%, and 3%. As a result, the straight-line yields for these opportunities are quite appealing, even when discussing cap rates in the low 7% range.

Mitch Germain, Analyst

Last one from me. You referenced 25%, 30% of the healthcare expected sales maybe kind of extended into 2025. Was that always the expectation? Or did that come about from the education of marketing those properties and seeing where the demand in the market was?

John Moragne, CEO

So I think the answer is both. As we discussed during our fourth quarter earnings call, it takes a considerable amount of time to manage the process and reach the point we were at when we announced the healthcare portfolio simplification strategy in February. We began that process early in 2023, worked through it internally and with our Board throughout the summer, and brought on JLL and CBRE to assist us in the fall. We approached it with an open mind regarding how we might execute it. However, when we announced the strategy to the market, we fully expected to be able to execute quickly on the first half. We aimed to extend the next 25% over a longer period, and the final 25% will take more time. This aligns with our initial expectations from a few months ago.

Ronald Kamdem, Analyst

Two quick ones. Just starting on the guidance raise on sort of the redeployment timing and so forth is really interesting, but trying to figure out what's the bad debt assumption in the guidance that did change at all? And to be a little bit more specific, curious about Red Lobster and what sort of contemplated bad debt number?

Kevin Fennell, CFO

It's Kevin. I'll take the first part and John can take the second. But we started the year with 75 basis points of cash revenue, which we did last year as well. We hold that throughout the year. And so as you saw, 15 basis points for the quarter, operating inside of that, and we'll certainly update as the quarter rolls forward or the year rolls forward.

John Moragne, CEO

Concerning Red Lobster, we are actively monitoring the situation. There have been discussions around potential bankruptcy, which has not yet occurred. We have assessed our portfolio every quarter for the past few years and have decreased our exposure from 25 assets to 18. Initially, when we invested in 2016, it represented 4.5% of our adjusted base revenue, and it is now at 1.6%. This decrease is partly due to natural attrition from our portfolio's growth and partly from our ability to divest some assets. Our real estate assets are performing strongly, typically showing about twice the coverage across the portfolio. Red Lobster will require quality real estate for successful operations and to attract customers, and we believe we can provide that. From an investment perspective, we have approximately $0.82 for every dollar invested, including the Red Lobster we sold at a mid-6 cap rate last quarter. While recovering our investment is important, we also anticipate significant opportunities in the future. We remain cautiously optimistic about the potential outcomes, even if Red Lobster undergoes Chapter 11. The casual dining sector in the continental U.S. requires jobs, and there will be opportunities for someone to take over a solid brand with strong real estate and historical performance. Overall, I feel cautiously optimistic about our direction.

Ronald Kamdem, Analyst

And then on the portfolio simplification, obviously, a big chunk of it got done, so nicely done. With the sort of move in rates, could the timing slip a little bit? Or do you have sort of enough line of sight where you do feel like you'll be below that 10% by the end of the year or potentially?

John Moragne, CEO

Yes. We're pretty confident we'll be below 10% by the end of the year. With the next 20%, 25%, having a good line of sight to where that's headed, that gives us a lot of confidence. And then as we work through the rest of the portfolio on an individual basis, we think we can get there pretty confidently. And then we'll take our time with the rest of it. As we said, focus there is often with disposition outcomes and not just pushing them out the back of the truck.

Caitlin Burrows, Analyst

I was curious if you could share more about the retail deal and how it originated. It appears to be a unique strategy, especially since the press release mentioned that you invested in the property rather than acquired it. It seems like you're planning to keep the outparcels while ground leasing the remainder of the retail center. Could you elaborate on how this came to be and if you are considering pursuing similar deals in the future?

John Moragne, CEO

Yes, we are very excited about this. It’s a strong example of the creativity we can demonstrate in this type of market. As I mentioned earlier, the low interest rate-driven growth we've relied on for the last 15 years is not something we can count on moving forward. We need to depend more on our real estate and operational expertise, establish direct relationships, and seek creative solutions. The recent slowdown in commercial real estate lending has opened up opportunities for us, and we are fully engaging with them. This specific opportunity presented itself through our partnership with Sansone, who has also partnered with us on UNFI. They have been managing this retail location for 30 years and were involved in its initial construction, giving us great confidence in their management capabilities. The previous owner was in a situation where they needed to transition from a closed-end fund and distribute funds to limited partners, but there were not many traditional lending options available. We stepped in to fill that gap. We are thrilled to have acquired seven retail sites at attractive cap rates, featuring well-known names like Bass Pro Shops, Chick-fil-A, LongHorn Steakhouse, and Burger King, which will enhance our portfolio. To achieve this, we provided a comprehensive capital solution. The transitional capital we invested is structured in two parts. One part is aimed at eventually converting it into a ground lease, but that requires collaboration with the tenants. The second part is expected to have a hold period of three to five years, focusing on lease-up activities and lease extensions, with the site already 95% leased, positioned very well for future growth. Sansone has been an excellent partner, and there are other similar situations out there. This represents a creative opportunity for us to invest capital, especially when traditional net lease transaction activity is at historical lows. We are open to pursuing similar opportunities, whether this is a unique case or part of a broader strategy in the future. We’ll see what opportunities arise.

Caitlin Burrows, Analyst

That sounds good. And then maybe just similarly on the industrial deal, I guess, bigger picture, to have acquisition cap rates in the mid-7% range for retail and industrial does seem like a really good outcome for you guys. So incremental to what you just said on the retail side, is there anything else you could add for kind of how you expect to achieve those kinds of yields over the rest of the year? And if there's any other additional color you could give on the industrial property again, like how you sourced it, what made it unique for you guys?

John Moragne, CEO

Yes. We found the industrial deal through a personal relationship, which presented an opportunity because the seller needed someone who could ensure a successful closing, simplify the execution process, and make a substantial investment to provide a comprehensive solution for their acquisition. We are very pleased with this deal and will share more details in the future. It involves an industrial campus in California, with a cap rate in the 7% range, which is promising. Looking ahead, we continue to identify strong mid-market industrial opportunities in that same cap range. These are exciting for us and others in the market. Many public REITs and private institutional buyers are targeting mid-cap industrial properties, making them highly competitive. We will maintain our discipline and not pursue deals that present unfavorable risk-reward scenarios. If we miss out on some opportunities, that's acceptable. Conversions are currently more challenging, but we aim to find the right deals and build the right relationships, which is why direct connections and off-market opportunities are crucial right now. Simply bidding on the properties that come through brokers' emails will be tough in the near future. Our focus is on exploring creative opportunities, such as the retail center, and working on expanding our pipeline of build-to-suit transactions.

Eric Borden, Analyst

Just on that last point around laddering the potential development opportunities, how are you guys thinking about that just given the delay between the capital outlay and then when the NOI kind of comes online for you guys?

John Moragne, CEO

Yes, there's a balance there. I think it's really attractive from a differentiated growth strategy, but you have to balance it with current rent-paying new opportunities. One of the things that we want to spend time on is the pro forma leverage that we included this quarter for the first time. We are sitting on a low leveraged position already at 4.8. But when you pro forma in the way that UNFI coming online, you get down to 4.6. So we've got a lot of room there, but it is a balance between these things with capitalized interest. There is some current benefit as we are funding these over time, but the real benefit is when they come online. So being able to ladder them, I think, is important. If you've got these big, huge balloons and nothing in between, that gets a little bit more difficult. But if you've got them coming online in a more consistent basis, which is the hope that we have, we need to prove that out; then it starts to be a really attractive way to allocate capital.

Eric Borden, Analyst

That's helpful. And then outside of traditional net lease transactions, some of your peers have had success in the sale-leaseback financing market. Just curious to hear your thoughts around what you're seeing today and if that is a potential solution for you guys to kind of grow externally?

John Moragne, CEO

Yes, we are still looking at some sale-leasebacks. The main consideration for us is the reason behind the company's pursuit of these. Are they aiming for growth? Are they working on an acquisition? We aren't particularly interested in addressing a capital structure issue unless we feel confident about it moving forward, especially if the company has limited access to other capital sources and is resorting to the sale-leaseback market. However, this market is more restricted now than it has been in the past. Many corporations currently have substantial cash reserves and aren't in need of sale-leasebacks like before. Nonetheless, we will definitely assess these opportunities as they arise and focus on understanding their purpose and the reasons behind the funds they are seeking.

Spenser Allaway, Analyst

Maybe just a bigger picture question. Just given the more cautious cost of capital signal that's being provided by the market right now, how has your thinking changed, if at all, regarding redeploying the disposition proceeds into new investments versus buying back shares, bringing down leverage further, or perhaps just sitting on dry powder until that cost of capital improves?

John Moragne, CEO

Yes. So our job is to allocate capital as advantageously as possible. And so we're always evaluating all the alternatives that are in front of us. And the ones that you set out, Spenser, are really the ones that we're thinking about. We're in a great spot right now from a leverage standpoint. So we have looked at paying down some debt. But where our debt currently sits relative to what we can get on a straight-line yield basis from investing in new opportunities isn't necessarily that attractive, particularly given the additional cash proceeds that we have from the healthcare sales. But if you take share repurchases, we have that tool in the toolkit for a reason. It's something that we'll evaluate and we'll think about given where our shares are trading currently and an implied cap rate north of 8%. The fact that we are in a low-levered position, the fact that we have some additional dry powder relative to the healthcare sales, it makes it an interesting conversation. So it's something that we'll evaluate and make sure that we're allocating capital to the most advantageous place possible.

Operator, Operator

Operator Instructions. The next question today comes from the line of Ronald Kamdem from Morgan Stanley.

Ronald Kamdem, Analyst

Kevin Fennell, CFO

We started the year with 75 basis points of cash revenue, which we did last year as well. We hold that throughout the year. And so as you saw, 15 basis points for the quarter, operating inside of that, and we'll certainly update as the quarter rolls forward or the year rolls forward.

John Moragne, CEO

And on the Red Lobster point, we're actually monitoring that. I mean, it's certainly in the news, anticipated bankruptcy. They haven't done it yet. But we've gone through and evaluated our portfolio every single quarter for the last few years. As we talked about a handful of times, we reduced that exposure from 25 assets down to 18. When we first initiated that position in 2016, it was 4.5% of our ABR. It's 1.6% today. Some of that's attrition from the growth in the portfolio. Some of that's from us being able to sell it off. We've got really strong real estate. The real estate is performing well there. With the Red Lobster on a going forward basis, it's going to need quality real estate to be able to operate the restaurants and get people in the door. We think that we offer that to them. But even if we're just looking at it from an investment standpoint, we're $0.82 on the dollar out of these, including the one Red Lobster that we sold at a mid-6 cap rate in Q4. So it doesn't take much for us to get our money back out. We're not in the business of just making our money back though, and we expect that there's going to be plenty of opportunity here into the future. As I've said a handful of times, we're cautiously optimistic about where this goes.

Operator, Operator

Operator Instructions. The next question today comes from the line of Caitlin Burrows from Goldman Sachs.

Caitlin Burrows, Analyst

I am not sure if you are implying that this topic might be better suited for the second quarter call, but I would like to hear your thoughts on the retail deal. Can you explain how it originated? It appears to be a distinct strategy, and the language used in the press release suggests that you invested in the property rather than acquiring it. It seems that you are retaining the outparcels and will be ground leasing the rest of the retail center. Could you elaborate on how this came about and if there is potential for similar deals in the future?

John Moragne, CEO

We are really excited about this opportunity as it's a strong example of our creativity in the current market. As I mentioned earlier, we can no longer depend on the growth driven by low interest rates that persisted for 15 years after the financial crisis. We need to lean on our real estate expertise, operational knowledge, and direct relationships to devise innovative solutions. The recent pullback in commercial real estate lending has opened this door for us, and we're fully embracing it. We collaborated with Sansone on this project, who has managed this retail location for 30 years and even constructed it initially. We trust their management capabilities. The previous owner was tied to a closed-end fund that had to divest and reinvest those funds elsewhere, which meant they faced challenges finding a capital source to meet their needs. We stepped in to fill that gap with a unique solution that allowed us to acquire seven valuable retail sites at above-average cap rates, including well-known names like Bass Pro Shops, Chick-fil-A, LongHorn Steakhouse, and Burger King. To achieve this, we needed to provide a comprehensive capital solution. The transitional capital is structured in two parts. One aspect involves shifting towards a ground lease over time, which will require coordination with tenants. The second part likely involves a 3- to 5-year hold period, during which we will focus on completing lease-up activities and lease extensions. Currently, the site is 95% leased, so it's in excellent condition. We hope to transition it over time as we seek a long-term owner. Sansone has been a strong partner, and we see similar situations with other potential opportunities. This represents a creative way for us to allocate capital amid historically low activity levels in traditional net lease transactions. We are open to exploring these types of opportunities, and while this may be a one-off case, it could also pave the way for future ventures. We'll have to see how opportunities develop.

Caitlin Burrows, Analyst

John Moragne, CEO

Yes. We sourced the industrial deal internally through a personal relationship. It was an opportunity presented to us as they needed someone who could ensure a successful closing, simplify execution, and handle a significant financial commitment for the acquisition they were pursuing. We are very pleased with this deal and will share more details in the future. It involves an industrial campus in California with a cap rate around 7%, which is currently favorable. Looking ahead, we continue to see promising opportunities in mid-market industrial properties within that 7% cap range and are excited about them. Many others are also interested in mid-cap industrial assets, making this a competitive space. We will maintain strong discipline and won’t pursue these opportunities to a point where the risk-reward balance is unfavorable. If we miss out on some, that’s acceptable. Conversions are currently more challenging, but if we can identify the right opportunities and foster strong relationships, that’s crucial. Direct relationships and off-market opportunities are especially important at this time. Relying solely on bidding for properties advertised through broker emails will be difficult in the near future. Therefore, we're focusing on those direct relationships, exploring creative opportunities like the retail center, and developing our pipeline of build-to-suit transactions.

Eric Borden, Analyst

John Moragne, CEO

Yes, there's a balance there. I think it's really attractive from a differentiated growth strategy, but you have to balance it with current rent-paying new opportunities. One of the things that we want to spend time on is the pro forma leverage that we included this quarter for the first time. We are sitting on a low-levered position already at 4.8. But when you pro forma in the way that UNFI is coming online, you get down to 4.6. So we've got a lot of room there, but it is a balance between these things with capitalized interest. There is some current benefit as we are funding these over time, but the real benefit is when they come online. So being able to ladder them, I think, is important. If you've got these big, huge balloons and nothing in between, that gets a little bit more difficult. But if you've got them coming online in a more consistent basis, which is the hope that we have, we need to prove that out; then it starts to be a really attractive way to allocate capital.

Eric Borden, Analyst

John Moragne, CEO

Yes, we are still considering some sale-leasebacks. The main point for us is to understand the company's motivation for pursuing this option. Are they aiming for growth or working on an acquisition? We're not focused on resolving a capital structure problem unless we have strong confidence in the situation. If a company has limited access to other capital sources and is turning to the sale-leaseback market, that's not necessarily appealing to us. Currently, the market seems more constrained than before. Many companies have substantial cash reserves, so they may not need sale-leasebacks as much as they used to. However, we will certainly assess any opportunities that come up and concentrate on the rationale behind their funding needs.

Operator, Operator

Operator Instructions. There were no additional questions waiting at this time. So I would like to pass the call back over to John Moragne for any closing remarks.

John Moragne, CEO

Thank you, and thanks, everybody, for joining us today. I hope you can hear the confidence and conviction that we have in the execution we've had so far this year and where we believe we're headed over the course of the rest of the year. We look forward to talking with you more about it at the upcoming conference season. Thanks all, and have a great day.

Operator, Operator

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.