Earnings Call Transcript - PINE Q4 2021

John Albright, CEO

Good morning, everyone, and thank you for joining us today for the Alpine Income Property Trust Fourth Quarter and Year-End 2021 Operating Results Conference Call. With me is Matt Partridge, our Chief Financial Officer. Before we begin, I'll turn it over to Matt to provide the customary disclosures regarding today's call. Matt?

Matthew Partridge, CFO

Thanks, John. I'd like to remind everyone that many of our comments today are considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we undertake no duty to update these statements. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's Form 10-K, Form 10-Q, and other SEC filings. You can find our SEC reports and our earnings release, which contain reconciliations of non-GAAP financial measures we use on our website at alpinereit.com. With that, I'll now turn the call back over to John.

John Albright, CEO

Thanks, Matt. We capped off a record-setting year for the company with our strongest quarter ever of acquisition volume, acquiring more than $100 million of well-located, high-quality net lease properties at a weighted average going-in cap rate of 6.2%. The success we had growing the organization in 2021 allowed us to generate the highest total shareholder return of any of our public company peers. We meaningfully beat our fourth quarter and full year guidance, increased our quarterly cash dividend by nearly 23% year-over-year and dramatically improved our cost of capital. During the fourth quarter, we acquired 26 properties spread across 11 different states and 17 markets, with Houston being the largest market we invested in during the quarter. More than half of the acquired rents during the fourth quarter came from MSAs with over 1 million people and approximately half of the acquired rents were in the Urban Land Institute's Top 25 Markets for 2022. Our new acquisitions included 19 tenants, 9 of which were new tenants to the growing portfolio, operating in 12 sectors, and most notably, we have the unique opportunity to purchase a portfolio of ground leased properties in Houston. The ground leased transaction resulted in 34% of acquired rents in the fourth quarter coming from the ground leased properties where the tenant has invested in improvements and we own the land. The ground leased structure is a superior investment because it provides an external layer of protection due to the tenant's investment in improvements, making the tenant much more likely to operate in the location over the long-term. Those improvements then revert to us if the tenant ever leaves or at the end of the lease term, which results in a higher overall residual value for our investment. As I previously mentioned, the portfolio of ground leases we purchased are all in the Houston market and have strong macro fundamentals, while the ground lease portfolio did bring our average cap rate down in the fourth quarter, this is a special opportunity to invest in the asset with excellent risk-adjusted returns. I'll stress that this quarter was unique, and therefore, we anticipate a higher average cap rate on our investments for the first quarter of 2022, more in line with what you saw from us during the first three quarters of 2021. For the full year of 2021, we more than doubled our portfolio through the acquisition of 68 net lease retail properties for just over $260 million at a weighted average going-in cap rate of 6.8% and a weighted average remaining lease term and acquisition of 8.1 years. Throughout the year, we acquired a number of new tenants into our portfolio, including our first Lowe's, Academy Sports, Burlington, Camping World, Tractor Supply, Harris Teeter, and O'Reilly Auto Parts, just to name a few. When we take a step back and look at the markets where we acquired properties throughout the year, they included some of the strongest in the United States, including Houston, Dallas, Charlotte, Atlanta, Seattle, Washington, D.C., Phoenix, and Orlando. With the attractive locations of our assets and rents that we believe are below market, our 2021 execution is a good representation of our overall investment strategy where we look to combine excellent real estate fundamentals with well-performing retailers in sectors that mitigate the near-term risk, but preserve upside through long-term residual value. At the end of the year, our portfolio was once again 100% occupied and consisted of 113 properties, totaling 3.3 million square feet with tenants operating in 26 sectors within 32 states. Our top tenants include Wells Fargo, At Home, Hobby Lobby, Academy Sports, Dollar General, Walmart, Walgreens, and Lowe's. The largest change to our top tenant list came from the sale of our Hilton Grand Vacations properties. This sale generated a true cash gain of over $7 million and a book value gain of more than $9 million, helping improve our overall book value by $0.70 per share. With the Hilton sale complete, the Wells Fargo property in Hillsboro, Oregon is the sole remaining office asset in the portfolio. We are in active discussions with interested parties, and we have included this property sale in our 2022 disposition guidance which will help fund our acquisition activity for the year. For 2022, we'll continue to execute our real estate-focused investment strategy, where our size supports us to be nimble and acquire high-quality acquisitions in a competitive, but fragmented net lease transaction market.

Matthew Partridge, CFO

Thanks, John. As John mentioned earlier, our portfolio remains 100% occupied, and our tenants have performed very well, paying 100% of their contractual base rents in the fourth quarter and throughout the entire year, including all of their scheduled COVID-related deferral repayments. For the fourth quarter of 2021, FFO was $0.42 per share, a $0.05 per share increase over the third quarter and AFFO was $0.41 per share, which was a $0.04 per share increase from the third quarter. For the full year, FFO was $1.58 per share, representing a 28% increase over 2020, and AFFO was $1.59 per share, which was a 53% increase over 2020. Our AFFO for the full year was positively impacted by $430,000 of repaid rent related to previously disclosed COVID-19 rent deferral agreements. And as we disclosed last quarter, we have one remaining tenant making repayments under our previously agreed to rent deferral agreement, and these payments of $22,000 per quarter are scheduled to occur through the second quarter of 2022. General and administrative expenses for the year, which includes the $3.2 million of management fees to our external manager, totaled $5 million. This was a year-over-year increase of 7.9%, which was meaningfully offset by our revenue growth of more than 56%. G&A as a percentage of revenues in 2021 was 16.7%, a year-over-year decrease of more than 750 basis points, which compares very favorably to a number of our small-cap net lease peers and continues to reflect our improving organizational scale and efficiency. As has been the case in each quarter of 2021, our growth allowed us to increase our cash dividend in the fourth quarter by nearly 6% to $0.27 per share. FFO and AFFO fourth quarter payout ratios were very healthy at 64% and 66%, respectively, and we currently have a strong annualized yield of approximately 5.6%. Our fourth quarter dividend marked the sixth dividend increase by the company since its IPO in late 2019, our fifth consecutive increase in as many quarters, and a 23% increase over our fourth quarter 2020 quarterly dividend. We anticipate announcing our regular quarterly cash dividend for the first quarter of 2022 towards the end of February. Turning to our capital markets activities and the balance sheet. 2021 was a very busy year. We nearly doubled the size of the company, sourcing $250 million of debt and equity through a combination of term loans, loan assumptions, ATM issuance, and our inaugural follow-on offering and OP unit issuance. During the fourth quarter, we issued 152,000 shares of common stock through our ATM program for total net proceeds of $2.8 million. And year-to-date in 2022, we have issued 213,000 shares of common stock through our ATM program at an average price of $19.98 per share for total net proceeds of $4.2 million. We ended the year with net debt to total enterprise value of just under 50%, net debt to pro forma EBITDA of 8.1x, and a very healthy fixed charge coverage ratio of 6.2x, which is one of the strongest in the net lease sector. With no debt maturities other than our revolving credit facility until 2026, year-end liquidity from revolver availability and available cash on the balance sheet of $60 million, and anticipated future proceeds from disposition activities, we believe we have adequate liquidity to fund our projected acquisition activities for the near future. As we look out to 2022, we did provide initial guidance in our press release last night. This guidance relies on a number of significant assumptions, including, but not limited to, our ability to raise funds for investment at a reasonable cost of capital, our ability to acquire and sell assets at reasonable valuations in support of broader capital markets and an overall stable economy. We began 2022 with portfolio-wide in-place annualized straight-line base rent of $36.9 million or $35.7 million of in-place annualized cash base rent. Our full year 2022 FFO guidance range is $1.53 per share to $1.58 per share and our full year 2022 AFFO guidance range is $1.51 per share to $1.56 per share. As I previously mentioned, our 2021 AFFO per share results included the positive effects of $430,000 of COVID rent deferral repayments. And with those COVID rent deferral repayments having largely run their course, in 2022 they are anticipated to total just $45,000. While the year-over-year changes do create some noise in our AFFO per share comparisons from 2020 to 2021 and from 2021 to 2022, they do not impact year-over-year comparisons for FFO, because we continue to straight-line the contractual rents during the repayment period instead of moving to a cash-based revenue recognition approach for those impacted tenants. Our 2022 per share guidance does assume some delevering of the balance sheet when compared to our year-end 2021 credit metrics, both from a forecasted dispositions and from our projected capital markets activities. While the ebbs and flows of leverage do impact period-to-period growth metrics for Pine, we have maintained that a long-term focus on risk-adjusted returns drives the best long-term value for our shareholders. On the transaction front, we expect to acquire between $200 million and $250 million of retail net lease properties during 2022. And subject to market conditions, we believe these acquisitions will occur at a similar blended yield to our 2021 full year acquisition cap rates. Our transaction volume guidance and anticipated cap rates do not include the potential grocery development site at our existing property in Jacksonville, Florida, which we disclosed in the third quarter and is still subject to finalizing customary due diligence and approvals. And finally, our guidance does assume we sell between $40 million and $50 million of assets throughout the year, including, as John mentioned earlier, the loan remaining office property leased to Wells Fargo in Hillsboro, Oregon. Given the lease with Wells Fargo has less than 4 years remaining, we expect our portfolio's weighted average lease term to meaningfully improve after we sell this property and redeploy the proceeds. With that, I want to thank our shareholders and business partners for their strong support in 2021, and we look forward to continued success in 2022. I'll now turn the call back over to John for his closing remarks.

John Albright, CEO

Thanks, Matt. 2021 was a strong year of growth for Pine, and we are excited to be entering 2022 with such a high-quality portfolio with no meaningful near-term lease maturities and robust acquisition pipeline. All of our momentum to the end of 2021 has continued with a fast start in 2022, and that momentum will be a strong tailwind as we execute our real estate-focused strategy, and seek to drive further value for our shareholders. I want to congratulate our team on a record-setting year and thank you to our shareholders for their support. And at this time, we'll open it up for questions.

Operator, Operator

And our first question comes from RJ Milligan with Raymond James.

R.J. Milligan, Analyst

A couple of questions. I wanted to start out with the acquisition guidance. You guys did $260 million in 2021, calling for $225 million, a slight decline in 2022. I'm just curious what's sort of driving that and what's your visibility over the next couple of quarters in terms of acquisition volume. And what potentially could we see to get to the higher end of that range by the end of 2022?

John Albright, CEO

Yes, thanks RJ. The visibility for our pipeline looks very promising. However, we are taking a cautious approach due to the unpredictable macroeconomic environment. Factors like potential geopolitical issues could affect the markets. As a result, we are not aggressively pursuing acquisitions just for the sake of it. While we are optimistic about increasing our activities, our actions will depend on the conditions of the capital markets. I am not overly worried about our pipeline or our ability to secure high-quality, profitable opportunities, but I do have some concerns regarding the overall market backdrop.

R.J. Milligan, Analyst

That makes sense. And then, Matt, in your opening comments, you talked about leverage just over 8x at the end of the quarter. And obviously, that bounces around depending on capital markets activity. Assuming, obviously, the dispositions or planned dispositions are factored in there. But can you just talk about how you expect leverage trends as we go through the year and sort of on a longer term basis?

Matthew Partridge, CFO

Yes. Thanks, RJ. I think the good news is that we've got more liquidity in the stock over the last few months, and we've been able to execute on the ATMs to start the year pretty efficiently. So I think you can assume we'll probably be active on the ATM to match fund transactions throughout the quarter going forward. And then within guidance, our guidance sort of assumes we're going to be plus or minus 7x range at the end of the year. So there is some delevering in there. And obviously, we gave some indication on what we thought the share issuance would look like with the range that we provided. So there certainly will be some delevering, and we'll be efficient on the ATM. And then to John's point, we'll see how the capital markets evolve.

R.J. Milligan, Analyst

And then my last question, just to make it a little bit more broad. John, you talked about the expectations for cap rates to sort of remain the same in terms of '22 versus '21. Can you just talk about what you're seeing out there in the market in terms of cap rates? And has any of this macro headwinds that we've seen over the past couple of weeks, has that impacted pricing or the availability of product?

John Albright, CEO

We haven't noticed any improvement in pricing from a buyer's perspective; it's remained fairly stable for now. We're becoming a bit more selective and are considering bidding a little wider to test if there is any loosening in the market. So far, we haven't observed that. We're hopeful we can find some opportunities at more favorable prices, but we're currently identifying solid acquisition properties that provide good yields, while also exploring the possibility of doing even better. However, there has been no significant change in market pricing. There is still a lot of capital out there, with many investors viewing this as a hedge against inflation. There's chatter in the brokerage market about capital seeking the security of these types of assets for clear reasons. We're facing competition from that. Last year, there was a scramble for 1031 exchanges, with everyone concerned about that, and now we seem to have an inflation-induced scramble. We'll continue to monitor the situation and actively pursue opportunities.

Operator, Operator

And our next question comes from the line of Michael Gorman with BTIG.

Michael Gorman, Analyst

John, just sticking with the acquisition market for a bit. Obviously, you still see some strength there. Can you just talk about are you seeing any kind of divergence in opportunities, whether it's amongst geographies or the different kind of retail property types that you're looking at?

John Albright, CEO

Yes. As we focus on the sale of Wells Fargo, we aim to create a strong top 10 tenant list. We are dedicated to showcasing the quality of our portfolio and will pursue high-quality tenants to improve tenant concentration. We are excited about the promising acquisition opportunities in desirable markets that will help strengthen our tenant base. This applies across various sectors and locations. We were pleasantly surprised by some of the locations we've secured, such as the Houston acquisition in the fourth quarter. The ground lease portfolio we acquired was a great deal in terms of pricing and quality, reinforcing the overall quality of our portfolio and proving to be an unexpected and excellent acquisition for us and the company. We hope to replicate such opportunities in the future.

Michael Gorman, Analyst

And maybe kind of transitioning off of that with the quality that you just talked about. Your presentation had some new disclosures in it, talking about demographics. It's not something that often comes up a lot in net lease. So I'm just curious, as you focus on kind of the quality of the actual real estate itself, is that something that's getting priced into the market? Or is this a situation where not a lot of the other bidders are looking at the underlying real estate demographics and maybe you can pick up what we would call better quality real estate at the same pricing as another location?

John Albright, CEO

Yes, we are actively trying to shift the conversation because our portfolio is exceptionally strong compared to others. However, this strength is not reflected in our stock price, as we are trading at a low multiple. When you examine our portfolio, the demographics, and the locations, we should be trading at a higher valuation due to the quality of our assets. We want to highlight this fact to potential investors in net lease REITs. They should recognize that they can acquire shares of Alpine at a low multiple, enjoy a higher dividend yield, and gain access to a superior portfolio of real estate in solid markets. We are particularly focused on this strategy. Currently, Houston is our largest market, benefiting from favorable macroeconomic conditions, especially related to the oil industry, contributing to a robust economy. A study we conducted with John Burns two years ago, which considered various factors such as major airports and large universities, revealed that Houston ranked the highest for job and population growth. This finding was surprising, particularly since it was during a time when oil prices were around $20 per barrel. Further insights from John Burns indicated that Houston's appeal is largely due to its business-friendly environment, which promotes growth. While Houston might not hold the top position indefinitely, this illustrates how we approach the market by considering macroeconomic factors alongside the strength of our real estate acquisitions.

Matthew Partridge, CFO

Mike, I would add that in the net lease sector, people often prioritize tenant quality, which is certainly important. However, when we acquire assets with tenants that may not be as strong as usual, it's typically because we see significant value in the real estate itself. This creates unique opportunities in the market where the pricing may be influenced by the tenant's quality. The strength of the real estate and the potential to adjust rents to market levels allows us to capture longer-term residual value.

Michael Gorman, Analyst

There is a different opportunity because others aren't viewing it the same way. That makes sense. My last question is about the capital in the space. As you look at acquisitions, what kind of competition are you encountering? Is there still a significant amount of 1031 money available that might be unaffected by economic conditions? I'm trying to understand whether there is a lot of capital out there, how sensitive it is to economic changes and interest rates. Will the market react in tandem with interest rates, or is there a possibility of a delay of six to nine months if there is a significant rise in rates, during which the capital might remain unaffected due to other motivations?

John Albright, CEO

Yes, that's a good question. Currently, we're observing a decrease in 1031 driven activity with smaller acquisitions. Much of that took place towards the end of the year. Now, there's a shift towards individual buyers and smaller transactions, where people are allocating capital differently rather than relying on 1031 exchanges. Consequently, I don’t anticipate a significant tightening of cap rates due to a surge in 1031 money. We do, however, see some very low cap rate trades, like a Chick-fil-A ground lease, but this isn't a widespread trend. Larger institutional investors are not really engaging with these kinds of products, although there is significant capital pursuing larger acquisitions. We're in a favorable position competing primarily with smaller players, allowing us to achieve better yields on high-quality assets. However, competing for high-profile ground leases like McDonald's or entering the $300 million acquisition range would be challenging for us. This middle ground represents our sweet spot.

Operator, Operator

And our next question comes from the line of Rob Stevenson with Janney.

Robert Stevenson, Analyst

John, what's the right way to think about the fourth quarter acquisitions ex the ground leases? Were the cap rates on that consistent with the 6.8% in the third quarter that you did and the 6.8% for the full year? Was there something in terms of the quality that brought that down in addition to the plus or minus 5% cap rate on the ground leases?

John Albright, CEO

Yes. Really the ground leases kind of drove in the cap rate. And as we mentioned in the intro, we expect cap rates to be higher than our fourth quarter average. So that was a little bit of a one-off, if you will, that did that. So we're being picky going forward and elevate that.

Robert Stevenson, Analyst

But there wasn't anything from an outside of the ground lease, it sort of skewed the two-thirds of the non-ground lease acquisitions away from a sort of high 6s, low 7 sort of cap rate in the fourth quarter. There's no market pressure that's pulling that down inherently.

John Albright, CEO

Correct.

Robert Stevenson, Analyst

Okay. And then what are the characteristics of the dispositions beyond Wells Fargo? What makes those assets ripe to sell in 2022 for you guys?

John Albright, CEO

Thank you for the useful information. We are receiving interest in some assets we acquired recently, with potential buyers expressing a strong desire to own them. We will assign a price and let them know that if they're interested at that price, we're willing to sell. While they may appreciate the asset or the credit associated with it, we believe everything has its price. This interest has come from recent purchases, including inquiries about Alpine Music Theater opening for summer concerts. That's a bit of the guidance I wanted to share.

Robert Stevenson, Analyst

Matt, can you provide some insight into the timing of the fourth quarter acquisitions? Should we expect them to be mid-quarter or heavily weighted towards late December? Additionally, how much of the $1.6 million of NOI was factored into the $0.42 of FFO?

Matthew Partridge, CFO

Yes. I'd say the majority of it occurred in December. It wasn't all in the last week or anything, but it was certainly back half weighted within the quarter.

Robert Stevenson, Analyst

So ex-dispositions, your run rate is actually higher than that $0.42 million at this point.

Matthew Partridge, CFO

Correct.

Operator, Operator

And our next question comes from the line of Barry Oxford with Colliers International. Barry, your phone may be on mute.

Barry Oxford, Analyst

It was on mute. Getting back to the capital structure and paying down some of the debt in '22 and utilizing the ATM, your share count does go up a fair amount. Can you guys get to that share count just via the ATM? Do you think there's enough liquidity there? Or look, at some point during the year, we'd probably do a follow-on.

Matthew Partridge, CFO

I mean I think it's to be determined. The liquidity, like I said, has improved quite a bit over the last few months and it's hard for me to project how that's going to trend going forward. But if it continues to improve, I think it's feasible that we could do that amount off the ATM, but I'm not going to sit here and tell you one way or the other, that that's the way that we've assumed it's going to happen. We're going to maintain flexibility in terms of how we execute on that.

Barry Oxford, Analyst

So you got a couple of models with a couple of different scenarios in them.

Matthew Partridge, CFO

We do.

Operator, Operator

And our next question comes from the line of Anthony Hau with Truist Securities.

Anthony Hau, Analyst

Just one quick question on ground lease. What's the lease structure on those Houston ground leases?

John Albright, CEO

The lease structure is essentially that we own the land, while the tenant is responsible for the building. We have a long-term ground lease with various escalations over time. It's a conventional arrangement, nothing particularly unique about it. However, we appreciate it because it places us in a strongly asset-protected position with potential upside. This gives us a lot of flexibility as the landowner.

Anthony Hau, Analyst

And what's the rent escalation in those ground leases again? Are they like 5% over 5 years?

Matthew Partridge, CFO

It varies. Some of them are annual escalations, some are 5% or 10% every 5 years. Some of them are flat with escalations in the options. So it depends on the tenant.

Anthony Hau, Analyst

And what's your appetite to buy more ground leases in this environment?

John Albright, CEO

We would consider purchasing ground leases if they are offered at a price slightly above what they would typically trade for, especially if a portfolio discount arises. For example, if we encounter a $50 million ground lease portfolio opportunity, we might purchase it and then sell off some retail assets to keep some ground leases that yield higher returns than we could generate otherwise. This approach would help us maintain our cap rate, although I don't anticipate a lot of such opportunities since there is significant buyer interest in ground leases. We will be sure to monitor the situation.

Anthony Hau, Analyst

And this is my last question. John, what's your philosophy on issuing equity to reduce leverage and growing the size of the portfolio and earnings growth if the stock price stays the same?

John Albright, CEO

Looking back at some instances, if we examine the highest FFO multiple net lease REIT currently, which is Netstreit, we notice that Alpine was outperforming it until they scaled significantly. After that, they experienced rapid growth. It’s clear in this market that we need to expand a bit more to gain traction regarding our cost of capital. We've made significant progress, so we don't require extensive activity in the capital markets as we refine our portfolio to be top-notch. Once we complete the sale of Wells Fargo and have that capital ready for acquisitions, and as those deals come together, our tenant list will show strength. It will become evident that this is a prime investment opportunity; Alpine's yield and FFO multiple will reflect that. We are being cautious with capital markets until we achieve favorable capital costs. However, we understand that as we grow larger, it becomes more appealing due to increased liquidity and reduced risk, which is beneficial. We are careful and attentive to these factors. Despite that, we are clearly an attractive stock at our current valuation, and I believe our shareholders are being compensated for their patience as we pursue this transformation.

Operator, Operator

And our next question comes from the line of Craig Kucera with B. Riley Securities.

Craig Kucera, Analyst

I wanted to circle back to the Wells Fargo sale. I think last quarter, you mentioned that there was some consideration that from residential redevelopers. First of all, is that potentially driving better pricing than we would have seen maybe 6 months ago, given the interest in the sector? And second, sort of can you handicap when you think that might close given the activity?

John Albright, CEO

Yes. So the residential part of it certainly played a very large role in the interest. And so I would say that the buyer interest, the quality of the buyer interest is very strong because of the residential play. And because of, as you mentioned, the sector is very strong and great market backdrop for it and a lot of players. So that certainly helped quite a bit. And with regards to timing, that's kind of a second quarter expectation on a close.

Craig Kucera, Analyst

And I feel like last quarter, as far as considerations regarding overall office asset sales, you were thinking kind of maybe in the mid-7s. Is that maybe tightening given the increased interest from some of these residential developers?

John Albright, CEO

No, I wouldn't say that because you have to remember that Wells Fargo has almost 5 years left on their lease and they have renewal options. So a developer has to wait to reach that development opportunity, which factors into their overall yield expectations. Therefore, I wouldn't say the pricing became tight due to having the lease in place; a substantial player is needed to manage the yield and so forth.

Craig Kucera, Analyst

Shifting gears. I know that you added Sportsman's Warehouse here in the fourth quarter. I'm curious as to whether or not those purchases occurred before the canceled merger with Bass Pro and did that impact your underwriting at all?

John Albright, CEO

It did happen before they canceled, but we became very comfortable with the acquisition. We're more concerned, to be honest, that the merger may have led to the closure of some of the Sportsman's stores due to overlap. Now, obviously, that concern is gone. However, we felt at ease after talking to the Sportsman team, as these stores are strong operations and perform well. Additionally, the company received a $50 million termination fee, and with no debt, they are in a solid position. Therefore, I expect, based on their investor presentation, that they will continue to grow as a standalone entity. So to answer your question, we completed the purchase before the merger was canceled, but we were more concerned about the merger at that time than we are now.

Craig Kucera, Analyst

Just thinking about your lease expirations, it looks like a few of the purchases you made in the fourth quarter were shorter-term leases. You now have some expiring in '22, a little bit more in '23. Do you recall whether or not those leases were priced at market? Or are there any opportunities maybe for increases to market?

John Albright, CEO

Most, if not all. I'll let Matt answer. But I don't think I've seen a renewal where it's flat. So the expectation is they're going to have escalations.

Matthew Partridge, CFO

Yes. Most of them, Craig, over the next few years have escalations at the renewal options. And just given the rise in inflation, I think it's going to be a lot harder for tenants to relocate in a specific market, because the cost of occupancy is going up and to make that change, they're going to get repriced to where rents are in the market at that time. And so we feel pretty good about the stickiness of the tenants.

Craig Kucera, Analyst

And one more for me, that kind of dovetails with my final question. Can you give us a sense after this round of acquisitions here in the fourth quarter of sort of what the breakout is from a rent escalation perspective? What percentage is flat versus fixed versus maybe any CPI sprinkled in there as well?

Matthew Partridge, CFO

Yes. Very few have CPI. It's not as relevant in the more institutional net lease space because most of our tenants, almost three-quarters, are publicly traded. In terms of what's flat, what's annual, and what's other, about half the leases are flat, and the other half have contractual rent increases. One thing to highlight is that with our weighted average lease term being slightly lower than our peers, we are positioned to benefit from rent increases that occur in the options, which usually range from 5% to 10%. So even though we have some flat leases in the portfolio, when those flat leases come up for renewal at the end of the primary lease term, we should see additional rent growth going forward due to those option increases.

Operator, Operator

And our next question comes from the line of Jason Stewart with JonesTrading.

Jason Stewart, Analyst

I wanted to sort of loop back to the concept of capital outflowing from the broader economy and think about the way you're looking at disposition and acquisition cadence throughout the year and how that sort of comes back to that, I think, John, the first comment you made about activity there and flow of funds.

John Albright, CEO

Yes, the pipeline we have is very strong for this quarter, and we are being very selective. We believe there will be more opportunities in the future, especially with larger assets that people are looking to sell. However, we are not rushing to make acquisitions at the start of the year because we think there might be even better opportunities ahead. We are being patient and only pursuing acquisitions when we see favorable conditions, without trying to time the market.

Jason Stewart, Analyst

And then aside from the Wells Fargo asset on the disposition side, does that factor into your cadence of thought process for dispositions?

John Albright, CEO

Yes. Outside of Wells Fargo, we are not looking to sell some of these assets, but if someone is very interested and aggressive on pricing, we won't try to time that. We will sell it as that interest develops. We are not selectively picking our spots; if someone wants to meet our price, we are open to selling assets.

Operator, Operator

And our next question comes from the line of Wes Golladay with Baird.

Wesley Golladay, Analyst

I want to revisit the built-out footprint in top MSAs. Can you provide insight on the renewal potential for these top MSA assets compared to traditional net lease? Generally, we observe renewals at flat rates. For the top MSAs, are we looking at something more similar to the mid-to-high single digits that shopping center companies see on renewals?

Matthew Partridge, CFO

Sorry, Wes, you kind of broke up there. What specifically would you like us to discuss regarding the top MSA?

Wesley Golladay, Analyst

Yes. For net leases in the top metropolitan statistical areas, net lease companies usually experience flat renewals after the annual escalations. However, when examining the short portfolio with a focus on the top MSAs, I'm curious whether renewals there might resemble those of shopping center companies, potentially resulting in mid-single-digit to high-single-digit renewals.

Matthew Partridge, CFO

Yes. I think going back to my comment really to Craig's question. Most of our leases, a vast majority of them have 5% to 10% increases in the options. And so as we're continuing to see positive demographic trends in those top MSAs, right, I mean...

John Albright, CEO

One thing we're observing is that tenants are interested in negotiating early extensions with us because they want to remain in their spaces without facing rent increases. They're approaching us and asking if we would agree to keep their rent flat if they commit to a longer term. We receive quite a few requests like this. While there is a potential for a 5% to 10% increase if a lease is renewed or ends, we sometimes prefer to be more cautious and accept an early extension. Does that clarify things?

Operator, Operator

And I'm showing no further questions at this time, and I would like to turn the conference back over to John Albright for any further remarks.

John Albright, CEO

Thank you very much for attending the call and look forward to talking with you going forward in this new year. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.