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Thank you for standing by. This is the conference operator. Welcome to the Spirit Realty Capital's Second Quarter 2022 Earnings Conference Call. [Operator Instructions].
I would now like to turn the conference over to Pierre Revol, Senior Vice President, Corporate Finance and Investor Relations. Please go ahead.
Thank you, operator, and thank you, everyone, for joining us for Spirit's Second Quarter 2022 Earnings Call. Presenting on today's call will be President and Chief Executive Officer, Jackson Hsieh; and Chief Financial Officer, Michael Hughes. Ken Heimlich, Chief Investment Officer, will be available for Q&A.
Before we get started, I would like to remind everyone that this presentation contains forward-looking statements. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those currently anticipated due to a number of factors. I'd refer you to the safe harbor statement in our most recent filings with the SEC for a detailed discussion of the risk factors relating to these forward-looking statements.
This presentation also contains certain non-GAAP measures. Reconciliation of non-GAAP financial measures to most directly comparable GAAP measures are included in the exhibits furnished to the SEC under Form 8-K, which includes our earnings release, supplemental information and investor presentation. These materials are also available on the Investor Relations page of our website.
For our prepared remarks, I'm now pleased to introduce Mr. Jackson Hsieh. Jackson?
Thanks, Pierre, and good morning, everyone. We had another productive quarter with the team performing well across multiple fronts. In the aggregate between acquisitions and dispositions, we completed over 50 transactions, and our operational metrics continued to demonstrate strong performance.
Starting with capital deployment. We invested $417 million, including 38 acquisition transactions, of which 31 were with existing Spirit relationships such as Life Time, Zips and off-lease only to name a few.
Since our last earnings call in May, we have seen cap rates start to move higher, especially for attractive distribution and light manufacturing transactions that meet our underwriting standards, and these higher acquisition yields will be reflected in our third and fourth quarter results.
Of the $4.8 billion of assets we have added to the portfolio since I joined as CEO, 1/3 have been industrial made up of 52% distribution facilities, 39% light manufacturing, 6% industrial outdoor services and 3% flex. To give you better insight into our industrial exposure, we have included additional detail on our industrial mix on Page 9 of our investor presentation.
As I mentioned on our Q1 earnings call, asset recycling and dispositions will be a key part of our strategy going forward, providing an alternative source of accretive equity capital and critical market intelligence while allowing for portfolio shaping, strengthening relationships within the brokerage community and demonstrating the quality of our portfolio.
During the quarter, we sold 10 occupied properties for gross proceeds of $93 million at an average cap rate of 4.38%. Approximately 43% of the gross proceeds came from assets that our team acquired in 2020 or later. These recent investments were acquired at an average 6.9% cap rate and were all non-investment-grade tenants. We were able to sell these investments at an average 4.7% cap rate, cashing in on their value appreciation in just a short -- few short years after enjoying the rent we've received.
The other assets were sold from the retained portfolio. These properties included an office building leased to a financial services tenant, a home improvement retailer with no escalations for the remainder of its 11-year term and several other smaller transactions.
Two of these smaller transactions were products of our proactive investment management where we successfully negotiated ground leases with Chick-fil-A and Aldis after our former tenant, Ryan's Buffet vacated in 2016. After receiving ground lease payments for several years, we sold those properties for an average 3.8% cap rate.
Finally, our portfolio continues to perform exceptionally well. We only have 4 vacant properties at quarter end, and our unreimbursed property costs were only 1.3%. Our lost rent, which represents tenants who are not paying rent, stands at a historic low of 0.03%, and our expected lease escalations over the next 12 months are 2%.
We believe our rigorous underwriting focused on industry fundamentals, credit and real estate strength, use of our heat map and utilization of our technology tools is paying off. We have built a solid foundational portfolio that continues to perform. And as we look forward, we see market pricing beginning to rationalize and more opportunities for Spirit to deploy capital at meaningful spreads.
With that, I'll turn the call over to Mike.
Thanks, Jackson. For the quarter, our ABR increased $24 million to $647 million, with 90% of the increase attributable to net acquisitions and the remainder driven by contractual rent escalators. 6 of the 7 theaters released during COVID are now fully open. The seventh theater is still undergoing extensive improvements and is slated to hold the largest screen in Illinois with an anticipated opening next spring.
With the strong summer blockbuster season, the ramp-up of these theaters is going very well. During the second quarter, we received $915,000 in rent from 7 theaters, representing 65% of the scheduled rent at stabilization. Also, as Jackson mentioned, all of our portfolio metrics, including occupancy, unreimbursed property costs and lost rent, delivered pristine results, resulting in our adjusted cash NOI increasing by $23 million to $647 million.
Turning to expenses. Our cash G&A margin, excluding prior year COVID costs improved, falling 60 basis points to 5.2% compared to the second quarter of 2021, driven by the scalability of our platform as our revenues grew 6.3% compared to the same period.
For the second half of the year, we expect cash G&A to be between $19 million and $21 million, which compares to $19 million in the back half of 2021. Our cash interest expense increased $1.3 million since last quarter, driven by higher revolver balance and a 44 basis point increase in our revolver borrowing rate.
Subsequent to quarter end, we received commitments for an $800 million term loan facility structured as a $300 million 3-year term loan and a $500 million 5-year term loan. In anticipation of closing the new facility, we entered into interest rate swap agreements that would effectively fix the 3-year term loan coupon at 3.59% and the 5-year coupon at 3.45%. We anticipate the new term loan facility to close in a couple of weeks.
During the quarter, we issued 2 million shares of common stock to sell certain forward contracts, generating net proceeds of $90 million. As of quarter end, we have unsettled forward contracts for 1.1 million shares and maintain leverage of 5.2x and a fixed charge coverage ratio of 5.8x.
Through our expanded credit facility, outstanding forward equity and cash on hand, we had $594 million in total corporate liquidity as of quarter end, which will increase upon closing of the anticipated term loan facility.
Turning to guidance. We are maintaining our AFFO per share range of $3.52 to $3.58, our acquisition target of approximately $1.5 billion and our disposition range of $200 million to $300 million. From a capital recycling perspective, we believe dispositions will continue to be a good source of funds as we see robust demand for many of our properties.
To echo Jackson's comments, the ability to sell over $90 million of real estate at a 4.38% cap rate in a rising interest rate environment speaks to the quality of our portfolio.
With that, I will turn the call over to the operator to open it up for Q&A. Operator?
[Operator Instructions]. The first question is from Haendel St. Juste with Mizuho.
Jackson, maybe you could quantify for some of the higher cap rates you alluded to in your prepared remarks, maybe across some of the major asset types that you're looking at here.
Okay. Thanks, Haendel. Just to clarify, these are deals that were in our pipeline and what we're seeing today, right?
Yes. Yes. I think you had mentioned that you were expecting higher cap rates in the back half of the year. And maybe as part of that, can you share some thoughts on the pipeline and what some of the pricing there looks like?
Okay. Great. Look, if you remember on our last quarterly call, I referenced we were seeing cap rate increases. I think I used the range of 25 to 50 basis points, generally. We were seeing that on that call last quarter. The difference today is there's just more volume of opportunity.
I can tell you in the last 3 weeks in our acquisition pipeline meetings, we're seeing really interesting opportunities that are really at meaningful spreads where we think versus, say, earlier in the year or last year. And what that translates into is I'd say generally like in the retail assets that we're looking at evaluating, cap rates have increased 25 to 50 basis points if you compare it to say, late last year.
In the industrial and light manufacturing opportunities that we're evaluating now, I would say the range of cap rate increase is 50 to 100 basis points as compared to what we were seeing last year. And like I said, in the last 3 weeks, we've seen a high volume of interesting opportunities, particularly in the industrial subset. So I would expect that if that trend continues, you'll start to see more significant percentage of industrial assets acquired in the fourth quarter.
You didn't ask, but I'm going to tell you like one of the reasons why I think this is happening is this concept of is gone. People that need to close transactions once certainty of close versus price, I think it's really critical. And one of the reasons why we are so consistent on this disposition program going forward is it's super informative, gives us a lot of visibility real-time as to how bidders are responding in the marketplace, and that gives us better information on how to lean in and lean out.
So if you look at our disposition results from this past quarter, we had 2 assets that were acquired by what I'll call dedicated industrial funds, small funds. We had 3 buyers that were 1031 buyers that bought some of the industrial and some of the retail. And then we had 3 buyers that were just kind of all cash, either high net worth or just people that didn't really need financing to close on those purchases.
In those industrial opportunities that we were selling on a couple of those cases on the final bids, we had like 5 bidders on one case, close to that on another situation. So those are kind of very interesting pieces of information for us. We were not successful in selling some of the other things that we're looking at from a pricing standpoint that required more CMBS debt.
So all in all, like I said, that sort of gives us some visibility as to how bidders are handling things. I'd say the other thing that we're seeing, Haendel, is it gives me a lot of encouragement as we're seeing deals come back around that were sort of failed deals that we looked at earlier in the year went away to a higher bidder at a higher price. And things have come back around saying, "Oh, we're going to look to 3 to 4, what we believe, credible buyers and see if we can get a deal done. And I'd say, some of those opportunities are probably 50 basis points wider.
The other thing that we're seeing is, in some cases, especially where there's a broker involved in the industrial area, we're seeing like as opposed to best and final bids, they're taking rolling offers. So that kind of tells you -- should inform you that maybe the bidding is not as robust.
I'd say that overall, what gives me the most encouragement today is that a lot of the larger private equity firms that were dedicated in this space, particularly industrial side, last year and they were driving down cap rates based on access to cheap low rate, floating rate CMBS debt, like those guys are basically taking the summer off at this point.
So the people that are showing up at these situations we're showing up, I'd characterize as probably 5 to 7 people that can kind of write a check don't necessarily need mortgage debt because obviously, if you're borrowing mortgage debt today, you're doing a floater, you're looking at 5% to 6% probably on short-term floating rate debt instrument. And if they lock in CMBS fixed rate loan, it's definitely north of 5%.
So I think that kind of gives us a bit of advantage relative to how we borrow and fund ourselves. And I also believe fundamentally that long-term rates are going to come down. So we kind of put that all together, it looks pretty interesting for us right now. That's why we made that point.
So another one perhaps on transactions, but from a different angle. You had a bit of a slowdown in activity in the second quarter versus the first quarter. Your guidance seeing some deceleration in the back half. But you've also alluded a few times to really interesting opportunities. So I guess I'm curious how you're feeling about your liquidity and your cost of capital today and your ability to pursue these opportunities.
Sure. I mean kind of mentioned like one of the things that we look at really carefully, look is when we do a sale leaseback to me, the competition is, obviously, other people that can provide a sale leaseback, but it's also the high-yield market and the leveraged loan market because we particularly focus on BB and B credits.
If you look at the high-yield index today, it's widened overall by about 375 basis points. Leveraged loan default levels are at record lows, if you look at that. If you look at year-to-date high-yield issuance, it's standing at around $70 billion. If you compare that to last year, year-to-date, those volumes are $300 billion. Last year, in total, there was $461 billion of high-yield issuance. So this year is going to be dramatically low from an overall comparison basis.
But as you know, in this high yield market, the way it works is when things reopen, the most liquid, big issuers come first, then there's kind of price discovery. And eventually, what trickles down is small B, BB credits get access to the market. And basically, they don't get access today. That's just the way it's working.
If you look at single B spreads, if you look at that B index and the CCC index, high yield mix, that's very directionally informative about the kinds of yields that we can get, especially in the industrial area, right, or the things that we're targeting. Today, the single B spread index is 573 basis points, the CCC index is 1,122 basis points. That seems high, but that's in line with the 20-year average for issuance levels across those credit tranches.
The all-time tight spreads were back in late 2021, and B spreads were 354, CCCs were 585. So if you look at sort of what we've been buying, it's no mystery that we were really heavy in industrial as a percentage in the first 2 quarters of 2021, starting to lighten up in '21 back half. I suspect you'll start to see us get much heavier as a percentage of industrial versus retail in the fourth quarter. And if this yield differential continues, spread differential continue to stay wide, it will stay -- it will be a higher percentage of industrial, that's what I'll say, I guess, I'd say. As it relates to, I guess, the cost of capital, Mike, maybe you can tackle that.
Yes, look, I think we're not -- we don't focus about capital and do we think that for the right opportunities, we think there's capital available for them. So I think we just want to stay right now disciplined on what we're seeing and what Jack is talking about we're seeing in real time. And if more opportunities present themselves and we'll lean into itself.
The next question is from Harsh Hemnani with Green Street.
I noticed about 30% of this quarter's dispositions -- this quarter's occupied dispositions came from office assets and that's notable, just given the low cap rate that these dispositions took place at. I want to check how the market -- how -- what does the bio pool look like for these office assets? And how were you able to get a low cap rate despite a property type that seems like today is not in favor?
Okay. Thanks, Harsh. I kind of made that statement earlier. This concept of FOMO has gone. The reason I say that is like if you were trying to sell anything in the third and fourth quarter of last year, pretty much anything or finance anything, you probably pretty much get it done at some kind of basis.
If you look at our success in dispose, I kind of wanted to mention like it was fun. It was 1031. It was like rich people. The office building that we sold, it was leased to a financial institution, had several years left on the lease. The buyer was a billioner. He had some -- he's local. He knew the market well. I think he has bigger designs for that asset, maybe when that lease renews.
So I wouldn't say that all assets would trade like that, but one of the things that we do when we look at our disposition strategy as you really think through, especially because there's no more pharma, you got to figure out who your targets and trying to get the best execution. And when you see us selling assets going forward, we're going to be extremely disciplined and very -- we'll have a selling strategy as to who will buy and why they'll buy.
When you have a super competitive market like we saw late last year, you just kind of throw stuff out there and send the $100 out and see what kind of comes in and all kinds of different people show up, that's not the kind of environment we're in right now. So we have -- that particular asset was a very targeted selling process. I'm not suggesting we'll be able to replicate that cap rate with other office buildings. But I would say at the end of the day, the underlying real estate quality of that particular location was just a phenomenal location in spite of the lease that was in place. That's what helped us get that at
And then one more...
I mean, Harsh, the other thing I would say is like another example of a similar sale that we did was when we sold that sunny delight deal in New Jersey last year. Remember, we call that, that was a deal that we had bought when I first got here, it's like a 7.7 cap rate. It's around $27 million that we paid for it. We end up selling it for a 3.9 cap rate at a price of $59 million. Sunny delight has 7 -- roughly 7 years of remaining lease term, but the buyer there sort of had different ideas about possibly redeveloping it, maybe expanding it, but you had a tenant that could still exercise a lease option.
So we look at -- we look for opportunities within our portfolio where maybe we're not going to redevelop it or do something like that, but we can still extract a really high price for it and return. So that was kind of a long way of saying. Not a lot of assets will trade like that. But obviously, we have things in our portfolio that are pretty unique.
I guess -- so at these low yields, this is, of course, a very attractive source of capital for you. And given the guidance that you've put out there for dispositions, it seems like there's about $150 million more, maybe a little above that coming through in the back half of the year? Do you think given that cap rates are increasing, you can still get these kinds of yields and dispositions? What are you expecting in the back half?
I would say like -- yes. I mean, look, I think it's going to really -- it's highly dependent on what we obviously decided to sell. It's not necessarily just trying to get the lowest possible cap rate. I mean if you look in this quarter, put out at little note. They said our net acquisition yield this quarter was a based on what we bought and what we sold. It's an interesting way to think about it.
When we look out as to what we think we're going to be putting out in the market, it's probably going to be a little bit higher. There's going to be some risk mitigation assets that go in. It also depends on the mix of things that we're selling. I mean, look, I think you've heard us say, one of the things that we tried to create is a very liquid portfolio. And our portfolio is extremely liquid like on the Mac paper deal that we sold 2 Mac paper properties, right?
When we acquired that portfolio, which was 14 properties, -- remember that we acquired that in late March 2020. So we already saw COVID sort of starting to creep in and spreads are widening, still closed, didn't renegotiate anything with that sponsor because they were buying the business. It was part of an acquisition financially in the company.
Selling those 2 properties at $27.5 million at that 4.5 cap rate, increases the effective cap rate on the remaining 12 properties in that portfolio to 6.92%. So it's a 67 basis point increase on our investment yield on our original investment. So the way I would sort of describe what's happening is we're not just looking at accretive recycling. Obviously, yes, we acquired all these properties on a net yield basis at a 7 cap. But remember what this is doing to things that we buy, it's boosting those going in yields as well. So kind of get for out of it.
The next question is from Wes Golladay with Baird.
Jackson, I think you mentioned that certainty of close is getting valued a lot more these days. Are you starting to see a lot of re-trading? And then when you look into your pipeline, you mentioned the new volume was high. Are you going to see a lot of new relationships coming in the pipeline in the next few quarters?
I would say it's going to be a combination of existing and new relationships. I'll give you a good example, like on Golf. We had a meeting with SubCorp recently, the senior management team. And look, we got a lot of questions about that golf acquisition that we did. What I can tell you about that portfolio, the portfolio that we acquired, if you compare fiscal year 2019 results to second quarter 2022 TTM, so it's kind of like-over-like periods, the revenue in that portfolio is up almost 20%. EBITDAR is up 7%, year-end coverage is up 7% and rent to sales is down 200 basis points. So pretty good, right?
After meeting with that management team, there's way more upside still in this portfolio as the upcharge different management -- membership categories within that private club portfolio. And look, I would tell you right now, we're going to do more golf acquisitions with ClubCorp going forward. Expect to see that in the pipeline, and it's going to have a range of acquisition as well as some redevelopment opportunity with them. We've been talking to other operators as well. But look, we're going to leverage the relationships we have in the lines of trade that we think make the most sense today where we can get the best risk-adjusted return.
So yes, I think it's clearly going to be a focus on repeat business, which was a high percentage this past quarter. And we're being very selective in what we're buying right now. And like I said, the most encouraging thing I've seen is the things that make the most sense to buy are starting to turn up now. Maybe there's some price capitulation. People just need to close. They need to go forward -- move forward.
And then you guys in the past, you have a lot of examples of where you've in your portfolio that is valued a lot higher in the private market. And I guess, where the equity is today is it just recovered, but to say if we're not as favorable, would you just dial up more of these opportunistic dispositions? And is there any way to quantify how big this bucket could be for you assets where if you find the right buyer, which you have done many times in the past, you can just get an abnormally low cap rate?
Yes, I mean there's -- we have -- if you looked at -- like I'll use an example, 3 of what I would consider some of the best transactions -- not best, but just really interesting ones that we could monetize Mac paper would be there, right? We've already proved that. Shiloh, which we acquired in 2021. One of the sales this quarter was the Worthington Steel building, that was one of the acquisitions within the Shiloh opportunity. We bought that whole portfolio at an 8.2 cap rate, and we ended up selling Worthington at a 5 cap. I mean, it just gives you some idea of the latitude.
Service King, I mean, I got a bunch of questions about that last quarter. It's one of the best transactions we've done. I tell you right now. That was a 21-story portfolio, very attractive going-in yield, very, very good lease. Since we bought back sale leaseback, we did that directly with the company. Clearly, capital has invested $200 million and removed $500 million of debt and merge it with another company they own called Crash Champions, credit is totally different, completely upgraded. Now it's 550 units.
And like Mac Papers and Shiloh, we've already gotten reverse inquiry for units in a high for cap. We're not even selling yet, just reverse So we're just going to kind of keep doing that. We have got an ability to identify the stuff. And whether we sell these things one-off or do a joint venture or whatever or lop off bigger pieces, we're just going to keep making good real estate investments. That's what we do, and we're going to find the best source of capital to attack it.
And for that service, we ask you bought that window was a little bit more, I guess, unclear story on the capital structure. Is there any way you can disclose that cap rate that you bought to that? Or is it something that there may be sensitive about?
Yes, there's some confidentiality things around it. But what I would tell you about that acquisition like Shiloh. It had a lot of complexity, really good real estate, really good unit coverage, really good lease. And when we spent time with the company, we believe that there was a path for them to get on the other end of success. And that what gave us a lot of conviction to move aggressively on it. So look, we look at a lot of things like that and don't do them. But when we find them, we lean into it pretty hard. was in the middle, yes.
Sorry about that. Jackson, go ahead.
Yes. Remember, Shiloh, if you recall, was a company that was also in bankruptcy coming out in the restructuring, and we did the sale leaseback in combination with that kind of restructuring process. And look, just because the company's filing doesn't necessarily mean your real estate assets are going down at value. If you think about bankruptcy, senior debt converts to equity. If you've got really good real estate and the company restructures, your properties just got a whole lot better and your business got better.
So remember how we underwrite. We look for critically long-term robust industries. We look for really good real estate, and we look for management and operators that we believe are sophisticated and are large that can kind of manage through complexity. And you just keep repeating that over and over again, and that's what this $4.8 billion of properties and bought since that year. We continue to apply the same underwriting credit strategy to all the stuff we buy.
The next question is from Mitch Germain with JMP Securities.
Jackson, you seem to be pretty positive about...
By the way, you -- Mitchell, can you speak a little louder? We can't really hear you. Maybe you off. You'll come back in the queue or something, yes.
The next question is from Rob Stevenson with Jamie.
Jackson, how are you feeling about gyms these days? Are you positive there? Are you just positive on lifetime given the expansion there in the quarter?
Look, we -- I'll say it's a very specific answer. We love lifetime given what they do. I mean they are the category killer in their space, high-end country club experience. Now look, they're a public company. I don't have to say any secrets. They have not gotten back to pre-COVID levels yet. But for instance, if you look at our gym that we just acquired up in Frisco, we bought 2 assets this quarter, 1 in Frisco, 1 in Plano.
When Frisco opened, they already had a waiting list. Just think about that. Those are 2 of the probably best suburban locations in the country, definitely in the top probably 10% quartile. Those gyms are awesome, and they will do well. I believe that they will do well, and it will continue to improve in our membership.
If you go to the other end, Fitness, which we love. That's a high volume, low price operate in the gym space. They're already exceeding pre-COVID levels. So they've recovered from the unit coverage and profitability and revenue. They've actually exceeded pre-COVID levels. So I think that -- I guess, what I'd say is this is just my own impression, but like lifetimes going in price is a little higher obviously than It's more of a financial commitment, but the offering and product and services and opportunity that they provide membership is just a much more phenomenal experience.
So look, we like the subscription business like the car wash business, the golf business, health club business. I just think for the higher-end gym operators, people have kind of started to do different things, but I do believe they'll come back to Life Time -- Life Time offers, tennis, Pickleball, water, great pools, great programming. It's just a great facility. So -- but we're very comfortable. Let's see, but I'd say we're very selective about the operator and the price points that we get into, not all gyms. We're very focused on what I'll call that Life Time space and then the high volume, low price provider like Avasa that we think is best in class.
And then are you guys seeing any price discovery on decent performing movie theaters yet. It? Seems like vacant and adaptive reuse theaters are the ones that are trading out there. So just curious if you're seeing anything to put a price point on lease theaters at this point.
We heard of a couple of them. But yes, we're obviously not selling look movie theaters right now. But Ken, why don't you...
Yes, we -- I'd suggest that the answer is no, there's not been enough transactions to say where pricing is shaking out. It's interesting. We've seen some large well-known concept theaters on the market for nearly double-digit cap rate but also seeing some regional players and pretty good real estate locations on the market in the 5 and 6 cap, not that they're going to get that. But I'd say the answer, there's just not enough transaction volume to figure out where pricing is for theaters right now.
And then last one for me. Jackson, how did you and the Board think about the potential to buy back stock when you were trading in the mid-30s in mid-June? Or did you?
We didn't really look at it. I mean we -- if you remember, since I've been here, we bought back a lot of stock at one point, I can't remember the percentage of the float, but north of $300 million while we're going through that whole SMT spinoff.
I'm glad we didn't buy back stock because I guess -- look, I'd put it this way. If we were in a prolonged period and we didn't see opportunities to deploy capital at what I call really attractive levels in attractive real estate investments then, yes, buy back stock makes total sense. But when I can buy a Service King or a Shiloh or a Mac Paper, and I'm not competing with 20 people and people want certainty of close, and I can get -- and I got high -- I have the B index and CCC index trading at the 20-year average -- spread average and the underlying base rates are going up. I've got to buy. So I'm going to buy. I'm going to make good investments because buying back stock in just a moment in time.
If I -- Mac Papers is going to be the gift that keeps giving if we want to. Same with Shiloh and service case. The assets are going to continue to improve. We're going to continue to get rent bumps. We're going to continue to get cash flow. So yes, but we do look at buybacks, but we never really seriously considered it even at the dip because we didn't want to lose opportunity to kind of deploy. And we're seeing it not I'm in the last 3 weeks, the happiest I've been.
The next question is from Michael Goldsmith with UBS.
Your cash capitalization rate for acquisitions in the second quarter was slightly lower than the first quarter. And previously, you talked about the cap rates moving higher. So when should we think about this being reflected in the numbers? And then given cap rates moving higher, does this make you less likely to maybe move up the risk curve for higher yields?
Good question, Michael. I mean, the first two quarters were largely done at a very early part in what I call the life cycle of a quarter. I think in the third quarter, you'll start to see an increase in the cap rate, but not the same kind of volume as you saw in the first two quarters because as I said, the volume of opportunities just wasn't there. People were still hoping for, hey, I want the -- I want the sixth cap. I don't want the 7 cap. I'm offering a 7 or 6 quarter.
So I think what you've seen today is real price capitulation, particularly in that industrial light manufacturing area in retail now. So I think what you're going to see from us is higher yields, lower volume in the third quarter, and I suggest that you'll see higher yields and much more industrial and hopefully much more volume in the fourth quarter and going forward.
And then to follow up on that, you talked about industrial cap rates up 50 to 100 basis points. How does that compare for distribution versus manufacturing?
I mean distribution is obviously tighter. It's really -- that's a hard question because it really depends on the nature of the distribution in the market and the particular manufacturing subsector that it's in. I think that has a lot to do. I don't know, Ken, if you want to -- there is a difference, but...
Yes, there is a difference, Jackson mentioned. Distribution tends to be a tighter cap rate. But when we say light manufacturing, that just means the majority of the space is dedicated to light manufacturing. I would say typically, those buildings do have distribution capabilities and whatnot. But relatively speaking, those cap rate increases that Jackson referred to would, I'd suggest, apply equally to both of those asset classes.
And then as a follow-up, cap rates starting to move higher, so maybe the spreads kind of compressing a bit. So you've been focused on dispositions as funding. But I guess what would you need to see from here where you can kind of switch to move away from dispositions to other sources for funding?
Well, I mean, I think, first, no matter what our stock price is, our cost of capital, we're always going to be disposing. Maybe it's a small amount, but I think that we get strategic information out of that. It's real time. Obviously, what we're trying to sell something, we see who's bidding, how they're bidding, the number of bidders, that's super informative for someone that's a company that's buying so much to be able to figure out when to lean in.
I would say that we'll look at the equity markets if things continue to go. Like I said, the last 3 weeks have been great. It's been kind of -- to be honest, it's been pretty since the invasion and spreads widened. There hasn't been product, people are not really price capitulating on cap rate, but I believe it's happening now. And I just don't know how long it's going to continue.
If you remember after COVID, in the middle of 2020, like we got all in, the third quarter and the fourth quarter 2020, we picked up off lease. That was a failed transaction with another buyer. We got a great deal with those guys. We want to -- we're doing more follow-on business with them. But then 2021, too many people came in. That market's got crazy and it crushed the business. We got it really hard to do stuff. Today, portfolios, in my opinion, are trading at a discount. It's harder to finance them. So look, to be finally interesting large portfolio, we do it totally at this point. is matter of criteria, and we thought we were getting paid properly.
The next question is from Joshua Dennerlein with Bank of America.
Just kind of curious on the term loan you did post quarter. Just kind of thinking through just the potential accretion that might offer you guys and kind of how you think about debt needs going forward.
Yes. I mean, Josh, it was a good execution for us. I mean, it's not closed yet. It's going to close in a couple of weeks. But obviously, the rates are swapped. So that's locked in. We feel it's a better cost of capital than where the bond market was today. I think we'll get back to doing bonds in the future. I think when we look at the bond market today, it was very disrupted and we don't think it made sense to go into disruptive market.
So I think it's good with we have a balance sheet our size and a credit rating like ours that you can pivot to different pockets of capital, whether it be debt or other types of capital. And so I think you'll continue to see us take advantage of the right types of capital to fund our business, but that was definitely good execution for us at this particular time.
I'd like to pitch for -- Josh, I'd make a pitch to all of our companies, companies that compete in this space, the other public net lease REITs, you've seen a number of us access the term loan market. If you had an acquisition strategy that was reliant on CMBS or secured mortgages, you'd be basically taken a summer off, honestly. If you were a buyer that was really reliant on high-yield debt or high-yield B term loans, probably taken a year There's just no LBOs going on right now.
For us, being able to pivot into investment-grade term loans, I mean I'm not suggesting that's going to be there forever, but it's there right now. And that's why people are taking it. There's a lot of volatility in the swap markets. You can sort of hedge rates at this moment in time, but it's not great 3.5%, which it was better. Maybe I wish we would have hedged earlier in the year, but still pretty good. It works for our model. And we'll just keep touching on term loans if that's what it takes. Because I do believe long-term rates are coming down as a fundamental point of view right now today based on what I believe is happening. I could be wrong, but believe that then the strategy makes sense.
Are there any kind of limits on how much term loans you can have or -- just not as familiar with the market.
Yes. I mean there's not really a limit. There's plenty of being capacity out there, and we have a lot of banking relationships. I think that it's just -- it is a piece of capital you want to constantly do. I mean, look, what we can do as long as we need to. So I think it is a place you can go back to. All of our peers have done it. There are some companies out there that use really exclusively term loans. So -- and there's a Term Loan A market that we access with a small bankrupt Term Loan B market, which is a whole another universe of investors. So there are different markets out there, and we'll evaluate those in the future when we have future debt needs.
But I think that's the good thing about, as Jackson was saying, being a large investment-grade company, we have different pockets of capital that we can go to on the debt side, for example, a lot of competitors out there don't have. And I would argue right now that us and a lot of the other big public companies, we have the best cost of capital around right now because we can access these different pools of capital.
And also access at large scale. But I would tell you like you know where our equity multiple is and it's not great. Our cost of capital is -- look, we just have a longer put vis-a-vis our peers as it relates to cost of capital. So we're just going to try to be as nimble as we can. If we got to sell more assets at low cap rates to execute, we're going to do that. We've got to do more term loans. We're going to do that. Bond market puts up, we'll do that. But right now, if I keep seeing what we saw in the last 3 weeks and it continues, we'll figure it out. We have the best solution.
Maybe just one quick follow-up on that. Like you mentioned equity, just kind of what do you have to kind of see to start tapping the equity markets again?
It's really just this continued what I saw in the last 3 weeks, high volume of quality things that we would like to buy that criteria. We have not seen that, I'd say, in the past several months. I don't know if that's going to continue, like this is 3 weeks. I don't -- it's one of the reasons why we didn't increase guidance because like, hey, if this kind of -- this was just a 3-week blip, and we're kind of good. We're okay with our guidance. If this trend continues, guess what, we'll do more than our guidance on the acquisition front, I'll tell you that.
But I think it's hard for us to shift and make change because I told you right now, like we'd like to do more industrial because we're getting paid for it. Based on the credits and the nature of the real estate we're seeing right now in the industries. If it continues, like I said, into the fall, we expect to do a lot more. But I just can't tell you right now if that's going to -- if this 3-week trend is going to continue.
Yes. I mean I would tell you, I gave you those high-yield indexes like if things stay at that 20-year average from a spread basis, I would tell you we'll do more. You're going to split out to say that. If you see that index compress back to lower levels like we saw in 2021, probably more challenging for us to do the volume that I suspect we'd be able to do.
The next question is from Ronald Kamdem with Morgan Stanley.
First one is on Kohl's. Obviously, they've been in the news about potentially looking to do sale leaseback and so forth. Just maybe can you comment just your relationship there and more appetite to do more there.
Yes. We bought some calls this past quarter. We like Kohl's for one. We bid on some other ones to wasn't success. But yes, we like Kohl's. Look, there -- one of the things that we like about them is that they're not in mall locations. They're freestanding generally. There are some but majority are freestanding or in shopping centers. What they're doing with SOFR seems to be getting traction. I'd say of all the department stores, in my opinion, they're doing really good work right now. And so yes, I think if they were going to go sell some properties, I'm sure we would show up and bid on. Just on the price and rent structure and price per all that kind of stuff the locations, obviously, but we like them.
And then just the second question is just piggybacking on sort of the questions on sort of the debt. Obviously, the $800 million that is presumably supposed to fund and so forth. Just in terms of leverage levels, just how high would you be willing to go before sort of considering coming back to the equity markets and so forth? Like how do you think about that trade-off?
We want to stay within our leverage be at 5, 5.5x, ended the quarter of 5.2. I think if you look out to the rest of the year with our current guidance in place, we could not fund any additional equity other that we have on the and still stable at that 5.5x range. But that's -- as Jackson earlier mentioned, if we see opportunities, and we're happy to lean into an issue equity if need itself. We'll figure that out.
Yes. I mean, Ronald, I would say like if you look at just kind of look at our -- I think we have that one schedule in the investor presentation that talks about quarterly capital deployment performance. And if you look back in Q3 2020, Q4 2020, Q1 2021, Q2 2021, a good majority of the acquisitions were in the industrial space. And then you look at what happened in Q3, Q4, Q1 of 2022, we were just getting priced out. We're getting bid out by other people. If we start to get some success on some of the things I just talked about that we're seeing in the past 3 weeks, was your equity for sure. .
And if we see more, we're in more equity. But we're kind of like said, it's been sort of a 3-week phenomenon in terms of volume, credit and opportunities at a cap rate that we think makes sense from a risk-adjusted return.
And then my last one was just on just the comments on the experiential sectors, obviously looking to do more golf. Were there any others either in the pipeline or on the short list, whether it's theme parks, marinas, it could be whatever? Is anything else that was sort of really interesting, really attractive that or sort of in the pipeline that you were looking at?
No. I mean we look at a lot of different things, but pulling the trigger on something like Main Event, Dave & Busters, obviously, that was a great thesis for us with how that ended up the combined companies. Golf, we have a lot of interest in golf, and we'll pick our spots, pick our operators, pick our real estate. We look at theme parks. We look at gaming. We look at marinas, haven't gotten there yet to either price or credit or whatever. Not to say we'd never do it, but we do look at a lot of different things, but it's got to have that real staying power and upward trajectory from a demand and user standpoint for us to really get there. That's way to put it. But we're looking at things that may try to find opportunities where we think there might be some cap rate compression in the future.
The next question is from John Massocca with Ladenburg Thalmann.
Just a quick one for me. The guidance that was maintained, is that including the impact of the new term loans in the swap? Just thinking, I know that swaps locked in, but the transaction is still a little bit ongoing there. And so I don't know if that was kind of contemplated in your per share guidance.
Yes, it does. It has the new term loan built into it, which obviously has rates going up in the third and fourth quarter.
The next question is from Greg McGinniss with Scotiabank.
So just to clarify on that last point, midpoint of guidance implies just a touch of a pullback from the $0.90 a share in Q2. Is that primarily driven by higher interest expense?
Yes. Interest expenses is a lion's share of that. If you think about it, we're reaching the revolver primarily in Q1 and Q2. And the average revolver rate, I think, in Q1 was about 1.1%. It's about 1.6% in the second quarter, and we're swapping $800 million of debt to 3.5%. And then we'll be using some revolver in the fourth quarter. And of course, those rates are going to 3.5%, 4% by the end of the year. So definitely some higher interest business back half of the year that's affecting the midpoint of our guidance range. .
Any other items to consider or really just that?
Well, the other thing, of course, is our loss rent and leakage reserves. You've seen, obviously, year-to-date, we've had no loss rent in our property cost leakage or unreimbursed property costs has been historical low. You could assume that in our forecast, we're a little more conservative and we do forecast some reserve for that. And so that also is built into our guidance.
And just final question for me is how are you thinking about exposure to some of your top tenants such as Life Time, in terms of where you're comfortable bringing that exposure similarly on retail versus industrial, is there any diversity level or exposure that you're targeting there?
I guess I would sort of -- overall, I mean, no one asked, but the way we think about it, we think that obviously, this is -- we're going to be in a Fed-induced possible recession. We think it's going to be shallow, not deep. We think that the housing industry is kind of right in the crosshairs of what that's focused on. We think this interest rate cycle will be short lived. And given the start trading down and don't have back in the office, to be honest with you.
So I think that what that sort of means is earnings are going to slow down for a lot of the businesses that we invest in. So we're spending a lot of time looking at industries that we think will continue to perform at the high rate of growth. There are some industries that will continue but will slow. We think there'll be some industries in our portfolio that might deteriorate a bit, and then we think there are some industries that will be countercyclical on the way up because of a trade down with consumers.
So rather than answer it like in our Top 10, we have a kind of point of view on each of these industries and we're going to try to be thoughtful on rebalancing some of that as we move forward based on what I described to you is our view of the economy over the next several months or quarters. And then probably the dispositions that we do will follow suit with how we feel about some of those, where things go. I mean -- I think it's -- we use that heat map. We spent a lot of time talking about it. We've reevaluated it. We adjusted it. So yes I would rather not get so tactical about individual names when we look at sort of industries -- industry exposure, for instance, is a big one.
This concludes the question-and-answer session. I would like to turn the conference back over to Jackson Hsieh for any closing remarks.
Thank you, operator. Well, look, hopefully, from this call, you'll conclude that our portfolio is performing great. Our operating platform doing a great job, doing 50-plus transactions. We think there's a lot of underlying value in our real estate that's not reflected necessarily in our NAVs that are out there. And we think that with these debt spreads staying at widened 20-year levels on the averages, we think there's going to be more opportunity for us to deploy capital at better spreads in cautious about where we think the economy is going.
And from a funding standpoint, having basically no debt on the revolver after this term loan closes, I think we're pleased to get some interesting stuff done through the balance of the year. So appreciate your support and interest.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.