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Earnings Call Analysis
Q2-2023 Analysis
Spirit Realty Capital Inc
As we assess the company's performance in the first half of 2023, we note the implementation of a well-crafted capital deployment strategy that doesn't rely on new equity but instead capitalizes on asset disposition proceeds, in-place debt, and free cash flow. The company's acquisitions of properties showcase impressive cash cap rates and economic yields, overshadowing the performance of past quarters and exceeding previous year's benchmarks considerably. Particularly striking is the strategic sale of properties at cap rates that provide a healthy spread over capital deployed, underscoring efficient capital recycling without amplifying debt or equity levels. The upward revision of AFFO per share guidance for the second time this year reflects not only strong operating performance but also the successful execution of a shrewd investment strategy.
The solid operational backbone is demonstrated by a high occupancy rate of 99.8% and commendable AFFO per share growth. This is complemented by a robust increase in annualized base rent (ABR), which reflects a diversified portfolio with burgeoning industrial components. Moreover, careful cost management is evident from a reduction in cash G&A costs and margins. The balance sheet remains robust with substantial liquidity, and the company remains steadfast with leverage under control. The revised guidance for dispositions and AFFO per share underpins a confident outlook for the continued financial health and capital deployment effectiveness of the company.
Management conveyed a cautious but positive outlook on cost of capital trends, noting marginal improvements and an advantageous fixed debt environment extending into the following year. There's a clear inclination to wait for more favorable conditions before pursuing additional capital market activities. Moreover, the company remains selective regarding CapEx investments, focusing on opportunities that bolster yields and potentially improve lease conditions, which aligns with a prudent long-term growth mindset. The guidance remains balanced, neither conservative nor aggressive, reflecting methodical planning and careful selection of investment opportunities.
The company's portfolio mix, highlighted by a diversified industrial component, stands robust, with key relationships with tenants strengthened over time. Despite absorbing some isolated tenant challenges, the credit watch list remains stable, supporting the claim that a meticulously managed and diversified tenant base reduces volatility and risk. The practice of occasionally buying into some tenants' debt to gain insight underlines a proactive approach to credit management and tenant relationships, further exemplifying the company's focus on maintaining portfolio health and strength.
An aggressive disposition plan with carefully selected properties for sale hints at the company's agility in seizing market opportunities. The increased guidance reflects strategic planning to target specific buyer types and a broader vision to reinvest in higher yield, mission-critical properties, particularly in the growing industrial sector. The management's optimism about the possibility of moving towards standard market financing in the near future underlines the confidence in the company's strategic positioning and balance sheet strength.
An underlying narrative of optimism about the health of the company's tenant base, bolstered by active industry shifts such as onshoring and manufacturing growth, paints a positive picture. The commendation of tenants' sophistication and proactivity during recent economic shifts reinforces belief in their resilience. Furthermore, a significant portion of business originating from existing tenant relationships demonstrates both the strength of the company's asset management team and a healthy pipeline of investment opportunities, which supports the anticipation of sustainable growth moving forward.
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Good day, and welcome to the Spirit Realty Capital Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Pierre Revol, Senior Vice President of Corporate Finance and Investor Relations. Please go ahead.
Thank you, operator, and thanks, everyone, for joining us for Spirit's Second Quarter 2023 Earnings Call. Presenting on today's call will be President and Chief Executive Officer, Jackson Hsieh; and Chief Financial Officer, Michael Hughes. Our Chief Investment Officer, Ken Heimlich, will be available for Q&A.
Before we start, I want to remind everyone that this presentation contains forward-looking statements. Although we believe these forward-looking statements are based on reasonable assumptions, they are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from those currently anticipated due to a number of factors. I refer you to the safe harbor statement in our most recent filings with the SEC for a detailed discussion of 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 the Form 8-K, which include our earnings release and supplemental investor presentation. These materials are also available for -- on the Investor Relations page of our website.
For our prepared remarks, I'm now pleased to introduce Jackson Hsieh. Jackson?
Thanks, Pierre, and thanks, everyone, for joining our call this morning. At the beginning of this year, we outlined a plan for 2023 consisting of 2 primary objectives: first, implement a capital deployment strategy that utilizes free cash flow, asset dispositions and existing debt to yield favorable investment spreads without issuing new capital; second, demonstrate the strength and diversification of our portfolio through consistent operating performance.
Halfway through the year, we are on track to meet our goals with our second quarter results, building on what we accomplished in the first quarter. During the quarter, we acquired $138 million in assets, comprised of 11 properties across 5 transactions at a cash cap rate of 7.63% and an economic yield of 8.88%. This is the highest cash cap rate and second highest economic yields we have achieved in the last 8 quarters, and higher than those achieved in the second quarter of 2022 by 129 and 180 basis points, respectively.
In addition, we invested $30 million in revenue-producing expenditures primarily related to the development and tenant improvements at a 9.87% cash cap rate resulting in total capital deployment of $169 million at a cash cap rate of 8.03%, an increase of 166 basis points from the same period last year. We sold 18 occupied properties during the quarter for $41 million at a cash cap rate of 6.27%. The average size of these transactions was $2.3 million and consisted of QSRs and C stores, drugstores and Red Lobsters.
We generated a 176 basis point spread between the cash cap rate on capital deployed and our occupied dispositions. We also sold 12 vacant properties for $26 million, resulting in total disposition proceeds of $67 million. Our capital deployment net of dispositions, was $102 million. Excluding vacant sales, the net effective cap rate was 8.61%.
Consistent with our 2023 plan, we didn't raise any equity this quarter and funded our capital deployment with disposition proceeds, in-place debt and free cash flow with no change in our leverage. The strength and diversification of our tenants, the industries they operate in, and the quality of our real estate portfolio, combined with better-than-anticipated investment spreads are allowing us to surpass our previous forecast and revised our AFFO per share guidance upward for the second time this year.
As we transition into the back half of the year, we remain dedicated to achieving our 2023 goals. We will maintain a disciplined approach to our investments poised to seize the most favorable opportunities that will yield optimal returns for our shareholders.
With that, I'll turn the call over to Mike.
Thank you, Jackson, and good morning, everyone. We are very pleased with second quarter results. AFFO per share was $0.91, $0.02 higher than last quarter. Occupancy remained high at 99.8% and our acquisitions and dispositions were accretive to our earnings and portfolio metrics, including Walt and lease escalations. During the quarter, ABR increased by $5.5 million, reaching $694.6 million with Industrial growing to 26% of our portfolio.
Other operating income increased by $1.3 million from last quarter, with approximately half of the increase resulting from 2 small lease terminations and half from higher interest income. Please note that the higher interest income, which resulted from unusually high cash balances related to the drawdown of $300 million in term loan proceeds was mostly offset by the corresponding interest expense, so no impact to AFFO per share.
Cash G&A fell to $10.1 million from $10.6 million last quarter, primarily driven by the timing of certain employee benefit expenses that fall into the first quarter. Our cash G&A margin fell to 5.3% and approximately 30 basis points lower than full year 2022.
Turning to our balance sheet. We closed the quarter with liquidity of $1.6 billion, comprised of cash and availability under our credit facility and delayed draw term loans. For leverage, which we define as adjusted debt to annualized adjusted EBITDAre remained flat at 5.3x compared to the first quarter and dropped by 1 turn inclusive of our preferred equity.
Regarding our guidance, we are revising our AFFO per share range to $3.56 to $3.62 and our disposition range to approximately $400 million, while maintaining our capital deployment range of $700 million to $900 million. Consistent with our 2023 plan, we believe these targets allow us to achieve our capital deployment objectives, absent any capital markets activity while maintaining low leverage levels.
With that, I will turn the call back to the operator to open it up for Q&A. Operator?
[Operator Instructions] The first question today comes from Joshua Dennerlein with Bank of America.
One thing I've kind of noticed is on acquisitions, it looks like the WALT kind of get longer. This quarter, it was 15.3 years. Is that something you guys are pushing to achieve or just like the market is getting a longer WALT these days?
Josh, it's Jackson. I'll take that one. I mean we're focused on primarily looking at new sale leaseback opportunities. So I'd say at a minimum, we'll start with a 15 year and generally, it can be up to 20-year new leases on our lease form. So that's primarily driving that WALT.
Okay. Okay. Good to know. And then maybe just 1 follow-up, just the cap rates. Do you think we're still going to see more cap rate adjustment higher? Or do you think that's kind of at a stabilized rate at this point?
I can say what we're seeing, it's -- I mean, I think, generally, I'd say that they're pretty stable right now. The thing that we're noticing is that we have 2 investment pipeline meetings, 2 investment committees a week and the volume of things that are coming into our pipeline are increasing and they continue to increase since the last quarter. So I wouldn't say the cap rate has increased, but the volume of opportunities seems to be increasing. So -- but that's encouraging for us.
The next question comes from Michael Goldsmith with UBS.
Jackson, just to follow up on your last comment when you said the volumes are picking up. Is that specific to one asset class, in industrial or retail? Or is it just across the board? And any further detail you can talk about in terms of where there are greater opportunities would be helpful.
I mean I think I would say across the board generally from what we see. I feel like there's a little bit less competition in the industrial space that we're focused on right now. And I think if I were to guess, just make up, I think one of the reasons why you're seeing more volume is, I think people -- the companies are looking for liquidity, right, and they're trying to find the most efficient way to get it. Clearly, there's challenges in the debt markets, corporate debt markets, bank markets, very selective. So the sale-leaseback opportunity is really a great source of liquidity and really it's right in the middle of what we're trying to accomplish.
So I think some companies probably sat on the sidelines, hoping things might get better. I think they're just deciding that these are the rates we need to move forward. And so thing that's most encouraging for us is we're seeing really good real estate opportunities, good credit opportunities at what we believe are attractive cap rates. I mean these are cap rates a year ago that would have been in the mid-6s, low 6s for the same type of opportunity. So in some regards, I think companies are just deciding they need to move forward. And I think that's gone up that's going to help us as we get into the back half of this year in terms of our acquisition volumes.
Got it. That's really helpful. And then on the opposite side of the coin, during the quarter, how did your cost of capital trend? Or are you seeing any movement up or down or any visibility in the near to intermediate term about the trajectory where you think you can be back in the market and start to drive accretive growth through borrowings and acquiring?
Mike, do you want to --
Yes. Sure. We saw some marginal improvement in our cost of capital, both on the equity and so the long-term debt side. Nothing that would make us want to go explore issuing more long-term capital. Remember, we have -- we're very early in the term loan market. We have a lot of term loan capacity fast woven drawing in, all of it is fixed at very low rates of maturity. So we have enough debt to really take us that's fixed to take us into next year.
So we can be patient on that. And again, we have cash on the balance sheet. We have a good disposition program. So we'll be included at the right time. We have some incremental improvement, but not enough to make us want to get out there yet and less yields on our acquisitions go materially higher.
Next question comes from Greg McGinniss with Scotiabank.
Jackson, given the substantial investment yield on the revenue-producing CapEx, can you just provide some details around those investments, what the opportunity looks like there in terms of continued investment and the types of yields you expect over the next year?
Yes. I mean, look, I think on our CapEx investments there's always going to be a smaller portion of what we do in a given year. I think that what we're seeing is tenants where we have existing master leases or leaseback business, they're meeting changes to their facilities, either expansion or new facilities or adding on to facilities and coming back to us is, one, efficient because they know a very credible source of funding. But more importantly, for our shareholders, you're getting paid to put this capital out now finally. And it also opens the door to give us an opportunity to have discussion around our lease term, provisions in the lease.
So it's kind of a give and take, but it's a very positive 1 for us. And so, yes, we'll continue to be very selective about it, but it's not going to be a material part of our business going forward. It's a pretty high bar right now. But most importantly, I do think -- we used to talk about forward commitments being 50 basis points premium. People used to talk about that. I'd say that premium is much higher now. If you're going to forward commit, we'll provide any type of development CapEx funding. It's -- I'd say it's closer to 100 basis points premium to a stabilized cap rate.
So I guess -- and then just thinking about where those investments are going. Is that primarily industrial, so maybe as the industrial percentage of portfolio increases, that level of opportunity increases?
I think it's less -- it's -- we're kind of more agnostic to property type. It's really how good is the customer, how good is the real estate, what the position of our real estate within that master lease. So we look at it really less focused on industry type, but more of how can it improve our yields as well as potentially improve certain aspects of a master lease. We'll look at it that way as well.
Okay. And just one more for me, if I could. Given this increasing volume of potential acquisition opportunities, coupled with the low cap rate achieved on dispositions, does full year investment guidance potentially feel conservative, especially given the other liquidity that's available on the term loans?
I wouldn't say it's conservative. I mean we've been pretty methodical about what we've been doing, as you can sell through the first 2 quarters. I'm saying that the volumes of things that we're seeing are increasing. So you probably see that in the fourth quarter. But I'd say our guidance, we feel good about where it is right now. Let's say it's conservative or aggressive.
We always need to be selective.
The next question comes from Haendel St. Juste with Mizuho.
I have a few questions, I guess, more broadly on the tenant, the health of the tenants. So can you, I guess, first discuss how you're seeing the portfolio performance versus expectation categories that are doing well and maybe better than expected in categories that you more concerned to watching more closely and how your watch list has changed over the past quarter or 2?
I mean, look, I'll start with I think portfolio is doing great. We're not concerned about any aspect of it. Of course, from time to time, you'll focus on particular tenants but I feel like our industries are mix right now are ideal and we've got a really good balance of retail, mission-critical industrial, industrial outdoor storage. The industrial is very, very well diversified. I mean if you look at our square footage, we're over 55 million-plus square feet the industrial position is 50% of that.
So what happened, half of our GLA right now is in the industrial space. So I would say, overall, we're very comfortable with our industry mix. if we can lighten up on movie theaters, I think we would do that, as I've said in the past, but we're in no rush because our movie theater tenants are extrude and are doing well. Maybe I don't know, Ken, if you want to talk about credit watch list.
Credit watch list continues to be very manageable. It's relatively stable. We're in a position now where we have a much deeper relationship with all of our tenants. So -- but overall, it's very stable, not seeing it increase.
Okay. Great. Great. On the theaters, I guess, I've noticed I think there was a $2 million straight line reserve in the Q from bankruptcy, not sure what to that was, but assume that was tied to movie data sales. Is that right?
No, no. That was not for movie. That was another small operator one-off that is running some issues that we put on a cash basis last quarter.
Okay. And then in the Q, you also I think you bought $10 million of term loans for $0.79 of a dollar. I know it's not a big novel, but just curious on it's the borrowers an existing tenant or anything you could tell us about it?
Yes. I mean I describe that as an existing tenant. From time to time in the past, we've bought debt of tenants you got a different kind of reporting trends than what you see in a lease. So sometimes we see that as a tool to get more insight into a company's credit gives you a different relationship versus landlord. And I'd also say that, that's not going to be an expanding part of what we do at super select and one-off Sure.
The next question comes from Anthony Paolone with JP Morgan.
Jackson, can you talk about just your thoughts on how much runway you have as you start to look out to '24 to continue to be able to sell at lower cap rates than what you're basically investing in?
To be honest with you, we could do it for a long time. That's not to say we will do it for a long time. I like to be issuing equity and financing the normal way. The things that we're selling, we laid out a plan earlier this year that we thought the spread might be something like 100 basis points between our dispo cap rate, acquisition cap rate. And that mix is in, what I'll call, accretive sales, there will be some defensive sales that are part of that mix. But with the size of portfolio that we have, Anthony, there's just -- there are a lot of assets. Obviously, we can sell them.
The things that we've been selling, I'd describe as really middle of the fairway type of assets. They're not the best. Obviously, and we don't have a lot of worse. So they're just generally pretty average. The dispo cap rate range this quarter was on the low side, 4.95% cap rate up to a 7 cap with the majority being in the low 6s in terms of the cap rates that we were able to execute. A lot of -- we sold a lot of properties that -- a couple of properties have flat leases, lower bump structures somewhere nonreporting there were things that we feel like we can -- they're right to be sold, and we can reinvest in things that have longer wall, we think, have a lot of cap rate compression they were buying, growing businesses across the country, especially in the industrial side, where we think that will be that will be much more accretive for our shareholders, not just from earnings but also from an NAV standpoint.
But to answer your question, yes, there's a long runway to do this strategy. I'm hopeful that this is just this year's strategy. Next year, we go back to the normal things. And I think we're getting closer, too. And obviously, our cost of capital is getting closer to the point where we can move forward if we want to pursue that what I'll call, regular way financing via the capital markets.
Okay. And then, Mike, just for you. Can you -- I think you mentioned it, but what was the lease termination in the quarter? I'm just trying to understand in your guidance for the second half of the year, it implies a little bit of a drop-down from the $0.91 you reported to about $0.89. And so just wondering if that's a part of it or kind of what the items driving that are?
Yes, there's obviously -- there's some rounding there. So we did have about $500,000 of lease termination income in the second quarter. That caused us around to $0.91. Without that, you'd be $0.90. And if you look at the second couple of quarters, Q3, Q4, it's kind of round and it's like right there at that $0.895 to the midpoint of our guidance is kind of rounding to $0.90. So you're kind of flat if you kind of remove that other income in the back half of the year.
The interest income piece of that, again, that was offset by higher interest expense. We actually made about a $20,000 spread on having that extra debt drawn and having cash on our balance sheet. Ironically, our invested cash is making a little bit more than or $475 million that we get charged on that term loan today. We haven't seen that since 2008. But for the back half of the year, we do have, again, some rent disruption built in consistent with our guidance we put out at the beginning of the year. That was a little more back half weighted. So we still have that assumption in there. there some conservatism built in there.
And also, as you saw, we took up our disposition guidance, and we typically have a view that our dispositions are going to come in a little quicker than the acquisitions. The acquisitions are a little more weighted towards in Q4 and dispositions are a little more weighted to Q3. which also puts a little pressure just on a quarter-over-quarter AFFO per share. So it's just some assumptions like that moving around, you caused a little bit of flatness in the back half of the year, if you look at the midpoint of guidance.
The next question comes from Ki Bin Kim with Truist.
I was wondering if you can just provide an update on At Home and how their sales or EBITDA productivity has trended over the past couple of quarters and it is anything concerning?
Ki Bin, this is Ken. Yes. Basically, no, we're not concerned with the long-term aspect of At Home. Obviously, they're normalizing after in just an incredible run up in sales during COVID. But obviously, everybody, I'm sure, has seen. They recently completed some debt transactions. They got incremental liquidity of $200 million to $300 million and very importantly, they pushed out their maturities to 2028. But no, we're still -- we still believe in our underlying business model. So no, no concerns.
And on Party City, there was some news that the company might consider spinning off its balloon business, which I believe is one of your warehouses focuses on. Any kind of high-level thoughts you can share on how that might impact you guys?
Yes. On Party City, they expect them to emerge from bankruptcy during the third quarter. Yes, there are some last-minute things back and forth going on. But -- at the end of the day, I would submit that our path from Party City really confirms what we've always believed in, you vested in mission-critical real estate you turn out everything turns out okay, we have had 0 disruption in any of our lease obligations, be it rent, taxes or anything. So yes, there are some things going on right here at the end of the bankruptcy, but we don't expect those will have any factor in us getting rent payments going forward, concerns.
Ki Bin, I would say just on that facility, I've been inside of that balloon manufacturing facility. And it's -- I described it's just a turnkey operation. They do design, procurement, distribution out of that facility. It's a very sophisticated manufacturing facility that can kind of punch out different designs, pain on Mylar. It's -- we're super comfortable with that's going to be a business that can be around a long time in that facility. And as Ken said, whether it spins out or doesn't spin out, it really doesn't matter. It's going to just be a very valuable business with on a very valuable piece of real estate that we own in that little submarket in O'Clair.
The next question comes from Rob Stevenson with Janney.
Just one for me. Jackson, despite comparable operations on a solid balance sheet, the stock continues to trade one of the lower multiples and higher dividend yields in the peer group other than maybe increasing the industrial exposure or the IG tenant base. What do you think drives at least a relative revaluation, if not an absolute one here?
I mean, I think for me, what I believe is we just keep doing what we say we're going to do, which is try and punch out solid acquisitions, fund ourselves accretively. It's a mystery sometimes why we're trading at this kind of multiple when the portfolio is so solid, so diverse. I think in time, we'll be able to close that gap. And so we believe that we have a plan that can demonstrate the ability of our team as well as the performance of our underwriting and the real estate assets and tenants. So that's our playbook right now.
Okay. And then when you're looking at the back half of the year on the stuff that you guys are either negotiating on a contract, it highly likely that the acquisitions are going to continue to be tilted towards industrial? Or are there some big sale leasebacks in the retail space that will sort of even that out. How should we be thinking about that in terms of the asset base at year-end?
I mean for what we see right now, it's -- if I were to guess, it'd probably be industrial. But that being said, there are some large portfolios on the retail side. that are floating around out there, and we're evaluating them as well. One of the things that we're starting to just see is just the amount of repeat business coming out of our existing database. We don't break it down every quarter, but I can just tell you, it's increasing and we're getting better investment opportunities from existing owners and operators within our account base.
The next question comes from Wes Golladay with Baird.
I'm just curious if you have any developments that you're funding that will open in the second half. And maybe a question for offline, but if you have it, it'd be great. do you have the amount of, I guess, what we call CIP that you spent the money, but you're not really getting any income at the moment?
This is Ken. There's no huge meaningful project that opens up on the back half of the year. As Jackson mentioned, that revenue producing CapEX line has a mix of TI dollars, so that obviously folks that are already were just improving in real estate. There are a couple of development projects, but whether or not any of those open before the end of the year, not quite sure. Possibly, that nothing I would suggest that would move the needle.
The next question comes from Ronald Kamdem from Morgan Stanley.
Just two quick ones. So one on disposition [indiscernible] just the activity that you're seeing or what you're putting out, what you're looking to put out and what are the likelihood of actually hitting the top end of that guidance?
Yes. Look, we -- the reason why we increased that guidance we actually went into the market with a larger tranche of properties. And they're very strategic in terms of what they're -- in terms of targeting different small retail buyers tend to do one type buyers. So you've got that out there. We've got some risk mitigation assets into the market, which time will tell, close percent LTV bank loans as part of our dispute process. which I think is encouraging from what we're going to do.
Great. If I could ask one more. Just – so looking at the – and I think I think the question came up already on the WALT. I’ll add to that in terms of the rent bumps as well. And then I think about that 8%-plus cap rate, the question is, how do you get comfortable? And how do you sort of make investors comfortable that you’re not going too far out on the risk curve and you’re still sort of balancing basically the acquisitions that you’re doing and the cost of capital that makes sense but not reaching Q4 on the risk curve?
Yes. I mean, look, I think – I would just tell you anecdotally, the assets that we’re selling in the 6s, probably a year ago would have been in the 5s. Some of the retail assets that you can buy right now, even investment grade, it will be closer to the high 6 cap rate if the WALT was sort of, say, 10 years. The things that we’re seeing are just, in my opinion, very, very solid real state investments. One of the deals that we did this past quarter was for a distributor of original OEM parts for the automotive industry, very, very successful business, very sticky business. We did a sale-leaseback for a company that does – that manufactures pipe fittings and flanges down in the Houston area. We did a food manufacturing company up in the Boston MSA area that does confections confection and cakes and bags, did an entertainment assets.
So all of these are really solid businesses. The price per square foot is reasonable, market rents make a lot of sense and they’re mission-critical for these companies. These same opportunities like I’m saying, would have been in the mid-6s last year. And so we don’t believe we’re going out on the risk spectrum at these cap rates. These are well underwritten credits in very, very viable industries. – at really attractive price per square foot. And just all cap rates have increased. So we could clearly stay in the high 6 to 7s, but you’re not going to give unit reporting, you’re not going to get the wall, you’re not going to get the master leases or necessary on the mission-critical aspect of what we’re seeing on the investment that we’re doing. So I don’t believe we’re taking more risk at all, to answer your question.
The next question comes from Linda Tsai with Jefferies.
Just 2 questions. In your 1Q supplemental, you showed unreimbursed property costs of 1.5%, but we didn't see it this quarter. Just wondering why it was taken out.
Linda, this is Mike. We actually took it in the first and 3 years, it's actually asked us about it. So we just kind of dropped it. And we do have that information in our SIP where you can calculate it. But it was 1.7% for the quarter and it's driven a little hard despite the timing of some real estate tax reimbursable and CAM expenses. But I'd expect to migrate around that 1.5% to 1.7%, well under the 2% that we had kind of put out at Investor Day a few years ago. But the information is in there, we just no one really focused on it. And none of our peers report it.
Okay. Got it. And then the strategy of not increasing your leverage using free cash, debt and acquisitions to fund acquisitions. I know it's not exactly ideal but the hand that's been dealt for now. How do you think about the level of earnings growth this can support?
It's interesting because this year, we were hit with some pretty big interest headwinds, interest rate headwinds for the step up from last year. In fact, if you go back to our original guidance you've got in February, we gave you Q4 annualized, which was $3.52. We did that because Q4 had the full impact of rising rates on us for last year. Compare that to our midpoint of guidance, that would imply 2% growth this year. So right there, you can see that even this strategy of recycling can produce some growth.
We're pretty bullish about next year given that all of our debt is fixed at free low rates. But we feel like we have a good plan for going forward. We really like some help on the equity side to grow more and faster. But we do feel like the way our balance sheet is locked in, the yields and spreads that we're producing we can produce better growth going into '24.
The next question comes from Michael Gorman with BTIG.
I just wanted to go back to some of the prior comments and just ask about the current tenants in the portfolio, kind of looking at your new investment opportunities coming from increasing sale-leaseback volume because of what's going on in the financing markets. How good of a read-through do you have on your existing tenants and how they're handling the challenges in the financing markets? And understanding the coverages are still strong, what's going on below the EBITDA line for your existing tenants that are I would assume facing the same financing markets that the new sale leasebacks are?
Yes. That's hard to -- generally, it's a good question. We monitor it every day basically is the answer. It's just in our normal dialogue. And we have a CRM that we are utilizing now through Salesforce that's really helping us at the senior management level. And so what I can tell you, we're seeing is the companies are doing better than people expect. There's real onshoring happening. There's real manufacturing happening I still think that labor is still an issue for some of our tenants that are in that manufacturing sector in terms of getting people on the job to procure and finish out items that are being manufactured.
And on the retail side, generally, the way our tenants are set up, they largely were pretty smart during COVID in terms of recapitalizing our balance sheets getting debt termed out, re-equitizing, going public. And so we feel really good about their very sophisticated and they're good operators. So we have largely been pleasantly surprised with the creditworthiness of the portfolio at this point. Of course, you got a couple of areas. You're always -- a couple of tenants that are always watching a bit more carefully, but generally, it's not because of necessary financing that got them into trouble or interest rates. There's some other kind of issues that might be affecting them. But I'd say overall, we feel very, very good about the health of our portfolio. And it's reflective in our ability to generate very little rent disruption in loss print, we talked about was 0.2%.
Great. That's very helpful. And then, Jackson, maybe just on that same vein, and I'm sorry if I missed this, but as you're thinking about investment opportunities and investment volumes, how does that look coming from the existing tenants and existing relationships, the volume that's coming through that pipeline recently?
Yes. It's coming from all -- it's a good healthy mix between coming from existing tenants which are really led by our asset management team and also just third-party new opportunities, new tenants that are looking for financing or new sponsors, and that's being procured by our acquisition teams. So it's a healthy mix that we're seeing. That's why I said like the pipeline of investments that we're evaluating has increased meaningfully over the last several weeks. -- and 80% of the business this quarter, I think is existing tenants.
This concludes our question-and-answer session. I would like to turn the conference back over to Jackson Hsieh for any closing remarks.
Thank you, operator, and thank you all for participating. I also like to thank our our professional and colleagues over at Spirit Realty. It's a very good quarter, and we're quite enthusiastic about what we see right now. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.