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Good day and welcome to The Spirit Realty Capital Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions]. Please note that this event is being recorded.
I'd 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 fourth quarter 2022 earnings call. Presenting today's call will be President and Chief Executive Officer, Jackson Hsieh; and Chief Financial Officer, Michael Hughes. In addition, 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 several factors. I refer you to the Safe Harbor statements 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 specific 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 include our earnings release and supplemental investor presentation. These materials are also available on the Investor Relations page of our website.
For our prepared remarks, I am now pleased to introduce Jackson Hsieh. Jackson?
Thanks, Pierre, and good morning.
We're pleased to report strong results for 2022, which exceeded the targets we announced in 2019. We achieved AFFO per share of $3.56, surpassing the midpoint of our 2019 Investor Day range by $0.14. We also increased our total ABR to $681 million, while increasing our industrial exposure to 23% with both hurdles exceeding our Investor Day targets.
Furthermore, we maintain high occupancy, low lost rent, and stable unreimbursed property costs across our portfolio of 2115 properties. These results reflect our prudent underwriting approach and well diversified portfolio leased to sophisticated operators in durable industries.
During the quarter, we invested $312.4 million in 24 properties at a 7.27% cash capitalization rate. 88.4% of these investments were in industrial assets, including distribution, light manufacturing, and industrial outdoor storage, with 90.2% of the investments originated through sale leaseback transactions.
We also invested $38.5 million in development and revenue producing capital expenditures, almost half of which was related to our $67 million investment in $125 million cutting-edge facility for SunOpta, a leading plant-based food manufacturer. This facility opened for operations in December.
Our disposition program also produced great results in the fourth quarter, we sold 21 occupied properties for $110.2 million at a 6.22% weighted average cash capitalization rate, representing a positive 93 basis point spread for a capital deployment cap rate and resulting in a $33.3 million gain.
The occupied mix included 42% retail, and 47% medical and only 4% of the sold properties were leased to investment grade tenants. For the year, we sold 278 million of leased assets at a weighted average cash capitalization rate of 5.47%, representing a 118 basis points spread for capital deployment cap rate and generating a $94.2 million gain. Only 24% of the sold properties were leased to investment grade tenants.
Our capital recycling program, which started early in 2022, has been very successful. It has allowed us to further reshape the portfolio and accretively redeploy capital into asset classes and industries that we find attractive today. We expect continued success with dispositions this year, in total through acquisitions and dispositions, Spirit has successfully completed more than 150 transactions in 2022, which is a testament to our people and the robust processes we have established.
As I previously discussed, the majority of our fourth quarter acquisitions were in industrial assets, which continues to be a strategic focus for us. Given our growing exposure, we have featured notable achievements in this sector in our supplemental investor presentation.
On Page 13, we spotlight the sales of Shiloh, Sunny Delight, BE Aerospace and Mac Papers Properties. These were industrial properties that we purchased and later sold, realizing 85% gain and capturing 312 basis points of cap rate compression, since we acquired these assets.
On Page 14, we highlight the fourth quarter acquisition of a manufacturing facility leased to Way Interglobal, a top RV appliance manufacturer and supplier. In November, shortly after we closed on our sale leaseback Way Interglobal was acquired by LCI Industries, a much larger public company, and a major credit upgrade for Spirit.
On the same page, we feature the development of the 270,000 square foot, state-of-the-art SunOpta facility, illustrating how Spirit can partner with industrial tenants to build mission critical facilities.
Finally, on Page 15, we highlight select industrial acquisitions completed in the fourth quarter, including one, distribution and two, industrial outdoor storage facilities. We find these investments appealing because they're mission critical assets leads to strong operators with low in place rents. And while the acquisition yields are very attractive for us today, we anticipate that these facilities just like the industrial dispositions featured on Page 13 will appreciate in value over time.
One of our earlier investments within the industrial sector was the 129 million sale leaseback transaction for a distribution center and two manufacturing facilities leased to Party City that we completed in 2019. We highlighted this investment at our Investor Day and provided an update on Page 16 of the supplemental investor presentation.
What's important to note is that despite Party City's ongoing bankruptcy, we expect a positive outcome for Spirit given Party City's dominant position in the party goods sector, and the assets high quality and mission critical nature. 85% of our investment is in the 900,000 square foot distribution center in Chester, New York, which is located in Orange County.
This property serves as Party City's primary distribution center, running at full capacity and handling over 45,000 SKUs for clients across the globe. Given its critical role in the company's operations, this facility epitomizes the concept of mission critical.
In addition, market rents for distribution centers in Orange County stand at $11 per square foot and are projected to increase by 6% this year. This is significantly higher than our current rental rate of $8.05 per square foot, which grows contractually at 2% per year. Our investment in this facility is well below replacement costs and should we ever have the opportunity to re-let the asset, there is significant upside in this property due to the high tenant demand for distribution centers, the lack of others of this size and the difficulty of doing ground up development in this market.
The two other facilities are smaller in terms of investment, but also have great stories. The Eden Prairie site is a manufacturing facility, responsible for production of 60% of the world's Mylar Balloons. This building is in a strong sub-market and is vital to the anagram business, the manufacturing arm of Party City.
Like Chester, it is an example of a mission critical asset. The Los Lunes facility is a high-quality asset in an excellent location. Notably, there's already been sub-leased to Cupertino Electric at the same rental rate that Party City was paying, showing the versatility and quality of the light manufacturing assets we pursue.
As a reminder, our approach to underwriting is based on analyzing industry duration, and our tenants position within it, examining tenant credit worthiness and evaluating the real estate residual value underpinning the facility. While it is important to get all three right, when you enter into a sale leaseback, we know that credits can change to the positive or negative for a variety of reasons. So the industry and real estate are paramount.
In the case of Party City, the credit deteriorated. But we remain confident in the industry and Party City's position as the dominant party goods supplier and manufacturer and believe the real estate is extremely valuable. We therefore expect a positive outcome for Spirit's investment and believe this will be a good proof of concept for underwriting approach.
As we think about the current year, we remain committed to taking actions that will create the most value for shareholders. We have set forth a fully financed capital deployment plan, utilizing free cash flow, asset dispositions and in-place debt to produce positive investment spreads in a volatile capital markets environment.
Our focus for the upcoming year is to showcase our portfolio strength and highlight our platforms effectiveness, which we expect to result in steady cash flows and dividends for our shareholders.
With that, I'll turn it over to Mike to discuss the quarter and our 2023 guidance.
Thank you, Jackson. Good morning, everyone.
Once again, our operations continued to perform at a very high level during the fourth quarter. We achieved a slight increase in occupancy a 0.1% to reach 90.9%. Our lost rent improved from 0.3% in the third quarter to only 0.1%. Our weighted average lease term remained stable at 10.4 years. Our unreimbursed property costs remained steady at 1.4%.
Our ABR increased by 19.9 million, reaching 680.9 million. The increase was driven by net acquisitions at 15.1 million, organic rent growth of 4.8 million. Our forward same-store sales growth stabilized at 1.6% as the majority of the movie theaters re-tenanted during COVID, which were driving a slightly higher growth have largely returned to paying full base rent rather than variable rent.
AFFO per share was $0.88 compared to $0.90 in the third quarter. The $0.02 decrease was primarily attributable to a reduction of 1.7 million in non-tenant income, an increase of 1.8 million in cash interest expense, reflecting a full quarters impact of the 800 million term loan borrowings, which we swapped to a fixed rate of 3.5% in August.
Turning to our balance sheet, we issued 1.6 million shares during the quarter under our ATM program, generating net proceeds of 63.9 million. We ended the year at 5.2x leverage with liquidity of 1.7 billion comprised of cash and cash equivalents, restricted cash and availability under our credit facility and delay draw term loans. We expect to draw on the term loan towards the middle of the year.
In addition, our deferred rent balance declined by 7.4 million during 2022 to 7.9 million at year-end and should decline to 3.5 million by the end of 2023. As a reminder, our deferred rent has already been recognized in earnings, therefore the repayment of deferred rent only impacts our balance sheet.
Now for 2023 guidance, our AFO per share range is $3.53 to $3.59, the capital requirement of 700 million to 900 million, and dispositions of 225 million to 275 million. To better understand our guidance, we have provided a walk from Q4 2020 annualized AFFO per share to the midpoint of our 2023 AFFO per share on Page 4 of our supplemental investor presentation.
As we noted on Page four, we believe that annualized fourth quarter 2022 AFFO per share, equating to $3.52 is the right run rate for analyzing and understanding our 2023 guidance, as the fourth quarter includes the full impact of the aforementioned $800 million of term loans and minimal non-tenant income. Walking forward with $3.52 per share, we expect about $0.04 from organic tenant growth, $0.06 from our 2023 net capital deployment, plus $0.05 from last rent reserves, which equal 1% of our AVR and less another $0.01 for inflationary G&A increases.
Keep in mind that as is usually the case at this point during the year, the last rent reserve is an assumption is not specific to a particular tenant. As Jackson mentioned, our capital deployment plan is entirely funded through free cash flow, dispositions and our existing debt capacity with no reliance on the capital markets. Should the capital markets turn more favorable, or we find compelling risk adjusted return opportunities, we will certainly consider taking advantage of those situations. But for now, we remain cautiously optimistic and disciplined in our approach to the year.
With that, I will turn the call back to the operator to open it up for Q&A. Operator?
Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Wes Golladay with Baird. Please go ahead.
Just quick point on the net investment activity. What type of spread are you looking at for investments this year? I think last year, you said you were around 118 basis points.
Hi, Wes. This is Mike. Yes, I mean, given the way we size it and the way we're going to use capital to acquire we're looking at about 200 basis points of spread.
Okay, fantastic. And then, you do have that 500 million delayed draw a term loan? Do you have to draw the whole thing? Can you do a partial on that? And what do you think about timing and putting on swaps? Or do you already have a swap to that?
Yes. We haven't swapped that yet. That's something we'll continue to evaluate and be optimistic about as far as timing, contractually, we need to draw that by middle of the year at July 1, although there is some flexibility that we can use to negotiate longer term extensions on some of that if we need to.
Okay. Can you do the whole thing, or can you do partial?
Yes. You can do partial up until July 1. So you do partial and then by July 1, you need to draw the whole thing unless we could actually get an extension.
Our next question comes from Haendel St. Juste with Mizuho.
I guess first question is, you guys backed up 3.2 million of deal pursuit costs in the quarter? I know you had a little bit last quarter, 470,000, I think, curious if there's any comments or anything you'd like to share on what drove that big increase? Or was anything? Well, any comments you can make probably on that. Thanks.
Sure. Hey, Haendel. Good morning. It's Jackson. That was kind of a one-off situation. It was a large transaction that we were looking to acquire. We spent quite a bit of time on last year. We also had obviously a large number of transactions that we completed. We closed over 100 separate transactions and U.S. cap rates were moving up throughout the year. We dropped a lot of transactions, if tenants were either delaying or if environmental due diligence or lease terms didn't come back the way we had initially underwrote the transaction and committed to it. We walked away. I'd say it's a combination of more transactions, more terminated transactions and a large acquisition that we were looking at potentially acquiring last year.
Okay. Fair enough. Appreciate that color. And maybe just a follow-up on the $0.05 of reserves embedded in the guide here. I know you guys don't want to get into a conversation around specific tenants, but maybe can you talk a bit broadly about the watchlist year exposure to kind of the at known risk categories? And then, specifically, Party City, you mentioned that you don't anticipate any rent disruption during or after emergence of bankruptcy. So just curious what scenario is broken, so guide for that as well?
Yes. Maybe I'll start first, and handover. We typically use a 1% reserve, it's just a normal loss rent reserve that's been historically what we've done, last year was slightly less. From what we see today, obviously, Party City is going through a restructuring right now, and we feel, as I talked about in my comments, we're highly confident in that asset in the cash flows. And if those cash flows change and we're wrong. We think there's actually upside in those cash flows given the real estate and things I talked about in the prepared remarks.
As it relates to watchlist, yes, we're looking at more things. There's more things, obviously, just given the environment that we're sitting in. I can actually tell you today that the realized active things that we're looking at in terms of lost rent are not here right now. So I know it just seems like to us to be more prudent with that 1% just as we look at it. And obviously, I can tell you our company and teams goal is to do a lot less than 1% in terms of lost rent this year.
So yes, we'll continue to update that as we go through the year to investors. And right now, we just think at the beginning of this year, just given some of the economic uncertainties that we want to be a little bit more conservative as we think about it.
Haendel, as Jackson mentioned, I mean that is a normal assumption that we start the year with. And one thing that makes it kind of a headwind to our guidance this year is that last year was just so good. We had very, very little loss rent. So just from a year-over-year kind of lapping the year standpoint. That assumption does create a headwind in our guidance.
And one thing, if you look at our unit coverage and corporate coverage, you'll notice that there wasn't much change between the third and fourth quarter. And look, we're seeing good performance in a lot of lines of businesses. The casual dining area, convenience stores, auto services, home furnishings, golf and particularly well, specialty retail. And obviously, there's some areas that have a little bit more pressure, car dealerships right now are dealing with some additional inventory and floor plan financing is going up. So I think in balance, it's basically the same, but we're just obviously being a lot more vigilant, staying close to our tenants right now.
Your next question comes from Michael Goldsmith with UBS.
You went heavy with industrial acquisitions this quarter, which has been telegraphed, but 75% of your activity was it industrial, industrial penetration picked up 230 basis points. So I guess as you continue to kind of transform the portfolio, have your assumptions kind of been correct in that this is where you want to be. What are you seeing kind of within the industrial category now? And I guess, kind of like just generally, with this macro backdrop, what are you seeing on the retail side? And is that just considered maybe more risky just given the economic environment. Thanks.
Sure. I'll start. Thanks. This is Jackson. Look, I think one of the reasons why we were so successful this past quarter in the industrial area is that just the challenges in the corporate financing markets, bank debt, high yield has made a sale-leaseback option, a more compelling financing option long-term for corporate tenants. And that's particularly the case that we highlighted this past quarter in the industrial space. I mean for us, we have this three-pronged approach that we talk about all the time, industry duration, tenant credit, real estate. And we're going to stick to that.
We've been doing that since we all joined here at this company since we've reshaped it beginning in 2017. And I think it's going to pay off. Obviously, we talk a lot about Party City. We fundamentally have underwritten assets that way in the industrial sector as well as retail. And we think that the things that we're buying today in the industrial sector are just super mission-critical, especially some of this industrial outdoor storage facilities that we're buying. That doesn't mean that we're not going to do retail. We still like it. We obviously, are very close to a handful of tenants and industries that we're particularly still bullish around.
But I think that the crack in the financing markets corporately have enabled us to be more competitive in this industrial space. That's why you're seeing it increase. The mortgage financing market has sort of made it more challenging for some of the private equity players, real estate private equity players that compete against us in this sector. So I think we're going to continue to make progress this year. And obviously, as the markets become to normalize and get more competitive again, we may have to shift away from industrial. But right now, we're seeing really good opportunities to sort of fit the things the criteria that we underwrite to.
No, I appreciate that, Jackson. And you kind of led into the second question. Just as we think about '23 and the concentration of where you're going to be dealing, like can kind of this makeup continue through this year? Or is it going to be a little bit more balanced? Like is 75% industrial sustainable? Or is it just going to be kind of a mix or where the just -- where there's opportunity overall?
Yes. I mean I could say like in the first quarter, it's going to probably look similar to that. As we project out through the course of the year, obviously, it's harder to predict that. I think a lot of our success is because of where the financing markets are corporately and in the mortgage market as well. That's having a positive impact for us, the challenge over there in that market.
I think as those markets improve; it just will be more competitive for us to be able to keep increasing at this space. So look, I think like we believe that we'll be able to do more in the industrial area. We're certainly going to do it in the first quarter. It's hard to predict the rest of the year. But we have the flexibility to invest in both areas, industrial and retail. So we feel like given our guidance and how we're thinking about the business plan this year, we feel very comfortable that we'll be able to achieve these results.
Our next question comes from Greg McGinniss with Scotiabank.
So just looking at Q4, where you acquired at a 7.2% cap 30 basis points higher than where it's generally been. Could we see higher cap rates this year than there given the current financing environment and tenant demand for sale leasebacks? And then, just curious if you could give us some details on where you're seeing more or less competition for assets and whether you're feeling more constrained by capital availability or compelling transactions at this time?
Well, on the cap rate side, I think in the first quarter, you're going to see our acquisition cap rates continue to drift higher. I'd say it's probably going to look somewhere in the 7.25% to 7.5% range that's probably a good assumption in 2023. And one of the reasons I think we're seeing that success is as I said, corporations are looking at their real estate, especially in industrial companies, monetizing it for long-term financing, just given kind of where non-investment-grade companies get trade today.
So I think that's going to continue to play out positively for us. Obviously, there's more competition for these types of assets. Some of our public peers do the same investment strategy. So I think we'll see that going forward. And I think the other thing that you'll see this year for us, if you look last year, we did about 100, I think it's like 114 million of CapEx in development. This year, that number will be probably similar, if not a little bit higher and it's going to be at least a 50-basis point premium to the cap rate I just described, the 7.25%, 7.5%. So it's going to be priced more appropriately. And we've already got a nice pipeline of, I'll call revenue, capital expenditure opportunities that are in the guidance for this year. So we'll continue to evaluate the market.
And then, the last piece to your question, Greg, we've been very active on the disposition market. And if you look at the number of transactions that we sold last year, part of it was reshaping, part of it was risk mitigation, part of it was just proof-of-concept in some ways to how we've invested. So we feel like we've got a very good handle on sort of where the market is trending right now. 40% of those sales like in the fourth quarter that we completed were 1031 buyers, 60% what I call private sort of institutions or individuals. So we'll continue to monitor the markets as we are buying and selling as part of the plan dictates for the operating plan for 2023. So I think we've got a good handle on where pricing is right now.
Maybe just touching on your revenue-producing CapEx comments. Is that build-to-suits, or is that just investing in current portfolio with the tenants that are there right now?
It's a combination of the two. It's probably more biased to existing tenants that are looking to either improve the facility or increase the size and square footage of the facility. I think as time goes on, you'll see us start to highlight this year a tenant has X, Y, Z space, they want to increase the facility by 30%. We're in an ideal position to provide that financing because we're sitting there with the lease, they kind of meet our approval actually, in some cases, to deal with the additional space that are on our sites. So it's kind of a win-win opportunity for us to reprice in some cases, some of the capital that are going in to enhance the overall lease economics. So that will be an interesting part of the story as we talk about that in the coming year.
Okay. If I could just add one quick one here. Just looking at the recent Ann Taylor acquisition. How do you get comfortable with that or other private equity-backed retailers as tenants and historically have been more prone to bankruptcy, and we're in a currently healthy environment, but looks like it might get more challenging in the near future here. So just curious how you go about evaluating those opportunities.
Yes. We're excited about that facility.
Well, Jackson's mentioned. We look at those opportunities, actually, like we look at any of the opportunities that we come across. It's a 3-legged stool, the industry, the tenant and the real estate. In this particular situation, we're very comfortable with the industry. Women's apparel, it's not going away. The revenue for that market is higher now than it was in 2019.
In the particular customer, the segment that our tenant targets has actually got the expectations are for continued growth. So we're very comfortable with the industry. For the tenant, obviously, our tenant operates both Ann Taylor and LOFT. Got limitations on how much we can go into the credit, but it's north of $1 billion of revenue, solid EBITDA, very low leverage. And one thing that we like about this retailer is they are the very omnichannel competent, substantial portion of the revenue is through e-commerce. So we like that aspect.
The third piece is the real estate. These are absolutely mission critical. This is the DC, the main distribution center for both of these brands. Also handles all of the ecommerce fulfillment. You've got one in the Columbus, MSA. Great facility below replacement cost, in line rents. All the aspects you would want in the DC, the 36-foot clear heights, things like that.
The other facility is just to the west of Indianapolis, the e-fulfillment. Again, this sets a major part of their revenue. So this is mission-critical to them. But we're thrilled with all aspects, all 3 legs of the stool. The biggest one being substantially below replacement costs. So we're very happy with this acquisition.
I'd just say one thing. We do have a meaningful percentage of private equity-backed tenancy in our company. And we were very positive on Sycamore. They're very, very high-quality sponsor and just like Helman and Freeman is over at home. These are very, very high quality, very predictable operators of businesses that run business as well and ultimately, sometimes monetized through IPO or merger. So once again, we like that Ann Taylor opportunity.
Our next question comes from Brad Heffern with RBC Capital Markets.
Can you talk about the terms that you're seeing in the sale-leaseback market right now? Are you seeing concessions from buyers besides the higher cap rates like higher escalators, longer terms, better lease protections, et cetera?
I mean, I can sort of tell you that the things that we're looking at in the first quarter, the industrial assets that we have 2-plus percent annual escalators. So we're seeing better opportunity on escalations particularly in sale-leaseback opportunities in the industrial area. Look, it's still competitive. I mean we look at a lot of different things before we kind of land on. Hey, this has all 3 of the three-pronged underwriting pieces that are meaningful for us. So we tend to find that once we kind of knock those down, it is competitive. There are other people that look at the world the same way we do.
So as Mike suggested that we're just out here not competing with people. But I would say, generally, in the industrial area, companies are looking at sale leaseback, high-yield bank financing as a means to an end. And so if the terms get too egregious in the sale leaseback, then all of a sudden, they look at corporate debt as an alternative. Retail has got just a little bit more commoditized, we are not seeing escalations to change in any meaningful way or lease term change in any meaningful way.
I would say the other thing, we have seen that's been a dramatic change in some of the industrial sale leasebacks that we're looking at. A year ago, terms and conditions were really competitive as it relates to buyers. Tenants had a lot more leverage over buyers in that conversation. I just think there were just more buyers, more private buyers kind of willing to not look at some of this stuff because I think they're not as long-term oriented in terms of hold periods. For us, we're buying these assets, expecting to hold them for the whole lease-term.
So environmental matters, lease term matters, assignment matters for us. So that's where we are, I think, in the current market. We're finding good opportunities still competitive when we get down there, but it's not as rambunctious as it was, say, a year ago.
And Michael, I just want to clarify on the unidentified reserves, are we purely talking about lost rent, we're talking about that? Or is there some accounting reserve that you're planning to take? I'm just a little confused about the terminology.
Yes. No. We're purely talking about lost rent reserves. So just an assumption around things that could happen in the portfolio throughout the year that could cause rent to go away, right? So it's just an assumption, it's not an accounting reserve. It's not anything that we've identified or is planned or that we have to take. It's just an assumption, again, consistent in how we've approached it and all the other years, it's just a reserve for the unknown.
Our next question comes from Josh Dennerlein with Bank of America.
Just one follow-up on the reserve and guidance. Sorry if I missed it, but how many cents was it in 2022?
It was about the same at the beginning of the year. Josh, it might have been a little bit slightly less. A little bit less than 1%. We typically look at 1% of ABR, so ABR was less. So from a dollar standpoint, it was certainly less. But generally, we target that 1% of ABR when we give our guidance.
Okay. But where did it end up? I guess, how many cents was in 2018?
Yes. Were it ended up. I think we ended up at about, I mean, 0.3% for the year, somewhere around there, about 30 bps for the entire year, I believe, if you average it out. So obviously, much less than what our assumption is for this year. We ended up for the year.
Okay. And then, I guess, over the years, what's kind of the range? Is that 30 bps the lowest you kind of ever saw. And then like maybe what's kind of the highest trying to think through a cycle.
Yes. That was definitely the lowest. I mean, since the spin-off, it's generally been lower than 1%. I'd say the exception of that would be 2020. I have to go back and look. I think it was a little above 1% in 2020, obviously, that was a rough year. But in all years since the spin-off outside of the COVID year, it's been sub 1%. But last year, it was definitely the best year we've ever had.
Okay. Awesome. And then, maybe just kind of turning to competition for assets. I guess, are you guys seeing more or less competition out there for assets that you're looking at?
I would say right now, in the fourth quarter, obviously, you can see the results. First quarter, we feel really comfortable with our current pipeline. It seems like there's a little drop in deal flow, to be honest with you, like you probably heard that from other management teams. We're still picking and finding opportunities. The volume of things that kind of meet our criteria just seem to be less than, say, last quarter. I'm not sure what's causing that right now. But that being said, I think we're really comfortable with the guidance that we put out here that we'll be able to achieve really good opportunities in that 7.25%, 7.5% range.
And like I said, we've got a good runway of revenue producing CapEx that we have already buttoned down basically this year through the course this year. So we feel very comfortable with that right now. And look, if things change where there is more opportunity, more attractive cap rates. Obviously, we haven't factored any capital markets activity in our guidance, obviously, we can pivot if that happens if that makes sense. But right now, we think we've sized the right opportunity for our targets this year given kind of what's happening in the market.
Jackson, if I reading into your comments, is that kind of lighter kind of slow right now for things you're interested and imply that guidance is more back half loaded for acquisitions?
I'd tell you, like it's probably equally weighted, I mean, from what we can tell right now. I mean, look, interest rates are still pretty volatile right now, right? But as we started the year, the forward curve has continued to increase. When that happens and sort of the corporate markets get more interjection, I think that kind of gives us a better opportunity to lean into industrial sale leasebacks. If corporate debt becomes more favorable, that creates competition for us as well as just people that compete with us on the sale-leaseback front.
So I think right now, we feel pretty comfortable with our pipeline and what we put out there. And if things change for the positive that make us accelerate acquisitions, we'll clearly take advantage of that if the opportunity presents itself. But we think this is a reasonable way to approach the marketplace given some of the economic uncertainty that's still out there.
Our next question comes from Rob Stevenson with Janney.
Can you talk about how the theater assets are performing today given the box office? And are there other looming near-term operator issues beyond Regal? And if you need to retenant anything today, how is the market for that today versus when you did the last batch of retenanting that you did well on?
Yes. This is Ken. The theaters had a phenomenal third quarter. Fourth quarter was not as great, but they held the line, whatnot, 2023, a big driver for the theaters is the release slate. 2023 looks pretty good and consistently throughout the year. Right now, that slate, you don't see any big gaps. So they've got a consistent release dates for the tentpole films. And that's what's the big driver for theaters nowadays.
It's interesting on the reuse front, it's public knowledge. Regal did reject one of our theaters. We've been pleasantly surprised with the inbound activity we've seen right now. It's very early days on that front, but it's not cricket. Whether it's other operators or other uses for that real estate. So we'll see as the year unfolds. But right now, we see a very stable outlook.
Okay. And then, how are you guys thinking about indoor farming and the potential returns and risk there versus owning the traditional 500 acres of farmland leased to a large farmer?
I mean, Rob, we don't have any farm exposure right now. And I think right now, to be honest with you, like our current lines of business are keeping us really busy right now. So I don't have a real comment on that. Yes.
Our next question comes from Harsh Hemnani with Green Street.
Mike, you mentioned targeting a 200-basis point spread for 2023. Can you give us a rough ballpark estimate for what kind of nominal cap rate you will have to achieve when your acquisition to roughly make that spread?
Yes. I mean, as Jackson mentioned, we're targeting 7.25%, 7.5% cash cap rate for 2023. So at that cap rate, we can achieve that 200 basis points of spread based on the way we're funding, which is free cash flow, accretive dispositions and balance sheet debt.
That's helpful. And then, Jackson, in the past couple of quarters, you mentioned that this is really the best opportunities you're seeing in a long time in the net lease space. Is that still the case? And what's played out in your pipeline over the first part of this year. And just given the favorable market environment, given how good the sale-leaseback market is for you today. Why do you think the public market has given you not the best cost of capital relative to your peers who aren't even as leaseback focus as you are? And I guess in internal discussions, what can you do to maybe improve that cost of capital to be able to capitalize on this opportunity that might be upcoming in '23? Because it seems like you're more constrained on the cost of capital side than you're able to source deals but maybe not have it be accretive because of the cost of capital?
Yes. I think you had a lot of questions there. I'll try to start with this one. Since 2019, post the wind up of SMTA. If you look at the midpoint of our AFFO guidance for this year. Our CAGR has been close to 5%. And that's been with a lot of economic macro headwinds, COVID and invasion, inflation, increase in interest rates. So we've been able to accomplish, I think, a reasonable growth rate since 2019. I think if you look at our tenancy, look, I think people have, for whatever reason, associated a higher risk to our tenancy. So Party City is going to prove out. We're very, very confident we're going to be able to show proof of concept there, and the asset is worth a lot of money, more than what we paid for it. We think that at home is another tenant that Top 5 tenant. They're headquartered in Dallas. We meet with them. We just have a recent meeting with them. We were very, very confident about what that company is going to do. Our real estate that we own, and we believe in that credit. And we believe that we'll be able to -- that will be another good proof-of-concept.
So I think, Harsh, what we have to do this year, the best thing that we can do to I think, try to improve our cost of capital is to basically outperform that lost rent number that we've highlighted as 1% this year. We think we can do it. Look, we think it's reasonable to put that out there. But I think if we're able to beat that number this year, certainly from a tenant risk standpoint, people would not necessarily associate our portfolio in that way. We're originating more industrial opportunities. I think we're going to continue to keep pace with that just given some of the dislocation in the corporate financing market. So we're just going to make this company from a portfolio standpoint better.
And look, we've gone big, and now we're playing a little bit smaller in terms of number of transactions and volume. And I think this year will be a really good year for us to show kind of proof-of-concept what this company can really do. I mean we acquired an extraordinary number of transactions relative to what we've historically done last year. This year, it's like half of that, right?
But I think one of the most important things that we're going to be able to show is at the -- how creditworthy this portfolio is, given some of the sort of comments that we've gotten in the past about risk of potential tenancy.
Our next question comes from R.J. Milligan with Raymond James.
I wanted to ask you about the $60 million that was issued on the ATM this quarter. Can you talk about the thought process in issuing equity at those levels? And can we expect more ATM issuance in 2023?
Yes, obviously, it's just a small amount. We want to make sure we kind of enter '23 at a good leverage level. There were still decent spreads. In the fourth quarter when you look at that sliver amount of equity. So I think we ended in a good spot, presold spreads last year, finished out the year in a good place on the balance sheet. And that sets us up well for '23 based on our capital deployment plan. Right now, where the stock price is, we're not planning to issue any more equity. The equity price improves materially, and we see good acquisition opportunities that where the cap rate is at a place where we think the spreads are there, we could certainly get the ATM, that's definitely off the table.
We could do something even bigger and accelerate later in the year if that makes sense. But for now, we feel like we ended 2022 in a good spot in the balance sheet to set us up for our capital deployment plan this year without needing to access to capital markets. So status quo stays the same, I wouldn't anticipate an activity, but certainly, if the opportunity presents itself and if something makes sense, whether it's from a cap rate standpoint, our acquisitions or stock price improvement or a little bit of both, we could become active again.
That's helpful. And I know that or the midpoint of the guidance, I think, assumes that you're funded from free cash flow, dispositions and then increasing debt. And I'm just curious, based on that guidance, where do you anticipate leverage ending the year assuming no more equity issuance?
Yes. I think our leverage will continue to be in that mid-5s range that we typically target. We're always going to maintain conservative leverage and obviously maintain our BBB rating. So that mid-5% range is where we're comfortable. Obviously, we ended 2022, a little bit below that. So I think we have some flexibility there to kind of migrate into the mid-5s.
Our next question comes from Ronald Kamdem with Morgan Stanley.
Just a couple of quick ones. Just looking at the deck, the bridge for the guidance is really, really helpful. So I see the $0.06 from net deployment. Presumably that includes sort of the interest cost headwinds. I was just wondering if you could break out what the interest cost headwinds is in '23.
Yes. So that includes any incremental interest on any incremental debt we're using to fund the acquisition. So that's built in there. The interest expense headwind for '23 on the debt that we issued in 2022 is built into the Q4 2022 annualized AFFO per share, right?
And that's why we went off that because that Q4 $0.88 that we annualized had the full impact of the $800 million term loan, which essentially was all the debt that we ended up issuing in 2022 that we fixed at 3.5%. That's what made that walk easier. If you were to think about that debt from a year-over-year basis, right?
So we put that debt in place in middle of August, fixed it, and that was obviously cheaper that early in the year in 2022. So if you were to kind of walk from the full year '22 to the full year '23, just on that debt, that would be about a $0.05 year-over-year. But the way that we've kind of designed this walk for you was to incorporate the interest rate headwind on the debt we issued in '22 in that Q4 annualized number.
So when you look at the net capital deployment, that does have the impact of higher interest rates on the incremental debt we've used to acquire properties throughout '23. If that makes sense.
Got it. Makes a ton of sense. And just my second one, just going back to sort of the acquisition guidance. So I guess the first one is, are we supposed to understand that sort of $800 million at the midpoint, it sounds like the messaging is it's more sort of opportunity constraint than capital constrained at this point or is it both? Just trying to get a sense of that number?
I would just say, it's a little bit of both. I mean, look, for us, look, we talked about our cost of capital. It's not at the place where I believe it should be and for us to issue capital and do larger amounts of volume. I don't think that makes a lot of sense. I think to me, what makes sense is really prove out what we've been doing the last few years, which we believe we will this year. And at that point, we can look at potentially increasing volume with a more effective cost of capital.
I mean, so I'd say it's a combination of both. I mean, the opportunity set that we see is still there, but we don't think it makes sense, obviously, keep acquiring in a $1 billion-plus rate given our current cost of capital and we think we'll get -- it will be better for shareholders for us to kind of prove out all of the deals that we've transacted are really good, which we believe they are.
Great. And then my last one, if I may. Just sort of sticking with that cost of capital point, just because I don't think I've heard this question asked on the call yet. I think in the past, you talked about, number one, potentially looking at JV capital, right, and partnering with JVs as a source and then maybe being open to sort of more strategic actions in the space with maybe others having a better cost of capital. Just curious where your head is at today. The interest rate environment seems to have more staying power here. So both on the JV and sort of strategic actions. Any comments you can share would be helpful.
Yes. I would say probably on the JV side, I don't probably not -- we're probably not going to pursue that this year. There's clearly opportunity for us to do it. I think it just complicates the story for us. And in terms of strategic, I mean look, I think if we found a compelling transaction that could redefine what we're doing increased growth, obviously, we would pursue that and finance it accordingly. My guess is we're going to end up just may seem kind of boring, but just sort of stick to this basic plan. And when we get to the end of the year, say, hey, look, everyone, we've bought close to $5 billion of real estate, really good real estate is performing really well, and we see more opportunity to do more. And I think that's going to be -- I think that will be an important aspect of what we do to try to get this cost of capital in the right place.
I mean, look, I can tell you, our senior management team is very aligned long-term with shareholders. I mean if you look at our 2020 performance stock awards that were issued, I mean, basically, those were completely surrendered because of performance. And if you look at our 2021s, '22s and '23s, our senior management team as executive team is basically 100% PSA. There's no restricted stock awards time-vested that we received. So we are really aligned with shareholder performance and that's all and so we believe that what we're doing will basically improve our cost of capital and put us in a good position.
Our next question comes from John Massocca with Ladenburg Thalmann.
Maybe just going back to disposition market quickly. As we're kind of 2 months into the year here, what are you seeing in terms of the mix between institutional buyers and kind of more 1031 or individual buyers for the assets you're trying to capital recycle out of. And you essentially had that 1031 buyer held up in kind of a new tax year, if you will.
Yes. This is Ken. The overall answer is that it's a mix of all those. Yes, the 1031 buyers are still there. They may not be there in the numbers they've been a year or 2 years ago. But it's safe to say that there are 1031 buyers out there looking to transact about 40% of our dispose or individual buyers, 1031 some cash. About 60% were institutional. So we're seeing what we like, which is a healthy mix. We're not relying on one specific segment to complete dispositions.
I also think like some of the buyers were focused on accelerated depreciation to not into last year. So some of the car washes present really good opportunities for that. So my guess is, as the year progresses, people will look to take advantage of accelerated depreciation and some of the asset types that we own that can provide that depreciation.
Okay. That's very helpful. And then just a quick line item one. Impairments were a little elevated in the quarter. Just wondering if there was something specific driving that, or if that was just tied to dispositions or kind of future capital recycling.
Yes. I mean, about half of that was related to Regal. Initially, we had a couple of properties on the rejection list. One come off for now on has been rejected. So we impaired a few there and then a few are just related to some future non-renewals.
Our next question comes from Linda Tsai with Jefferies.
Could you indicate what percentage of your investment guidance is due to revenue-enhancing CapEx? And is the idea that as long as you're more focused on industrial revenue enhancing CapEx remains elevated?
I didn't give an exact number. I kind of give this number that we did, whatever, 114 last year. It's going to be in that probably going to be a little bit north of that. And it's going to be a mix of industrial retail. I mean it's going to be, it's sort of very specific. So I would just say it's very tenant-specific right now. Less industrial or retail oriented.
Got it. And then within Industrial, how do cap rates vary, whether it's distribution, manufacturing, industrial and where are you seeing the best opportunities?
Yes. Go ahead, Ken, first.
Right now, the acquisitions that we do tend to be a mix of those. If you compare a pure distribution to a pure light manufacturing, I'd suggest distribution is going to be a little lower cap rate. A lot of the facilities that we end up investing in typically have a mixture of those. It's a manufacturing facility with as part of the real estate is the ability to do distribution. But we're seeing great opportunities in all three of those. And in addition to that, we mentioned it earlier, the industrial outdoor storage has been a nice little sector that we've found some great opportunities in.
Our next question is a follow-up from Haendel St. Juste with Mizuho.
I wanted to come back. I don't think you gave it, forgive me if you did, but can you outline what's in the pipeline as of today? And any color on categories and range of cap rates? Thanks.
Yes. We didn't talk about pipe, I mean I think generally, I would just say our pipeline first quarter was really good. It's a cap rate is also somewhat good. It's better than the fourth quarter. And it's a good mix of industrial once again in finding those opportunities.
Okay. And then, Michael, for you, a follow-up. The 200 basis points of spread you mentioned you're targeting. Maybe you could walk us through the math a little bit here, because just looking at traditional WACC, I can't quite get there given where your cost of capital is versus the deals, you're seeing in the cap rate. So maybe walk us through a bit more of your color on how you're driving ballpark at that 200 basis points. Thanks.
Sure. Well, you have our disposition guidance, which you can sign whatever cap rate you want to, but we look at the cap rate as part of our cost of capital. We have about $125 million of free cash flow that we're deploying. And then, we're using our delayed draw term loan as the debt piece of it, which is [indiscernible] plus 95 basis points.
Our next question is a follow-up from John Massocca with Ladenburg Thalmann.
I know we're over the hour mark here, I'll be quick. But just kind of a follow-up to my prior question. What are you expecting in terms of recoveries or renewals for the leases that are expiring in the quarter just kind of anything that's either baked into guidance or just kind of general thoughts would be helpful.
Yes. This is Ken. For 2023, what we think as far as the 2 primary metrics, renewal recapture. We do think renewals are going to be a little bit lower than historic, which was around the 90% mark on the recapture. We think we're going to be in the same range as historic, which is the mid-90s.
This concludes our question-and-answer session. I would like to turn the conference back over to Jackson for any closing remarks.
All right. I want to thank you all for participating on our fourth quarter earnings call. We're very confident in our portfolio, it's tenancy and our associates. And we look forward to meeting many of you next week at the Citi Global Real Estate Conference. So thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.