Broadstone Net Lease Inc

NYSE:BNL

Earnings Call Analysis

Stable Growth with Optimized Investments

The company reported a 1.3% quarter-over-quarter increase in per share results, attributing it to growth in its same-store portfolio and strategic asset recycling. They've further strengthened their financial position by reducing their revolver balance by $49 million, increasing capacity to over $925 million. The company prudently managed its fixed-rate debt, shielding against rising interest rates. A dividend hike of 1.8% from the previous quarter was declared, the sixth semiannual increase since the IPO, with a payout ratio target in the mid-to-high 70% range, comparing favorably to peers. Affirming its 2023 guidance, the company anticipates an AFFO of $1.40 to $1.42 per share. They revised their investment volume down to a maximum of $250 million and adjusted their disposition volume estimate to about $200 million to continue strong self-financed performance.

Continued Growth with Conservative Planning

The company has seen an increase of 1.3% in per share results quarter-over-quarter, a testament to its successful strategies in portfolio growth and prudent asset recycling efforts during the first half of the year. This consistent performance has reduced reliance on capital market activities and strengthened the financial standing of the company.

Solid Dividend and Financial Standing

Amid market volatility, the company's fixed-rate debt capital structure provided protection against surging interest rates, finishing the quarter with a leverage ratio of 4.9 times, slightly down from the previous quarter. Confidence in its financial stability and a strong Adjusted Funds From Operations (AFFO) payout ratio led to an approved dividend increase to $0.285 per share, marking the sixth semiannual dividend boost since IPO.

Updated Financial Guidance

In light of the current market conditions, the company revised its investment strategy, lowering the expected investment volume to a maximum of $250 million, down from the initial range of $300 to $500 million, while adjusting the disposition volume to approximately $200 million for the year. These revisions aim to align with a financially sustainable model without significant reliance on equity capital fundraising.

Addressing the Green Valley Challenge

Green Valley has been identified as the single largest distraction for the company. Rent from Green Valley has been omitted from both the 2023 and 2024 financial guidance to mitigate its potential impact. The company is actively seeking solutions, including the possibility of selling the asset or finding alternative tenants.

Navigating the Carvana Situation

The company holds a strategic investment in 140 acres of prime industrial land which has been leased to Carvana. Regardless of Carvana's future, the company believes in the substantial residual value of the land and is optimistic about maintaining its investment value through various potential uses or redevelopments.

Earnings Call Transcript 2023-Q3

[Operator]

Hello and welcome to Broadstone Net Lease's Third Quarter 2023 Earnings Conference Call.

My name is Cole, and I'll be the moderator for today's call. Please note that today's call is being recorded.

I will now turn the call over to Mike Caruso, Senior Vice President of Corporate Strategy and Investor Relations at Broadstone.

Please go ahead.

[Michael Caruso, executive]

Thank you, operator. And thank you, everyone, for joining us today for Broadstone Net Lease's Third Quarter 2023 Earnings Call.

On today's call, you will hear prepared remarks from CEO John Moragne, President and COO Ryan Albano and CFO Kevin Fennell. All three will be available for the Q&A portion of this call.

Before we begin, I would like to remind everyone that the following presentation contains forward-looking statements which are subject to risks and uncertainties that can cause actual results to differ materially due to a variety of factors. We caution you not to place undue reliance on these forward-looking statements; and refer you to our SEC filings, including our Form 10-K for the year ended December 31, 2022, for a more detailed discussion of the risk factors that may cause such differences. Any forward-looking statements provided during this conference call are only made as of the date of this call.

I will now turn the call over to John.

[John Moragne, executive]

Thank you, Mike. And good morning, everyone.

From what continues to be a challenging and dynamic net lease and capital markets environment, I am pleased to report another strong quarter of results. As you have heard us say consistently throughout 2023, we believe our prudent and highly selective approach to capital allocation is the best path forward in our mission to maximize long-term shareholder value; and our third quarter results and slightly revised guidance for 2023 reflect that. While we are maintaining our AFFO guidance range of $1.40 to $1.42 per share for the year, we are slightly adjusting our investments, dispositions and G&A guidance. More to come from Kevin on this.

Notwithstanding the difficult environment, our pipeline of potential investment opportunities continues to grow, as we evaluated over $10 billion of potential new acquisitions, our third straight quarter of sourcing above-average volumes, but while sourcing and underwriting remained highly active, the number of investment opportunities that met our buy box were minimal, as interest rates expanded nearly 100 basis points throughout the quarter. And the dislocation between public and private markets continued to widen, with new investment cap rates lagging the pace of interest rate increases. Of particular note, we recently walked away from a large, significant late-stage investment opportunity, as we could not agree on final pricing terms amidst the rapid increase in rates.

The lag we are seeing in cap rates and risk-reward trade-offs has been a persistent theme for this year, and the recent run-up in interest rates and treasuries only exacerbated the disconnect further. Despite that, we remain opportunistic in sourcing investment opportunities; and are committed to the prudent, patient and disciplined capital allocation strategy we have employed throughout 2023. We continue to believe that strategy will be key to avoiding missteps in such an uncertain market and providing long-term shareholder value.

Given the current investment environment and our highly selective strategy, our third quarter results were driven by continued solid portfolio performance and incremental asset recycling during the first half of the year. Our existing portfolio of 800 assets with 220 unique tenants who operate across 54 different industries and our best-in-class diversification have positioned us to provide durable and consistent cash flows across any market cycle. We continue to view our tenant and industry diversification as a key differentiator for BNL which, when combined with top-tier annual rent escalations of a weighted average 2%, provides significant downside risk mitigation benefits, especially in difficult or uncertain markets like this one.

Our real estate portfolio, which is predominantly leased to industrial and defensive retail and restaurant tenants, continues to perform exceptionally well, as evidenced by 99.9% rent collections during the third quarter and 99.4% occupancy as of September 30, 2023. As of quarter end, only 2 of our 800 properties were vacant and not subject to a lease. We have seen corporate- or site-level improvements in many of our headline watch list tenants, with the main lingering issue in our portfolio continuing to be Green Valley medical center.

Similar to our update last quarter, the tenant continues to fail to meet certain milestones as defined by our agreement. Based on the tenant's lack of progress, we are no longer anticipating operations to commence in Q4 of this year. While we have yet to receive rent that commenced on October 1, the tenant continues to maintain the property and cover carrying costs. We are closely monitoring their progress towards reopening the hospital, but we have also begun evaluating all potential alternatives and may look to bring a clear end to the outsized distraction that this single asset has caused our company for over a year.

As noted in my comments earlier, we had only a limited number of investments meet our criteria during the quarter, with the majority of investments driven by development fundings and revenue-generating CapEx. Partnering with current tenants and developers has created additional ways to add value and continues to supplement our more traditional investment-sourcing efforts. Our team remains focused on these relationships, along with establishing new partnerships, further diversifying our business. Despite the challenging lending environment, we have continued to have success selling select assets that either possessed a credit and/or residual risk throughout the quarter. These sales continue to provide benefits in both mitigating risk within our current portfolio while also building dry powder to be accretively recycled when the time and investment are right.

The resiliency of our portfolio, paired with our flexible and fortified balance sheet, gives us great confidence as we navigate this higher-for-longer interest rate environment. We ended the quarter at 4.9x leverage on a net debt-to-annualized adjusted EBITDAre basis, giving us ample liquidity and flexibility to deploy capital when an investment opportunity meets our criteria. I've said this before and I'm sure I will say it again: The decisions we made throughout 2022 and year-to-date in 2023 continue to put us in a position to make decisions that we want to, not decisions that we have to, which remains an important distinction in today's real estate market. In a higher-for-longer interest rate environment where the outsized growth of the post-GFC years will be difficult to achieve, operational expertise, financial flexibility, solid portfolio performance and durable cash flows will be key to success. And you have seen all 4 of those things from BNL throughout this year, and you will continue to heading into 2024.

With that, I'll turn the call over to Ryan, who will provide an update on our portfolio.

[Ryan Albano, executive]

Thanks, John. And thank you all for joining us today.

As John noted, our efforts in disposing of select assets that either possessed a credit or residual risk remained successful throughout the quarter. We sold 2 properties for gross proceeds of $62.3 million at a weighted average cash cap rate of 6.2%. Year-to-date, inclusive of asset sales closed since quarter end, we have sold 11 properties for gross proceeds of $189.1 million at a weighted average cash cap rate of 6% on tenanted properties. We intend to continue to opportunistically execute on asset sales in the fourth quarter and into 2024.

On an external growth front, price discovery in the transaction market persists. The upward trajectory of treasury yields continue to influence the capital allocation decisions of buyers at a more accelerated pace than the price expectations of sellers, leading to widening of bid-ask spreads and an overall decline of the transaction volume in the broader market. As John highlighted, we remain focused in our efforts of sourcing the right investments and highly selective in the pursuit of opportunities as the market continues its price discovery.

Our investment activity during the quarter consisted entirely of fundings related to UNFI and incremental revenue-generating CapEx. UNFI, our previously announced $204.8 million build-to-suit transaction, remains on track to open in the third quarter of 2024, with rent commencing no later than October of next year. Year-to-date, we have funded approximately $58.4 million and expect to fund an additional $37.5 million throughout the remainder of the year. We will continue to look at similar opportunities to partner with developers in this capital-constrained environment while remaining highly selective and cautious as the macro environment evolves.

From a watch list standpoint, similar to last quarter, we still do not see any notable overarching thematic trends across our portfolio. Specific assets such as Red Lobster, Carvana and Green Valley medical center remain a key focus. While we recognize that Red Lobster continues to evaluate ways to improve the company's overall operating performance, site-level performance across our sites continues to improve. We remain focused on these assets. And we'll look to confirm these trends over the next several quarters, beginning with Thai Union's third quarter results which will be released next week and through ongoing corporate- and site-level financial reporting. As for Carvana, we remain confident in our investment's defensive positioning driven by both the mission-critical nature of our industrial sites as well as the longer-term fundamentals in a submarket in which they are located. As we highlighted last quarter, we are encouraged by the steps they took during the second quarter to increase the company's financial flexibility and its planned path forward.

With that, I'll turn the call over to Kevin for commentary on our financial results for the quarter.

[Kevin Fennell, executive]

Thank you, Ryan.

Turning to our financial results. During the quarter, we generated AFFO of $70 million or $0.36 per share, an increase of 1.3% in per share results quarter-over-quarter. Results were largely driven by same-store portfolio growth and incremental asset recycling in the first half of the year. Additionally, we incurred $7.9 million of cash G&A, which tracks slightly better than planned.

We once again ended the quarter in a strong and flexible financial position despite no capital markets activity. Our success in disposing off selective assets allowed us to further reduce the balance on our revolver by $49 million in the quarter, resulting in more than $925 million of remaining capacity. From a leverage perspective, John mentioned we ended the quarter at 4.9x, down slightly from 5x at the end of last quarter. Given the current market dynamics, it is worth reminding everyone again that our mostly fixed-rate debt capital structure has insulated us from the surge in interest rates and the higher-for-longer expectations.

At our quarterly meeting, our Board of Directors approved a $0.285 dividend per common share and OP unit. This is a 1.8% increase compared to last quarter and a 3.6% increase over the dividend declared in the fourth quarter of 2022. This quarter's increase marks our sixth semiannual dividend increase since our IPO and is payable to holders as of December 29, 2023, on or before January 12, 2024. The dividend remains well covered and aligns with our targeted AFFO payout ratio in the mid- to high-70% range and represents an attractive dividend yield relative to many of our peers.

Finally, we are maintaining our 2023 per share guidance today with an AFFO range of $1.40 to $1.42 per share. We've been navigating this year with a focus on strong operating performance and self-financing our capital deployment. And as John alluded to in his comments, we are revising our investment volume from between $300 million and $500 million to up to $250 million for the full year 2023.

As Ryan talked about our success on the disposition front, we are also revising our total disposition volume from between $150 million and $200 million to approximately $200 million. Finally, G&A has been well controlled throughout the year, and as a result, we are revising cash G&A from between $32 million and $34 million to between $31 million and $33 million.

Please reference last night's earnings release for additional detail. And we will now open the call up for questions.

[Operator]

[Operator Instructions] Our first question comes from Mitch Germain with JMP Securities.

[Mitch Germain, analyst]

Nice quarter. This is the second quarter in a row where we've seen a bit more of industrial on the disposition front. And I'm curious. Is it -- I know that you guys have talked about specific assets and what the requirements are for you to sell, but is it also a little bit where the demand is in the market for sales?

[John Moragne, executive]

Yes. It's a little column A, a little column B. Thanks for joining, Mitch. We certainly have continued our trend this year of looking at dispositions where we continue to have either credit or lease rollover risk, and so we're looking to do risk mitigation at the same time that we're trying to generate proceeds. And to hit the old cliche, in many cases, real estate is a local game. And so when we're looking at where we have an opportunity to sell something, particularly when more than 50% of our portfolio is made up of industrial assets, there's going to be some industrial assets that make their way into it. There still continue to be some good demand for those assets. And where we've got some concerns, we're happy to move some of those along.

[Mitch Germain, analyst]

Great. And John, the runway. So if I think about -- obviously you guys have a fantastic balance sheet, lots of liquidity, but if I'm thinking about your funding growth heading into 4Q and 2024, how much of a -- you still have a pretty decent runway in terms of the ability to sell properties in this market...

[John Moragne, executive]

Yes, yes. We feel pretty confident about it. Our current view -- and you can call it conservative, but our view is that '24 is going to look a lot like '23. We're not anticipating that the equity market is going to turn our way where we're going to be raising significant amounts of equity capital, if at all, so we'll continue to look to self-fund and control what we can control. And so we've got an ample pipeline of opportunities that we're evaluating on the disposition front, a handful of the things that are in the same vein that we looked at this year, looking at some incremental reductions in health care exposure. And so we'll continue to do that and prepare ourselves for another run in '24 like we did for '23.

[Mitch Germain, analyst]

Got you. It seems like you've got some frustration regarding Green Valley. Where do we hit a certain head where you start to evaluate alternatives there?

[John Moragne, executive]

We're already there. Green Valley, as I said in my prepared remarks, has been the single largest distraction that we've had as a company over the last year. Where we stand today, we have 800 properties. And the large majority of my time and almost every conversation I've had externally has been focused on one of them, so we have been absolutely hopeful and supportive of our operator and trying to get them up and running. We will continue to do that, and -- but at the same time, this has been an outsized distraction. It's 0.8% of our ABR, so it's immaterial overall. We did not include any rent in our '23 guide. We will not be including any rent in our '24 guide, so it doesn't have a material impact on how we're thinking about financial results for this year or for next year. And it's time to look at all the options we have to clean that up, if we can.

[Mitch Germain, analyst]

Is it a labor issue?

[John Moragne, executive]

There's a host of things related to that particular asset, both the market itself and as well as sort of structural problems that you would see if you're looking at that type of hospital throughout the country. We're lucky to have a member of our Board of Directors serve as one of the regional CEOs for one of the largest hospital systems in the country. And speaking with her about the difficulties that sort of regional community hospitals like Green Valley are experiencing throughout the country and the number of ones that have shut down even in the last 12 months has been very helpful for us understanding the sort of risk profile of this asset and sort of helping confirm our view of where we need to take it.

[Operator]

Our next question is from Eric Borden with BMO Capital Markets.

[Eric Borden, analyst]

Maybe just starting with Green Valley. What was -- just given the fact that they didn't pay rent in October, what is the expected drag on AFFO in 4Q? And then maybe, could you just talk about some of the different options that you're currently evaluating as it relates to the asset?

[John Moragne, executive]

Sure. Thanks for joining, Eric. No impact on AFFO. They -- we had already built into our guide that they weren't going to be paying rent. And they are covering all the carrying costs as well as maintaining the property, so there's no leakage for us with respect to the asset right now, so there's no impact on AFFO. And from a sort of opportunity standpoint, they still are working hard to try to get up and running. And so there's a good chance that that's what happens, but in our focus on trying to minimize the distraction caused by the asset, we have worked to engage local brokers to help us evaluate possible re-tenanting options as well as to sell the asset. So we're looking at all possible options here.

[Eric Borden, analyst]

Okay, that's very helpful. And then one on Carvana: I know we've talked in the past and you mentioned in your prepared remarks how it's crucial to their operations. They recently received a rerating. And the stock is up 500% year-to-date, but on the other hand, car loan defaults are on the rise just given the weakening consumer. How are you thinking about your exposure to the auto industry at this time?

[John Moragne, executive]

Yes. I mean it's great to see Carvana have the improvement that they've had this year. It makes us feel better about it, but we keep coming back to that is a real estate play at heart. It's 140 acres of graded industrial land and a great industrial submarket outside of Indianapolis that has a lot of potential uses to it, so the residual value there was key to how we thought about making that investment. And it's key to how we think about, if there ever were to be something that happens with Carvana where either they go through a restructuring and they go through a liquidation, we feel comfortable that we'll be in a pretty solid position to maintain the value.

[Eric Borden, analyst]

Okay, that's helpful. And then one last one, maybe just on the acquisitions under control. What's kind of the breakout there, the $76.1 million? Is there any developments in that pool? And what is the expected pricing on those assets?

[Ryan Albano, executive]

Sure. The breakdown there is primarily leaning towards industrial, I'd say, there and upward. If you look further up the pipeline not under control, there are certainly development opportunities that we're looking at, but it's a -- predominantly industrial weighted, with a little bit of retail mix in there as well. And then in terms of economics, we're looking at things certainly north of 7%.

[Operator]

Our next question is from Spenser Allaway with Green Street.

[Spenser Allaway, analyst]

You talked about a widening bid-ask spread. Can you guys just comment on the magnitude of the spreads you're seeing currently? And are there any property types or industries that stand out as having a larger-than-average bid-ask spread?

[Ryan Albano, executive]

Sure. I'd say we've seen the bid-ask spread probably widen out in some cases; widen out maybe 25 bps, maybe even 50 bps. What I would say is there are certainly less bids on deals, and those bids are a range in terms of what the economics are that buyers are looking for. I'd say I've seen things probably about as wide as 200 basis points from top to bottom of the bid range. Obviously there are other terms involved that are at play that sort of drive some of that spread differential, but that's probably the widest I've seen it in quite a long time.

[Spenser Allaway, analyst]

Okay, that's really helpful. And then do you guys have a sense of what your AFFO growth would be next year absent any external growth?

[John Moragne, executive]

Yes. I think I'd point you towards a low single-digit figure based on our embedded lease bumps of 2%. Run rate for us is in that low single-digit growth.

[Spenser Allaway, analyst]

Okay, great.

[John Moragne, executive]

And maybe, Spenser, I'll finish the question if you step forward a little bit more on run rate. Given UNFI's impact when you think through that starting in October of next year, that number ticks a decent bit higher for [ '25 ].

[Operator]

Our next question is from Ki Bin Kim with Truist.

[Ki Bin Kim, analyst]

Just going back to Green Valley. Can you just talk about how that -- how deep is that potential pool of different operators that can operate that hospital? And secondly, how is the nurses' strike indirectly or directly impacting potential operations there?

[John Moragne, executive]

I'll take the second part, first. Ki Bin, they are having any sort of difficulties that you can imagine in terms of getting this thing up and running between the licensing process that they have to go through; between looking at staffing, pharmaceutical licenses, financing on these things; and all sorts of stuff, so I wouldn't attribute the delay to any one particular thing. Certainly nurses' strikes that are happening aren't helpful for the health care system generally and certainly aren't helpful for folks that are trying to get a new hospital up and off the ground. Let's take the first part of the question: This isn't a huge pool of potential operators that can come in there. Between state licensing as well as population densities and the way that the health care production system is surrounding this area, there's only a handful of players that could potentially have an interest in it. And it may need to be something that you rethink the use of the physical space, where maybe it's getting cut up into a different direction. You've got multi tenants that are going to potentially be in there or someone who thinks about using a portion of it. There's a whole lot that we have to think about and we're still in that learning phase, so more to come.

[Ki Bin Kim, analyst]

And you have 18% of your portfolio dedicated to health care. And I know the nurses' strike may not impact operations directly, but it does cause a higher benchmark for wages. Are you seeing kind of fall-through impacts on perhaps the cost structure for your health care tenants?

[John Moragne, executive]

Not at the moment, but I think it's also important to dive into the particulars of what our health care portfolio is. You can't paint with a broad brush the 18% that we have. About 7% of that is clinical, and the clinical assets would have nurses on staff and on site. And so maybe there's a little bit of a read-through to those assets, but then the other 11% of our ABR is a variety of things, including what would traditionally be considered medtail-type assets, plasma centers, dialysis. We have a decent chunk that's committed to veterinary services which wouldn't have those types of issues. And then we also have some sort of more R&D-type facilities that will be included in our health care bucket, so you can't sort of look at it as a monolith. And it's a fairly small percentage that we do have. And there's not any read-through that we have at the moment on that type of nurses' strike issue.

[Operator]

Our next question is from Michael Gorman with BTIG.

[Michael Gorman, analyst]

John, maybe just stepping back for a second and talking about dividend policy, obviously a nice little increase in the quarter. Stock is yielding about 8% in a market that seems to want to pay more attention to dividend yields, but given what we're seeing just generally in the cost of capital environment, how are you thinking about balancing continuing to kind of increase that payout to investors versus retaining what is probably your cheapest cost-of-equity capital here? So how are you balancing out the payout versus retained cash flow for future growth?

[John Moragne, executive]

Yes, good question. Mike, it's something that we talked about a lot. And when you look at the hard dollars, the total amount of increased dollars [ that then go out the door ] as a result of this dividend increase, it's about $1 million, so it's not a huge amount, but it is something. It's $1 million that could be applied somewhere else, from a capital allocation standpoint. Where we came down on was that in the current environment, as I sort of mentioned in my prepared remarks, the outsized growth that the net lease sector has experienced in the post-GFC world, for that 15-year period or so, feels more and more difficult. That's not to say that it's not going to come back and it's unlikely, but at the moment, we've gone through the entirety of 2023. We're looking at '24. And us and, I think, a lot of our peers are looking at '24 being very similar to '23. And so in a period when you're not seeing the type of external growth and the outsized return expectations that come from that, which is fed by a low interest rate environment and much better cost of capital than what our industry is currently experiencing, we turned and looked at, "Okay. Then we need to do better as real estate operators." And as I mentioned in my remarks, operational expertise, financial flexibility, solid portfolio performance and durable cash flows are going to be key to success in the short term; and potentially longer term, if you don't see a significant change in cost of capital. So when we looked at that and we thought about how do we provide the best possible value for our shareholders and the highest possible total shareholder return, continuing to provide them with solid dividend growth was a key part of that, so that's where we came down on that decision.

[Michael Gorman, analyst]

No, that makes sense, and I agree. And I'm curious as you think about '24 and you look at the opportunity set. Obviously, as you mentioned, Broadstone has got some skill sets here in terms of operations and redevelopment and development. Understanding that the cold storage facility is a pretty big lift through October, are you seeing alternative opportunities to step into broken development, step in on sort of mezz financing on properties you'd ultimately like to own at the end? Are you seeing any more unusual opportunities away from the regular-way acquisition market that's pretty slow?

[John Moragne, executive]

Yes. No, absolutely, we are. And that's actually the place where we continue to see what we think are the best possible opportunities. The regular-way acquisition market has been slow to adjust to rising interest rate and treasuries and cost of capital, a reality for people that are on the buy side, particularly now that you're seeing a full dropoff of the PE buyer and the 1031 buyer. There's a much smaller buyer pool than there was before. And as Ryan talked about earlier, that bid-ask spread is still pretty high in sort of the traditional market, but where you see a lot of difficulty for folks right now is in those developments. It's in those sort of creative capital allocation decisions where they are having difficulty finding their traditional sources of financing because the bank real estate lending market has completely ceased up, so that's a great opportunity for us to step in and provide them with a unique source of new capital. And then we're just in the process of looking at those, evaluating them and trying to make sure that those fit within the net lease wrapper and will be something that is readily digestible by the market and not something too far afield.

[Michael Gorman, analyst]

Great. And then just last one for me. I'm triangulating a few of the comments that you had in prepared remarks and prior questions. You mentioned of the deals kind of not fitting within the buy box, mostly from the cost of capital side, but then also, with the dispositions, kind of some credit risk or some tail risks on the tenant side. I'm wondering if -- given what you're seeing on cost of capital, if you've adjusted your tenant credit buy box in terms of what would actually make you comfortable in bringing new tenant credit onboard.

[Ryan Albano, executive]

Sure. I would say, yes, there's not a one size fits all in terms of how we're thinking about that today. However, we certainly have adjusted the way that we're looking at it and how we're thinking about bringing potential new credits online. In addition to that, I'd say that also goes for the real estate fundamentals. I would say we're -- we always look for a balance between the two, but we're in an environment where we've got pricing backing up and we've got financial strength across the market in general. And how long does that persist is a good question at this point, so we have certainly tightened up the way that we're looking at things. And I think you see that in terms of our selectiveness.

[Operator]

Our next question is from Ronald Kamdem with Morgan Stanley.

[Zhen Li, analyst]

You have Jenny on for Ron. I just have 2 quick ones. The first one is, if I dig into your pipelines, I see that Q3 investment is very light, so in this higher rate environment for Q4, if you want to compare with Q3, are your new conversations going on right now still kind of in the same pace? [ Or every party rather want to wait ] until like early 2024. Like any color on the pipeline would be helpful.

[Ryan Albano, executive]

Sure. I guess I'd sort of zoom out for a second. I'd say that, if you look at Q3 of this year versus Q3 of last year on an overall transaction closing basis for the market as a whole, not just us specifically, it's down about 66%. So I think that tells pretty much everything you need to know. From our perspective, we're looking at it being very selective. We've had a lot of commentary around that. As we look forward here, we're looking for prices to continue to adjust. Since late summer, we've seen 100 bps of change in treasuries, such as the risk-free rate alone, pushing the change in asset pricing or asset pricing expectations from a buyer perspective. And we're being highly selective, so I think what you're seeing is probably, [ yes ], a light Q3, but we have a number of opportunities that we're looking at today that have either been broken in the past -- and we're looking at ways that [ there are ] good deals. Just capital behind them is no longer there, but they take time to sort of come through the finish line.

[Zhen Li, analyst]

Makes sense. Second one is your -- on your cap structures. I hear you said you're not planning to use ATM programs in the, like, near future, but as you mentioned as well, the cap rates are continuing to go up, not only from acquisition front but also from disposition front. Just curious: If cap rates continue to go up, like, how do you measure whether you want to rather like sell assets to recycle, to fund your acquisitions; or you would use a further, like, ATM program? If you can talk about your approach there, it would be great.

[Kevin Fennell, executive]

Yes. I think the heart of your question is on source of funding. I'd say we've got a pretty big runway in front of us with where our balance sheet sits today. And I'd set a baseline expectation on, considering leverage, our disposition opportunities as we think about where we can redeploy that money. As John has mentioned, I think, quarter after quarter, after quarter, there's not a world where we're thinking about issuing equity at these levels, especially where the transaction environment currently sits from an opportunity set.

[Zhen Li, analyst]

Yes. If I can ask another one just for the pipeline front: Like do you think you will be focusing more on the industrial, like, over other sectors?

[Ryan Albano, executive]

Yes. I'd say -- when I look at our pipeline today and even look further up from what we have under control, I'd say it's weighted towards industrial and then with a second weighting towards retail.

[Operator]

We have a follow-up question from Ki Bin Kim with Truist.

[Ki Bin Kim, analyst]

Just a quick one on the large development project you have [ for UNFI ]. Can you just remind us how you're treating the costs to fund that? Are you capitalizing costs? And when do you start booking that income?

[John Moragne, executive]

Ki Bin, everything is -- associated with that development is hung up on the balance sheet, so you'll see the asset grow both from the dollars we fund but also the interest associated with it. And then when it comes online in October, that's when it will start hitting the P&L on both fronts.

[Operator]

There are currently no further questions registered, so I'll pass the conference back to the management team for any closing remarks.

[John Moragne, executive]

Thanks, everybody, for joining us today. Appreciate all the questions and looking forward to seeing many of you in Los Angeles, at Nareit, in a couple of weeks. Have a great rest of your day. Bye all.

[Operator]

That concludes today's conference call. Thank you for your participation. You may now disconnect your line.