Broadstone Net Lease Inc

NYSE:BNL

Earnings Call Transcript 2024-Q3

[Operator]

Hello, and welcome to the Broadstone Net Lease Third Quarter 2024 Earnings Conference Call. My name is Carla, and I will be your operator today. Please note that today's call is being recorded. I will now turn the call over to Brent Maedl, Director of Corporate Finance and Investor Relations at Broadstone to begin. Brent, please go ahead.

[Brent Maedl, executive]

Thank you, everyone, for joining us today for Broadstone Net Lease's Third Quarter 2024 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 3 will be available for the Q&A portion of this call.

As a reminder, the following discussion and answers to your questions contain forward-looking statements that 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, 2023, 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.

With that, I'll turn the call over to John.

[John Moragne, executive]

Thank you, Brent, and good morning, everyone. We began 2024 with 2 main goals: first, to reposition our portfolio through our clinical health care simplification strategy, focusing our future on industrial, retail and restaurant assets; and second, to put in place the foundation for attractive and sustainable AFFO per share growth through our differentiated strategy and core building blocks. With the progress we have made to date, particularly in this last quarter, I am proud to say that we believe we have substantially accomplished both and are now looking forward to setting a new baseline for B&L's growth and performance in 2025.

Starting with our clinical health care simplification strategy. With the completion of the latest tranche of sales comprising 10 clinical health care assets that closed on October 2, we successfully brought our total health care exposure below 10%, but most importantly, reduced our exposure to clinical assets to approximately 4% of our ABR.

The 6% of our assets that include animal health services, MedTailor medical retail and life science assets will generally continue to have a home in our broader portfolio and are not the focus of our current disposition efforts. Selling the 4% of our remaining clinical, surgical and traditional medical office assets will remain a goal for us, but will not be as much of a front and center focus now that our total clinical exposure is relatively immaterial.

In order to maximize value for the remaining clinical assets, we anticipate those dispositions will have various transaction time lines that comfortably extend into 2025 and beyond, given the need to address some combination of shorter lease duration, space utilization rates or elevated credit risk.

With a heightened focus on the clinical health care dispositions winding down, we have been able to devote more resources to our year-long effort to put in place the foundation for attractive and sustainable AFFO per share growth through our differentiated strategy and core building blocks, a key tenet of which is a laddered and long-term pipeline of attractive build-to-suit development projects.

We saw the considerable benefits of this strategy in multiple ways this quarter. First, we reached substantial completion on our UNFI build-to-suit development in early September. This brand-new high-quality 1 million square foot Tri-Climate food distribution asset strategically located in Sarasota, Florida is now operational and contributing to our earnings base with an initial cash yield of 7.2%, a 15-year lease term and 2.5% annual rent escalations that drive a straight-line yield of 8.6%. The project was ahead of schedule and below budget, thanks to solid execution by all parties. We are incredibly excited about this project and are grateful to UNFI, Sandstone, our development partner, and all of the parties that made this build-to-suit a success.

Second, we continued laying the necessary groundwork for sustained success in our laddered and long-term build-to-suit strategy. We currently have $405 million in committed development with attractive initial cash yields in the mid- to high 7% range and straight-line yields exceeding 9%. Subsequent to quarter end, we closed and began initial funding on 2 developments with an estimated total cost of approximately $114 million and expect to close and begin funding the rest of our committed pipeline in the coming weeks.

I'm extremely proud of our team's ability to execute on this differentiated core building block of our growth. These build-to-suit projects are all for identified tenants with structures in place to mitigate the traditional development risk associated with construction delays and cost overruns. Maybe best of all, we are leveraging existing and direct relationships to build this pipeline and further deepening relationships that should provide ample opportunity for more.

Our development partners need someone that brings surety of execution, deep experience and expertise and a willingness to be creative and help them secure projects and grow their businesses. They have found that in BNL.

With our attractive denominator, the individual size and aggregate scale of the build-to-suits comprising this strategic initiative moves the needle for our growth and does so in a differentiated way that drives long-term value. Just with this existing pipeline, we have already secured approximately $33 million of incremental ABR that will come online in Q4 2025 and the first half of 2026 and are actively seeking additional build-to-suit opportunities to round out our targeted ABR growth for 2026 as well as into 2027.

While the traditional net lease model relies on inorganic growth from the regular way transaction market, we are seeking to drive BNL's growth through this differentiated and long-term focused core building block. No one can predict what the net lease acquisitions market will look like in Q4 2025 or 2026, but we can tell you today, without having to do anything else, that we will add a minimum of approximately $33 million of ABR during that time period through this strategy in our build-to-suit pipeline as it exists today.

And with the incremental new ABR added as each project reaches substantial completion and rent commences, we're able to maintain our leverage ratio comfortably below 6x. We're doing things differently here at BNL, and we couldn't be more excited about what's to come.

We also have our eye on the future operationally. Our asset management team emphasizes engaging in re-leasing touch points as early as 24 months prior to lease expiration. So we are already actively evaluating our lease rollovers through 2026. This approach not only strengthens our relationships with tenants, but also provides us with valuable insights into their needs and intentions, such as identifying potential revenue-generating funding opportunities and gives us great confidence in our ability to successfully navigate upcoming lease expirations.

Recently, we secured 2 new leases for properties that had just vacated, achieving impressive lease terms of 13 years each and recapture rates of 100% or better. Year-to-date, we've executed 6 lease extensions or tenant renewals, all at or above 100% recapture with minimal tenant improvements required. Offsetting some of these gains, we now have 3 vacant properties, generating higher property operating expenses in the back half of the year. We are working towards optimal sale or lease outcomes for these assets to reduce these carrying costs and are cautiously optimistic about near-term resolutions.

While our overall operating results remain strong, and we are executing on our growth initiatives, we continue to see incremental pockets of credit risk as the broader impact from the duration of higher interest rates impacts consumer-centric industries and entities with less flexible capital structures. We remain vigilant in our tenant monitoring efforts and maintain great confidence in our portfolio due to its diversified construction, which limits the impact of any potential individual credit event and our proven ability to manage through any such situation that may arise.

Leveraging our core building blocks, consisting of best-in-class fixed rent escalations, revenue-generating CapEx investments in our existing tenants and assets, development funding opportunities and traditional acquisitions gives us confidence as we ramp towards returning to growth in 2025 and 2026, much of which is already visible through our committed build-to-suit pipeline.

For the current year, we are maintaining our AFFO guidance range of $1.41 to $1.43 per share. Starting this year with a view that a neutral AFFO per share result would be a positive outcome given our decision to strategically exit our clinical health care assets and redeploy the proceeds into quality investments, I am pleased that our accomplishments this year, including a reduction in cash G&A, will result in modest growth for 2024 and position us to establish a return to growth in 2025 with an ability to scale and ramp that growth in 2026 and beyond.

We made decisions this year that we believe are in the best interest of BNL and its investors for the long term and are confident that those decisions will lead to attractive and sustainable AFFO per share growth in BNL's future.

With that, I'll turn the call over to Ryan, who will provide additional updates on our build-to-suit pipeline, completed transactions and portfolio.

[Ryan Albano, executive]

Thanks, John, and thank you all for joining us today. Before turning to routine portfolio updates, I wanted to provide all of you with some additional details on our exciting and robust build-to-suit pipeline.

As John mentioned, we have made tremendous progress in our continued efforts to advance our build-to-suit strategy. The current pipeline consists of $405 million in committed developments with highly attractive initial cash yields in the mid- to high 7% range and straight-line yields exceeding 9%. Earlier this month, we closed on the first 2 of these projects, where initial funding has occurred and construction is now underway. This build-to-suit opportunity consists of 2 maintenance, repair and overhaul hangers, commonly referred to as MROs supporting one of our existing tenants, Sierra Nevada Corporation in advancing a project of significant importance.

Earlier this year, the U.S. Air Force awarded a $13 billion contract to Sierra Nevada Corporation to develop a successor to the E4B plane. Over the next decade or so, Sierra Nevada Corporation will assist the U.S. Air Force in replacing their aging fleet of E4B nightwatch planes, also known as the National Airborne Operations Center or Doomsday Aircraft.

If a catastrophe were to occur that destroyed the military's commanding control centers on the ground, the President would direct forces through an airborne E4B, thus the Doomsday term. The U.S. Air Force currently operates a fleet of 4 E4Bs, which have been flying since the 1970s and are near the end of their service lives.

The 2 MROs that we are building for Sierra Nevada Corporation will be directly supporting this very important project. Each MRO will be approximately 120,000 square feet in size with 75-foot clear heights, a 2-story office and an overhead crane system. They will be located directly adjacent to 2 of the company's existing MROs at the Dayton International Airport, strategically positioned within a few miles of Wright Patterson Air Force Base.

The total estimated cost of these 2 projects is $114 million and funding is expected to occur over an 18-month period with estimated completion dates of Q4 2025 for the first MRO and Q2 2026 for the second MRO. We are grateful for this opportunity to partner with one of our existing tenants and assist in their advancement of such an important project.

In the coming weeks, we expect to close and begin funding the remaining $290 million pipeline of currently committed build-to-suit opportunities and look forward to sharing further details related to those projects at the appropriate time. As John noted, we are very excited about the progress we have made on this front and believe these investment opportunities are highly compelling, featuring newly constructed, well-located buildings with strong tenant credit and yields that exceed most of the regular way transactions we've evaluated since the interest rate hiking cycle began.

In today's environment, these projects will drive future growth as we remain cautious about the regular way transaction market where we have consistently observed a disconnect between pricing expectations and the quality of opportunities.

Now turning our attention to our routine quarterly updates. Alongside our build-to-suit efforts, we closed on $93.9 million of investment opportunities during the quarter, bringing our year-to-date total to $381.9 million. This investment activity included $69.3 million of new acquisitions with a weighted average cap rate of 7.2% and an additional $24.6 million of fundings associated with our UNFI build-to-suit investment.

After reaching substantial completion, we are excited to count UNFI as our second largest tenant. This property is a premier Sunbelt asset located in Sarasota, Florida that adds tremendous value to our overall portfolio from both an NOI and NAV perspective.

Now shifting to our in-place portfolio. Trends remain largely unchanged during the third quarter. While we are confident that our portfolio will continue to deliver strong performance and generate durable and predictable cash flows, we remain cautious of industries that are sensitive to discretionary consumer spending and tenants who are exposed to persistently higher interest rates on their floating rate debt or face near-term debt maturities.

Our watch list has remained fairly consistent this year and consumer-centric tenants as well as some of our remaining clinically oriented health care properties remain in focus. Of particular note, we are pleased with the successful resolution of the Red Lobster bankruptcy proceedings with all 18 of our master lease sites remaining open while realizing a modest rent reduction of 8.25%.

Broadly speaking, the home furnishing space continues to be in focus for us, specifically including our tenant at home, which represents approximately 1% of ABR. As a reminder, we own a distribution center in Plano, Texas and a strong retail site in Raleigh, North Carolina. Both sites are well located in strong markets, and we believe they would garner significant interest from alternative users if we were ever to get them back.

Finally, as John mentioned in his remarks, we have substantially accomplished our clinical health care simplification strategy. On what remains of our clinically oriented health care properties, we continue to work toward optimal disposition outcomes. The majority of these sites are under negotiation regarding some combination of lease extensions, tenant improvement allowances and change of control transactions. We will manage these situations and strive for resolutions in the near to intermediate term.

With that, I'll turn the call over to Kevin to provide an update on our financial results.

[Kevin Fennell, executive]

Thank you, Ryan. During the quarter, we generated AFFO of $70 million or $0.35 per share, a decrease of 2.7% in per share results year-over-year. Results were largely driven by lower lease revenues in connection with our health care simplification strategy as well as incremental expenses associated with vacant assets. These factors were partially offset by lower cash G&A and interest expenses.

As John and Ryan mentioned, our portfolio continues to show resiliency, realizing 39 basis points of bad debt year-to-date, excluding Green Valley. For the full year, we remain comfortable holding our 75 basis point bad debt reserve and expect some elevated operating expenses to persist in the fourth quarter in connection with current vacancies.

The continuing trend of G&A coming in below expectations we set at the beginning of the year is primarily driven by lower compensation costs as a result of reduced headcount and lower professional services expenses. As a result, we incurred approximately $7 million of cash G&A expenses during the quarter, and we are lowering our full year cash G&A guidance to a range of $31 million to $33 million.

We ended the quarter in a strong and flexible financial position once again with pro forma leverage of 4.9x, in line with where we ended the second quarter. At the end of the quarter, we had unsettled forward equity of approximately $39 million in estimated net proceeds, which combined with approximately $870 million of revolver availability gives us ample capacity to fund our committed build-to-suit investments and evaluate incremental investment opportunities.

At our quarterly meeting, our Board of Directors declared a dividend of $0.29 per common share in OP unit payable to holders of record as of December 31, 2024, on or before January 15, 2025. Our dividend represents an attractive yield relative to many of our peers, remains well covered and will continue to more closely align with our targeted AFFO payout ratio in the mid- to high 70% range.

As John mentioned, we are reaffirming our AFFO guidance range of $1.41 to $1.43 per share. In addition to the cash G&A reduction I previously mentioned, we are lowering the high end of investment guidance from $700 million to $600 million. Please reference last night's earnings release for additional details, and we'll now open the call up for questions.

[Operator]

[Operator Instructions] So our first question comes from Eric Borden from BMO.

[Eric Borden, analyst]

John, just maybe on the guide, what's keeping you from raising it at this point in the year? Just rent collections are up sequentially. UNFI is now online and ahead of schedule, and cash G&A is tracking well. Is it really just the offset from increased expenses in the back half of the year?

[John Moragne, executive]

Yes. Eric, that's exactly it. This was all things that we anticipated coming. There were a handful of tenant credit events that we had earlier in the year that had to work their way through the process where we knew the impact was going to hit in Q4. Commensurate with that, there was also some additional carrying costs on some of the vacant assets that we're going to have between now and the end of the year.

We're confident that we've got some resolutions to take care of those in this quarter so that we will be on a better footing going into Q1. But these were things that we took into account as we set the guidance for the year and why we're comfortable holding where we are.

[Eric Borden, analyst]

Okay. That's helpful. And then maybe just turning to the acquisition environment. Just can you just discuss what you're seeing today more broadly in terms of volumes and cap rates? And if you were to acquire traditional net lease assets, what cap rates are you currently targeting? I know you guys are focused on the build-to-suit environment. Just curious if there's any opportunities in the near term for you guys.

[John Moragne, executive]

Yes. So I think it's pretty consistent from what we've been saying in the last quarter or 2 in that there's not a whole lot that's out there right now that we really like. There's certainly volume. The risk-adjusted returns on those relative to how we think about investing in regular way transactions aren't necessarily working for us.

Now there's certainly a cost of capital component to that. We are solidly in the 7s in the way that we're thinking about what the actionable universe is. But the things that are there aren't necessarily penciling for us in the way that you would want to see.

So what we've been telling a lot of investors, and Eric, you've heard us say this, has been if you want to understand the way that we're thinking about the regular way transaction market, look at where we're allocating capital today. And the place where we're allocating capital is primarily into our build-to-suit pipeline.

We think that is a really compelling differentiated strategy. And so we are much happier allocating there where we're getting mid-7 cap on upfront initial cash cap rates with our capitalized interest, and we're getting straight-line yields in the 9s. That's a really compelling place to allocate capital, and we're much happier doing that than chasing things down on a price basis in the regular way transaction market.

[Eric Borden, analyst]

Okay. That's helpful. And then just on the acquisitions in the quarter. Just we noticed that annual bumps were above the portfolio average and what's been acquired year-to-date. So could you just talk about was this a unique situation? Were you able to drive annual bumps higher? Or is this kind of the expectation going forward for you guys?

[John Moragne, executive]

I think a lot of it has to do with the weighting that we have towards our industrial portfolio. The bumps that you see in regular way retail and restaurant assets are always more muted than what we're able to get in the industrial sector.

And so when you weigh out what we've acquired this year and get down into the particulars of what we have, particularly in this last quarter, the majority of it is in industrial where we're able to command a higher aggregate rent bump. And so I think that's why when we talk about our 4 core building blocks, the first one there is weighted average rent bumps of 2%, which is highest tier in the space.

[Operator]

Our next question comes from Anthony Paolone from JPMorgan.

[Anthony Paolone, analyst]

I was just wondering if you could talk a bit more about just thinking into next year and investment spending. If -- it sounds like acquisitions will just be a much smaller piece of this. So just trying to think if that's, a, fair? And maybe b, like what is the order of magnitude? Because historically, you have done a pretty meaningful amount of investing. And if it's just going to be build-to-suits going forward, it just seem like the capital out the door will be a lot smaller as that builds.

[John Moragne, executive]

Yes. So I think if you're talking about capital in the near term, potentially, yes, it might be smaller. When you start looking out to the 9 month -- or excuse me, the 9-month, 3-quarter period that we were talking about in our remarks where we've got the ABR associated with allocating $420 million worth of additional investments, it's right in line with what we've done historically.

It's just on a sort of longer-term view of the way that we're thinking about the world. And with our focused now on laddering out those build-to-suits, so that way, we're having conversations today about what else can we add for 2026. Are there things that are going to come online at the end of '26 and the beginning of '27. Once you ladder into that, we're not going to have that conversation of how much are you putting out because we'll be doing it on a consistent basis quarter-over-quarter, year-over-year as those build-to-suits come online.

Now in the short term, we'll continue to be opportunistic and look for acquisitions that make sense for us. And if we see those, we'll go after them, particularly those direct relationship-based deals that is the majority of what we've done this year. Most of what we've done this year from a regular way transaction investment perspective has been with existing relationships, direct deals, things like that. We're not going after a lot of the things that are in the regular way transaction market.

I still think there's a lot of uncertainty in the regular way transaction market. I mean, even if you take the last 6 weeks or so, people have been waiting this entire year for the Fed to cut interest rates with the hope that you were going to get some certainty around rates and maybe you'd start to see rates come down and cap rates adjust and seller expectations and buyers' expectations starting to align better.

But if you take from when the Fed cut rates on September 19 to today, I mean, the Fed cut rates by 50 basis points, and you've seen 60 basis points of increase in the 10-year. So I'm not sure people are seeing the environment that they were looking for in the hopes that you'd get a better regular way transaction market. That's not something that we were banking on and planning for. We were planning to control our own destiny with the build-to-suit program with our 4 core building blocks, and we're very comfortable as we go into 2025 as the type of growth that we can generate in '25 and more in '26.

[Anthony Paolone, analyst]

Okay. And then in terms of dispositions on a go-forward basis, you talked about just health care slowing down and just doing the rest of that over time. But any other parts of the portfolio that we should think about as likely coming up for sale or as a source of funds really in 2025?

[John Moragne, executive]

Yes. I think it's more a traditional asset management strategy at this point. We've got the 4% remaining of the clinical health care that we'll be working on. Some of those we'll look to execute in 2025. Some of those may take a little bit longer. We have our office assets, which is about 5.8% of our ABR.

There's no real rush there. There's plenty of opportunity in the coming years to evaluate and find good solutions for those office assets, and we don't have to go out and light that value on fire. So from here on out, it's going to be more of a traditional asset management strategy where we'll be looking to mitigate some risk, take advantage of some arbitrage, do the stuff that you would expect us to do in years outside of this one when we had the strategic focus on clinical health care.

[Operator]

Our next question comes from Upal Rana from KeyBanc Capital Markets.

[Upal Rana, analyst]

John, with 2/3 of the health care dispositions out of the way, I know there's about 1/3 left. And you kind of mentioned that's going to be -- there are going to be mostly one-offs. Can you share what the appetite could be from buyers for the remaining assets?

[John Moragne, executive]

There's certainly interest. There's going to be -- as I said, you repeated sort of the one-off nature. So these are going to be individual discrete local, regional buyers, folks that have a particular interest in that asset and that property from an operating standpoint.

So we'll take our time on it. And the main reason for taking that time on it, as I said, is we want to try to maintain as much value as possible. There's always a buyer at some price, but we're not a seller at just any price. So we want to make sure that we find the right person in the right situation. And if that means we need to be patient and work on a lease extension, do some tenant improvement, work through a credit event, something like that, we'll make sure to do that to try to maintain as much value as possible.

[Upal Rana, analyst]

Okay. Got it. That's helpful. And then I know you are allocating more capital towards build-to-suits, but could you give us some details on what the competition has looked like in the transaction market? And do you think there could be some exhaustion from sellers where you may begin to allocate more capital towards traditional acquisitions?

[John Moragne, executive]

We certainly are open to it. We'll be as opportunistic as possible. The place that we play the most in sort of that mid-market industrial deal has been incredibly competitive this year with bid processes that look like they did back in 2021 and 2022. We haven't seen any exhaustion yet. But at the same time, as I mentioned a couple of questions ago in terms of where the rate environment went, people's expectations don't seem like they have been met in terms of what they were hoping for in the back half of this year. So it's possible that you start to see some capitulation here and there as people get used to a higher for longer environment.

We'll wait to see. We're poised and ready to jump on that. We've got $875 million of available capacity on our line right now, as I said in my prepared remarks, even with the build-to-suit program, we stay comfortably below 6x on a leverage basis all the way through to the end of those investments. And so we've got ample opportunity to be opportunistic and go out and buy some things if it makes sense.

[Operator]

Our next question comes from Jay Kornreich from Wedbush Securities.

[Jay Kornreich, analyst]

During the past quarter, you issued a small equity forward, your first in 2 years. And so I'm curious just as the focus switches from portfolio repositioning to now growth, how do you think about issuing equity capital to fund transactions going forward?

[John Moragne, executive]

Yes. So the environment is certainly more constructive than it was earlier this year. We were very pleased to issue the $39 million in ATM proceeds on a forward basis. It was great to get back in the market and sort of let the world know that we're open for business. It was a long 2 years between times when we had issued equity. So we were very excited to do that. At the same time, we're not currently trading in a place where we would feel that excited to go out and do a huge amount of equity.

Of course, you have to match these things up. It's a bit of a dynamic equation in terms of what the opportunity set is, what are the yields that we're getting. So the $39 million that we raised was a compelling opportunity relative to the long-term straight-line yields that we're getting on the build-to-suit program in the 9 cap range. So we're pleased with that.

But at the same time, we'll be cautious going forward. There's always a dilutive impact from raising additional equity. So it's the opportunity set, the yield and where our cost of capital stands relative to where our stock price is trading, we're happy to do it. But the thing is today, we don't need it. So we're not planning on going out and doing a whole lot more.

[Jay Kornreich, analyst]

Okay. And then just with the focus on the build-to-suit developments, which now stands at roughly $420 million, is there any kind of goalpost of how large you want to build this platform into? And as it continues to grow, how do you think about the funding of all these commitments as they ultimately start coming online?

[John Moragne, executive]

So from a funding standpoint, it's not altogether that different from the way we would think about it normally. We have the capacity today. We don't have any near-term debt maturities. We'll deal with those in turn. But we'll look at funding pretty similar to the way that we have in the past for the rest of our pipeline.

In terms of the capacity and the hope for the future with this, we're looking to make it as big as possible. We've got an opportunity here filling out, as I said, ABR of about $33 million that will come online sometime between Q4 of 2025 and Q2 of 2026. Sitting here today, being able to tell you that feels pretty exciting and pretty differentiated from what you would traditionally hear in the net lease space. So our hope is to be able to ladder this out going into the future, filling out the rest of 2026, start thinking about 2027.

This is a differentiated strategy that we believe is unique to us with our industrial focus, with the ability to do large chunky deals and with the relationships that we've been able to build with the developers, with our tenants as a unique funding source for them, gives them surety of close, a one-stop shop, makes it easier for them to grow their businesses and to find projects and then to move on to the next one. So this is something that we're very excited about.

[Operator]

And the next question comes from Ryan Caviola with Green Street.

[Ryan Caviola, analyst]

I just want to see if you could provide a bit of detail on the 2 new industries you entered last quarter and maybe share some thoughts on where you're looking to increase exposure or versus where you might feel you've reached optimal levels in specific industries?

[John Moragne, executive]

Sorry, can you repeat that again? I didn't catch the first one.

[Ryan Caviola, analyst]

Yes. Just -- no worries. Yes, just that you -- the industry count went up by 2 for the quarter. So just if you could provide some color on those 2 new industries you entered and if you're going to -- interest in increasing exposure there.

[John Moragne, executive]

Yes. I'm blanking at the moment. I mean, we moved into a different facet of sort of automotive services. One of our -- well, the largest acquisition we had in the quarter was with a company called Magna Seating, which is based outside of Detroit and services the auto industry there in terms of providing different versions of seats and automotive products for them. So it's a bit of an expansion of what we've already been into.

But to maybe the heart of your question, the diversified nature of our portfolio is something that we take quite seriously. The -- having a tenant base where we don't have any individual tenant that's larger than 4%, the number of industries, number of overall tenants that we have is incredibly important because it helps mitigate the risk of any individual single tenant event causing a significant problem for us.

And to your point on the industries, it's not just individual tenant risk, it's also individual industry risk. If you think about our watch list right now, looking at furnitures and some of the clinical health operators, the more industries you have in the portfolio, the better off that you can be in terms of mitigating the risk. So increasing that over time is a good one.

[Ryan Caviola, analyst]

And then investment activity in general has kind of split 70-30 industrial to retail. I just wanted to see if you expect that mix to remain steady or if there are emerging opportunities in either sector that might shift that balance going forward?

[John Moragne, executive]

Yes. I mean, we've been pretty steady on that for a while now. I think if you go back even 5 years in terms of our investment activity, 70% of it has been in industrial. So that has been a long time coming, I would say, in terms of the overall industrial focus. If you go back to 2018, our industrial portfolio was much smaller than it is today and where it sits now is the predominant portion of what we have.

We are nimble, though, and we're opportunistic. So if we were to see good opportunities in retail and restaurant assets, we would certainly go after them. We're not afraid of doing that, and we do like the diversification, going back to your first question. But 70-30 is a relatively sort of par for the course split for us, I think, going forward.

[Operator]

And our next question comes from Ronald Kamdem with Morgan Stanley.

[Unknown Analyst]

It's [ Jenny ] on for Ron. I think the first one, I want to follow up on the build-to-suit opportunities. So are you guys open to any -- this kind of opportunity with any new tenant relationship at this point? And going forward, if you do, like how would you make investors comfortable with the development -- like development risk and tenant risk related to it?

[John Moragne, executive]

Yes, so -- Yes. Thanks, Jen. With existing tenants, absolutely. This is sort of a marriage between the sort of second and third core building blocks of our strategy here where we certainly are looking to do revenue-generating CapEx projects with our existing tenants. But if they have new build-to-suit opportunities for them, we're happy to do that as well and sort of shift from that second to that third core building block.

This most recent one that Ryan talked about in his remarks here in Nevada Corporation is a great example. They were an existing tenant already in the portfolio. We have this wonderful opportunity to partner with them on the construction of these 2 MRO facilities in Dayton for an incredibly important project for the U.S. Air Force and the Defense Department. So we're happy to do that with more.

And from a risk standpoint, I mentioned it in my remarks, and we've talked to some investors about in more detail. We're not taking traditional development risk. I think first and foremost, it's important to note that we're not doing speculative development. These are all development projects where we have an identified tenant in place who will start paying rent when the project is completed. We're not sort of building a open a dream here.

And the second thing is in the structure of the deals that we're doing. We are putting in place sort of risk mitigants to ensure that if we are ever in a spot where we are taking on more traditional development risk, we are sort of the pocket of last resort, if you will. So it's something that is absolutely important to us. We are not looking to take on traditional development risk and happy to go in more detail with folks on that if it's needed.

[Unknown Analyst]

Yes, makes sense. So are you open to build-to-suit opportunities with any new tenant relationship at this point?

[John Moragne, executive]

Yes. I mean, any new tenant that has an opportunity for us, we're happy to take a look at. Whether every individual deal will pencil or not is an open question. But we are running projects as large as $200 million as we did with UNFI to as small as $2 million per site with a small QSR coffee concept. So we're happy to do things as large and larger than that and smaller than that and everything in between.

[Unknown Analyst]

Okay. Makes sense. And the second is, can you remind me of what happened to the Green Valley Medical Center?

[John Moragne, executive]

Yes. So that's a vacant property right now. There's no rent associated with it. There hasn't been any this year, there won't be next year. We're managing through the carrying costs and the hope is that we'll have a resolution to sell that very quickly. So it's not something that should really be on anybody's radar anymore.

[Operator]

[Operator Instructions] Our next question comes from the line of Caitlin Burrows from Goldman Sachs.

[Caitlin Burrows, analyst]

I think earlier in the prepared remarks, you did mention that there could be some pockets of credit risk that you see, which is limited to -- by diversification. But could you talk a little bit more about the risks you are seeing?

[John Moragne, executive]

Yes. Thanks, Caitlin. I would say it's the usual suspects. We're pleased with how Red Lobster went, but we need to see some sustained performance from them on the back side of it for them to come off the watch list. Ryan talked about at home. We're paying close attention to what's happening there, but their performance is really a concern from a corporate credit structuring issue as opposed to sort of the site level and the real estate there is pretty compelling. So we'll manage that just fine.

We're also paying attention to a handful of smaller operators in sort of the furniture industry, home goods as well as we've talked about at length, the clinical health care. There's a handful of operators there that have some credit issues that they're working through right now, and we're helping them through. So usual suspects for us.

[Caitlin Burrows, analyst]

Got it. And then maybe just also on the restaurant side, I feel like we've heard that there's some difference in how various different concepts are doing and it might relate to whether it's a sit-down or quick service, et cetera. But could you give some further comments on how the restaurant portfolio is doing?

[John Moragne, executive]

Yes. So the restaurant portfolio overall, I think we ticked up a little bit in sort of weighted average rent coverage from -- to about 3 3 for this quarter. But if you go down in particular, I mean, the lowest performer for us on a site level basis is Red Lobster, which is about 2, and then it ranges up to things in the 4s. So you got stuff in between. So overall, very pleased with where our restaurants sit.

[Caitlin Burrows, analyst]

Got it. And maybe just another follow-up on the build-to-suits. I guess, it sounds like a lot of the deals you're doing are with existing tenants, which generally makes sense. Given the size of the industrial properties, though, it seems like deepening those relationships would increase concentration somewhat. So is it just that they increase from some really small amount to something larger that's still not a concern? Or how do you balance that kind of concentration piece?

[John Moragne, executive]

Yes. So we have a pretty hard line that we're not going to go above 5% on an ABR basis with any individual tenant. It's been -- it's a difficult line sometimes because there's opportunities that we've had to go above 5%, but we're just not comfortable with it from a risk mitigating standpoint. So we've had to unfortunately decline some opportunities that we've seen in the last 12 months.

As the top 10 and top 20 tenant concentration gets a little bit higher as some of these larger projects come online, we're perfectly comfortable with that. We're already sort of top tier in terms of what the lowest concentrations are and adding a little bit to that is going to be fine. But the hard line for us is really that keeping every individual tenant at or below 5%.

[Operator]

The next question comes from Ki Bin Kim from Truist.

[Ki Bin Kim, analyst]

Just a couple of follow-ups here. On the $420 million of forward development funding commitments, in your press release, you show a few projects, the UNFI and Sierra Nevada. Is it just safe to assume that most of the remainder is industrial projects? And have you thought about maybe enhancing the development schedule in your supplemental for it?

[John Moragne, executive]

Yes. So we've got an updated schedule in the supplemental that gives a lot more detail, and we'll be adding to it over time. What's in the next sort of projects to come is predominantly weighted towards industrial. We have a little bit of retail in there that you'll see when the schedule gets updated. The intention is to start updating these on a more regular basis, not quarter-over-quarter. So you should expect to see some press releases from us with an updated schedule, hopefully, if we've been able to close these even potentially before NAREIT.

[Ki Bin Kim, analyst]

And the additional development deals, are these directly sourced? Or was this again like through the Sandstone group? Just trying to understand the origination process.

[John Moragne, executive]

Yes. So either direct through the developer or direct with the tenant in the Sierra Nevada Corporation situation. So -- and not just through Samsung. We're working with a couple of different developers at this point and expanding those relationships over time.

As I said in my prepared remarks, those developers are looking for someone that's going to provide them with some surety, with some consistency. We're simplifying the process for them where they used to have to find 3 different pockets of capital to make a development project work. They now just need to work with us.

So these are compelling opportunities for us and compelling for them so they can move on to the next deal where they're going to be looking to grow their business. So these are relationships that are incredibly important. And every deal that we have in our pipeline right now from a build-to-suit standpoint is either direct or is a relationship-based one.

[Ki Bin Kim, analyst]

And then just last one. On Page 18 in your supplemental, there's a comment that revenue and additional fundings will receive a cash cap rate of 6.8%. Just curious what that means.

[John Moragne, executive]

Yes, Ki Bin, that's the closeout sort of punch list items for UNFI. And so there's a little bit of yield differential from the ongoing project build and the closeout. And the primary gap with the difference is how the capitalized interest is earned under the contract.

[Operator]

[Operator Instructions] Our next question comes from Mitch Germain from Citizens JMP. That was our last questioner. I will hand back over to John Moragne for any closing remarks.

[John Moragne, executive]

Awesome, thank you. And thanks, everybody, for joining us today. As you can hear, we're incredibly proud of what we've accomplished this year. We're very excited about where -- what we're building and where we're headed and looking forward to talking with all of you in the coming weeks and seeing many of you at NAREIT. Thanks all, and have a great rest of your day.

[Operator]

That does conclude the Broadstone Net Lease Third Quarter 2024 Earnings Conference Call. Have a nice day. You may now disconnect.