Broadstone Net Lease Inc

NYSE:BNL

Earnings Call Transcript 2022-Q4

[Operator]

Hello and welcome to the Broadstone Net Lease Fourth Quarter 2022 Earnings Conference Call. My name is Bruno and I will be the operator of today's call. Please note this call is being recorded.

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

[Mike Caruso, SVP, Corporate Finance & IR]

Thank you everyone for joining us today for Broadstone Net Lease's fourth quarter 2022 earnings call. On today's call, you will hear prepared remarks from Chris Czarnecki, John Moragne and Ryan Albano. Kevin Fennell will also 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 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 will turn the call over to Chris Czarnecki.

[Chris Czarnecki, CEO]

Thank you, Mike and good morning, everyone. As this will be my last earnings call before stepping down from my role as CEO at the end of the month, I want to open the call by acknowledging and sincerely thanking all of the BNL employees, directors and capital providers for their support during my leadership tenure. I am incredibly grateful to have had the opportunity to serve BNL's stakeholders for the past 13 plus years, and to have served as CEO since 2017.

I am also very pleased with our board's decision to elevate our current Chief Operating Officer, John Moragne to the role of CEO upon my departure. Having worked closely with John for more than a decade, I am extremely confident that there is nobody better-suited to lead BNL into its next chapter. John knows our business inside and out and is beloved by our employees for his service-oriented leadership mentality. He serves all with grace, humility and intelligence. John is an exceptional leader of the Company already and he will make a phenomenal Chief Executive. I would also like to congratulate Ryan Albano and Kevin Fennell on their new roles as President and Chief Financial Officer, respectively. Both are highly deserving of these new roles and responsibilities and are excited for what is to come.

Finally, I want to welcome Jessica Duran and Laura Felice to the BNL board. Both are exceptional individuals with impressive professional backgrounds that will help support and guide the Company for years to come. Jessica has a deep background in retail and private equity from her current role as CFO with TSG Consumer and rechecks matters from her days at Deloitte. Laura's background is also in retailing with for 10 years at Clark's and now as CFO at BJs Wholesale Club along with a deep audit background from her time at PWC. The entire board is very excited to be able to welcome these impressive individuals to an already strong group.

And with that, I'll turn the call over to John and the rest of the executive team here today.

[John Moragne, EVP & COO]

Thank you, Chris and good morning to all of you who are joining us today. Before we jump into BNL fourth quarter and full year 2022 result, I would like to begin by thanking Chris for his immeasurable and innumerable contributions to the Company over the past 14 years, in particular, during his service as our CEO since 2017. BNL would not be what it is today without Chris' humble leadership and selfless dedication to all of our stakeholders. Chris' vision as CEO and steadfast commitment to our growth were the foundational blocks for BNL that has guided us ever since. He believed in small ego, big shoulder leadership that taught us all how to contribute to the greater good, pursue continuous improvement, create a service oriented and fulfilling culture and did so in a way that was never about him.

I am immensely grateful to Chris for his mentorship and friendship and I am confident that Chris' enduring legacy at BNL will be felt through our deep commitment to stewardship, transparency, and value creation. The foundation Chris has laid will help support BNL's bright future for many years to come. I am also grateful to both Chris and our board of directors for their confidence and support in me, but I look to continue to deliver exceptional results alongside the same talented team I have worked closely with since joining the Company.

Now turning to our results. I am pleased to report a strong fourth quarter to close out 2022. I am incredibly proud of all that we accomplished during the year and the results we were able to deliver for our shareholders, despite facing a challenging market backdrop. With over 900 million of accretive investments, more than 99.9% rent collected, minimal vacancies and proactive capital markets execution, we were able to deliver full year 2022 AFFO of a $1.40 per share, representing 6.9% growth over the prior year. Closing out 2022 with a conservative leverage profile of 5.2 times net debt to annualized adjusted EBITDAre and ample liquidity, we are well-positioned to continue to selectively pursue attractive investment opportunities in 2023.

For me, 2022 was the perfect distillation of what makes our diversified investment strategy so dynamic and frankly undervalued by the market. Throughout 2022, our broadly diversified buy box provided us with unparalleled flexibility. In Q1, we invested $210 million in 27 properties with 87% of the ABR coming from restaurants and retail assets.

Now, fast forward to Q4. A significant period of macroeconomic uncertainty, rising interest rates, dislocation between cost of capital and asset pricing and the transaction market struggling through price discovery as sellers are slowly forced to adjust their expectations. Responding to all this disruption, we shifted our focus to industrial assets, where we saw cap rate expand at a more accelerated pace due to sector specific supply and demand characteristics, as many private leverage centric buyers who rely on asset level financing exited the market due to rising debt costs.

With this shift, we finished the year with 72% of our total investment activity concentrated in our industrial vertical, as we were able to transact at higher cap rates and achieve better risk adjusted returns for our shareholders. During 2022, our weighted average acquisition cap rate expanded 100 basis points from Q1 to Q4, representing the largest expansion of any net lease REIT, having a buy box that spans multiple core property types and taking a disciplined, but nimble approach to where we allocate the capital, allowed us to maintain accretive investment spread without compromising our underwriting standards.

During the fourth quarter, we invested approximately $310 million in 17 properties at a weighted average initial cash cap rate of 6.7%. The leases for new acquisitions include a strong weighted average lease term of approximately 20 years and solid 2% rent escalation, translating into an attractive weighted average cash cap rate of 8%.

As discussed on our previous earnings call, fourth quarter acquisitions were largely driven by the single largest sale leaseback transaction in the BNL history, an opportunity directly sourced from an existing relationship to acquire seven mission critical industrial facilities leased to a food manufacturer with a longstanding and successful operating history. As our new single largest tenant exposure of 4%, we feel confident that the tenants focus on defensive end user products, deep industry relationships, and a strong track record uniquely positions the tenant to perform across all market cycles. In addition, the seven locations are master leased, well-located and represent 100% of the Company's production capabilities.

While Q4 represents the largest quarter of activity for 2022, we intentionally slowed our acquisition pace during the quarter as it became clear to us that additional price discovery and expectation resetting needed to occur to properly reflect an appropriate risk-reward trade-off. Predominantly, all of our Q4 transactions were closed by early November and had been underwritten and signed up in late summer. Solid capital markets execution earlier in the year allowed us to lock in a favorable cost of capital that translated into a creative investment spread on all acquisitions completed during Q4.

Heightened selectivity in the second half of the quarter translated into full year investment activity just above the low end of our guidance range, but it's positioned us to continue to prudently grow in 2023. We will continue to employ this more measured approach to external growth in the near term as price discovery persists. As always, we remain focused on only pursuing opportunities where risk and return are appropriately calibrated. As stewards of our shareholder capital, we do not believe in growth for growth's sake, and we will take a disciplined, prudent and selective approach deploying our capital.

We are currently focused on deploying available dry powder in hand that supports a creative spread investing at prevailing market cap rates. With quarter end, we currently have $5.2 million of investments under control, which we define as having an executed contract or letter of intent. In addition, we currently have $30.6 million in commitments to fund revenue generating capital expenditures with existing tenants. We continue to see creative ways to partner with our existing tenants in an effort to supplement our routine sourcing efforts. In addition, we will continue to creatively recycle capital through strategic dispositions in 2023.

During the fourth quarter, we sold three properties for net proceeds of $39.2 million at a weighted average cash cap rate of 5.8%. Subsequent to quarter end, we executed a simultaneous lease, buyout and sale of an office asset for total proceeds of approximately $39.5 million, translating into an all-in exit cap rate of approximately 6%. Opportunistic asset sales such as these not only provided additional dry powder to be accretively recycled, but also helped to mitigate both residual and credit risk in our existing portfolio.

With this sale, and on a pro forma basis, we have reduced our office exposure to 5.9% of our ABR from 6.5% at year-end, and we will continue to look for opportunities to reduce our standalone office exposure further in ways that generate strong returns for our shareholders. As for the health of our existing portfolio, as of year-end, all but three of our 804 properties were subject to a lease, and our properties were occupied by 221 different commercial tenants across 55 industries.

The portfolios weighted average annual rent escalation remains at 2% and the weighted average remaining lease term was 10.9 years. With significant ongoing economic uncertainty that may persist for an extended period of time, we have increased the scrutiny of our internal portfolio review process and credit stress testing in light of the current backdrop. Of note, the new operator at Santa Cruz Valley Hospital, now known as Green Valley Medical Center, continues to work through their licensing and accreditation process. It is on track to complete these steps and begin accepting patients later this year. In addition, we are monitoring Carvana situation closely and remain confident in the mission critical nature of the industrial asset we leased to them and its underlying residual value.

Finally, we sold three of our Red Lobster properties in 2022 for gains at attractive cap rates, and we'll continue to look for opportunities to decrease our exposure over time. We currently own 19 of the original 25 properties we acquired in 2015 and 2016 at [indiscernible] cap rates, all of which are subject to a master lease and are located in strong retail corridors and large population centers. Despite those areas of increased attention, our collections continue to pace the net lease industry with more than 99.9% collected for the year, which with the exception of 2020 during the COVID pandemic, when our collections were still top-tier in the net lease space, continues a seven-year track record of 99 plus percent rent collections since becoming a public reporting company with some of the lowest tenant concentrations in the net lease space.

Our highly diversified operating model creates a lower risk profile than a simple investment grade rated percentage would otherwise indicate. Geographic tenant brand and industry diversification provides a defensive hedge against any singular tenant credit event. I'm confident that our thoughtfully constructed portfolio is built to perform across all market environments, including the one we find ourselves in today. With a disciplined, prudent and selective approach to growth this year, no material debt maturities until 2026, conservative leverage profile, robust liquidity and solid portfolio performance, I believe BNL is well-positioned to capitalize on 2023 and build momentum throughout the year for differentiated growth in 2024 and beyond.

And with that, I will now turn the call over to Ryan.

[Ryan Albano, EVP & CFO]

Thank you, John, and good morning everyone. I would like to first start with an overview of our current balance sheet positioning and recap some of the capital markets activities we completed during 2022 that have positioned us to operate in a period of economic uncertainty while also pursuing selective growth in 2023. Proactive balance sheet management in capital markets execution throughout 2022 have positioned us for success both in the near and long-term. During the year, we judiciously raised capital focused on creating near and intermediate term financial flexibility via many of the capital markets tools available to us. This approach allowed us to lock in an attractive investment spread on all acquisitions completed during the year.

Build dry powder that can be accretively deployed during this period of extended pricing discovery, lengthen our debt maturity profile to provide greater flexibility in light of capital markets volatility, hedge our interest rate exposure in response to aggressive Fed monetary policy and provide ample cushion to operate during the economic uncertainty that lies ahead. As I outlined on our previous earnings call, we entered into two new unsecured bank term loans in August which allowed us to extend our debt maturity profile and lock in attractive relative cost of debt. We currently have no major debt maturities until 2026 and while we intend to be repeat issuers in the investment grade bond market in the future, the actions we took during 2022 provide us the flexibility to access the long-term debt markets when conditions normalize.

In addition, during the year, we sold a total of approximately $10.5 million shares of common stock at a weighted average sales price of $21.66 per share for net proceeds of $223 million under our ATM program. While we did not use the ATM during the fourth quarter, opportunistic use of the program in the first half of the year fueled most of the accretive acquisitions completed during the last two quarters of 2022. The ATM has been and will continue to be a core component of our overall capital market strategy. As of year-end, there was approximately $145 million of capacity remaining on the current program.

Finally, as I outlined on our previous earnings call, we completed a forward settled public offering of 13 million shares of common stock, a price of $21.35 per share in August of last year. We settled all outstanding forward equity during Q4 on December 28 for total net proceeds of approximately $273 million. Following settlement, we ended the quarter with leverage of 5.2x on a net debt to annualized adjusted EBITDAre basis. As of year-end, we had approximately $825 million of liquidity. As John stated, we are focused on selectively deploying this available dry powder on opportunities that are not only accretive, but are appropriately priced on a risk adjusted basis. Retained earnings coupled with strategic asset sales will continue to bolster available dry powder while also strengthening our balance sheet.

Now turning to our financial results. During the quarter, we generated a AFFO of $65.6 million or $0.36 per share, which represents 6% growth over per share results from the same period last year. Q4 AFFO per share results represent approximately 3% growth quarter-over-quarter, largely due to early quarter acquisition closings. Given our heightened selectivity during the second half of Q4, we do not expect to benefit next quarter from the tailwinds we typically experience from late quarter acquisition closings.

As for full year 2022 results, we generated AFFO of $252 million or $1.40 per share, which represents 6.9% growth over our 2021 results. Full year AFFO per share results landed at the top end of our final guidance range at the midpoint of our initial guidance range. We incurred $7.8 million and $32.1 million of cash G&A expense during Q4 and for the full year respectively. Total cash G&A expenses incurred during 2022 landed just below the midpoint of our guidance range. Strong and consistent operating results during 2022 translated into two dividend increases during the year.

Our Board of Directors has maintained a $0.0275 dividend per common share in OP Unit to holders as of March 31, 2023, payable on or before April 14, 2023. This represents an increase of 3.8% over the annualized dividend amount from the first quarter of 2022. The dividend continues to be well-covered with AFFO payout ratio in the mid-to-high 70% range and represents an attractive dividend yield relative to many of our net lease peers. We will continue to evaluate additional future increases to our dividend with our board on a quarterly basis.

Finally, we are introducing initial 2023 guidance today with an AFFO range of $1.40 to $1.42 per share, which represents an implied growth rate of 1.4% at the midpoint. This more modest estimate of year-over-year growth is driven by the strength of our 2022 results and reflects our patience in highly selective view and growth opportunities in 2023. We hope to revise our guidance upward as we progress further into the year and gain more clarity into both the pace of asset repricing and conditions in the capital markets.

For now, we are providing a conservative guidance range that reflects the following key assumptions: Acquisition volume between $300 million and $500 million, disposition volume between $100 million and $150 million, total cash G&A between $32 million $34 million. As a reminder, our per share results for the year are sensitive to both the timing and amount of acquisitions, dispositions and capital markets activity that occur throughout the year.

And with that, I will turn it over to Chris for closing remarks.

[Chris Czarnecki, CEO]

The time at Broadstone has been an incredible experience that far surpassed any expectations I had when joining the Company. I am deeply grateful to have had the opportunity to serve for many years and in many roles. The best has always been being part of the team at the BNL and living our one Broadstone mentality with them. The board and I have the utmost confidence in John, Ryan and the entire management team who have a long history of working together. They will continue to uphold our track record of success in delivering long-term value for all of our shareholders. I look forward to cheering on all of their successes. Thank you everyone. Operator you can now open the line up for questions.

[Operator]

[Operator Instructions] Our first question is from Ronald Kamdem from Morgan Stanley.

[Ronald Kamdem, Morgan Stanley]

Couple quick ones. First congrats to your management changes. Just curious as you are sort of thinking about taking the helm, anything that we should expect different or is it just more of the same? Anything organizationally, strategy wise? Thanks.

[John Moragne, EVP & COO]

From a strategy standpoint, I think the way we are thinking about 2023 as an opportunity to look for us, a differentiation for us, a catalyst for the type of growth and the multiple expansion that we believe this portfolio deserves would be the same whether [indiscernible] or we are in the position that we are today. There has been no daylight between Chris, Ryan and myself the entire time we have been working together. And so the strategy and the way that we are thinking about evaluating portfolio, evaluating opportunity set and looking to provide the type of long-term shareholder value that we have, and we believe that this portfolio can provide, would be the same.

Similarly, the sense of stewardship, the transparency and the commitment to growth and the commitment to value for our shareholders that Chris has instilled in us over these years at Broadstone, in particularly as CEO, we absolutely hope to be able to continue and honor him in that way. And so that's what you should expect to continue to see from us going forward.

[Ronald Kamdem, Morgan Stanley]

Great. And then what about organizationally, in terms of the reporting structures or any anything like that?

[John Moragne, EVP & COO]

I mean, the biggest changes are the two that you have got on the phone with you right now beyond me, shifting Ryan into his new role as President, Chief Operating Officer and sitting over our real estate functions. That is an area that Ryan has leaned into more and more over the years and really is sort of at the heart of how his brain works. So we are excited to have him as a part of that and bringing his deep experience as our CFO over the last six or seven years into that role and really providing sort of a forest level, big picture view of the market, the industry, how our real estate investments and full asset lifecycle fit into the broader capital markets and investor relations picture.

So that is an exciting area for us. And then elevating Kevin into the CFO role. Really deep capital markets expertise from his time previously with us with BMO as well as in the last three or four years that he has been with us. So we are excited to have Kevin step into that role. And so those are the two major reporting changes that you all would see. And then otherwise, we have got a really incredible team of people that I believe is the smartest group that we have got in the industry and working going incredibly hard to provide value for our shareholders.

[Ronald Kamdem, Morgan Stanley]

Excellent. From my side, if I could just switch to the acquisition pipeline. Obviously, the acquisition guide of $400 million. Maybe if you could give a little bit more color in terms of where you guys are seeing cap rates trending and what sort of a sweet spot that you guys want to be executing at? Clearly, high 6s, may be low 7s to get to the spreads. I would love to hear a little bit more commentary on the ground?

[John Moragne, EVP & COO]

Yes. You sort of now that we are looking at high 6s, low 7s. It is sort of a triangulation among a number of different things, but including the spread, how we think about risk-adjusted return, trying to match up what the opportunity set is with our cost of capital and still making good, prudent selected decisions. That discipline, that prudence that we are bringing, I think, is evident in sort of the first quarter pipeline numbers you are seeing, and now we have got $5 million under control at the moment. There are a handful of things that we are looking at including one fairly significant large off-market opportunity that we are evaluating right now that could shift those numbers, but it is not at a point yet where we felt comfortable including it in the under control numbers.

But the place that we have spent a lot of our time focusing on is the opportunity set in the space generally. Right now, the top of the funnel is in line with what we consider more normalized at these volumes. 2021 and 2022 has much heavier volumes than what you had seen in this industry on a normalized basis, pre-COVID. So in terms of the sort of routine volume that we are seeing in the first quarter, it works out to $20 billion to $25 billion in opportunities on an annualized basis that we would review. So definitely a slower start to the year than what people have been used to the last couple of years, but there is still plenty of good opportunities that are out there heavily-weighted for us in terms of what we believe is actionable towards industrial, but there has been a lot of retail that has been on the market this year as well.

The cap rates in industrial, as everyone saw last year, moved much further and faster than the other areas that we invest in. Retail and restaurants are coming along. Certainly, the investment-grade space has stayed in the high 5s, low 6s. So that is not something that we are spending much time on right now. Healthcare has not moved as much. We are currently in a little bit of a place where it feels like the heavier movement you saw on cap rates throughout that sort of the last nine-month period of 2022 has may be slowed or plateaued a bit, but at the same time, there is still lots of opportunities that are out there where we feel like price expectations are still getting reset, price discovery is continuing and the risk-reward trade-off on these assets, there is still a little bit of room to grow.

So we are cautiously and carefully monitoring these things. And with our $400 million midpoint of guidance on acquisitions, it certainly will be more back-end weighted than what it was last year when we were a little bit more smoothed out with roughly $200 million every quarter with $300 million in the fourth quarter, but we are completely open to reevaluating that guidance as the year goes on. And if the opportunity set or our cost of capital changes in a way where we believe that we can increase that acquisition guidance, we absolutely would.

[Operator]

Our next question is from Ki Bin Kim from Truist.

[Ki Bin Kim, Truist]

Congratulations, John, and best wishes, Chris. First question on the new top tenant, Roskam Baking Company. Can you just help us understand the deal and operate a little better just given the tenant concentration? I noticed that they were bought out by a private equity company like a year ago or two years ago, just trying to better understand the credit quality and potential risk for the Company.

[Ryan Albano, EVP & CFO]

Sure. Ki Bin, it's Ryan. We are very pleased with this deal. It is a defensive industry from a food processing perspective. Again, at the place that we have talked about before and like to play. We acquired six assets that are basically the entire production of the Company itself. They have, from a financial perspective, a defensive position in terms of their ability to pass through costs and protect margins. Their leverage is generally moderate and calibrated very well to the private equity starting point. And we feel good about the investment overall.

[Ki Bin Kim, Truist]

And since it is the entire production for the Company, you probably have a good sense of where the rent coverage ratio is relative to their of EBITDA, what does that look like?

[Ryan Albano, EVP & CFO]

Yes. We do not typically look at rent coverage for manufacturing sites themselves or food processing sites rather. We are looking at the credit profile of the tenant or the corporation as a whole, similar to how banks will underwrite it from a lending perspective, pPrimarily because the numbers that are going through the facilities themselves are not all that relevant from a coverage perspective, we spend more time thinking about how much manufacturing capacity they have at each site, how much of that they are utilizing, how much of that is open for additional production capabilities where they would need to add new lines. Those type of things are the things that we focus on at the actual site level, but less so from a general coverage perspective.

[Ki Bin Kim, Truist]

And just second question on Red Lobster. Any updates you can share on recent conversations you have had with the operator? And any updates on just how their business is doing overall?

[John Moragne, EVP & COO]

I do not think it is a secret that they are going through some difficulties right now. [indiscernible] has been very open about that publicly, as they have talked about their results for the year, and that is not a surprise to us or anyone else. We have had routine conversations with that since the Thai Union deal ever since COVID, making sure that we are aligned and understanding how their businesses are operating. We continue to have comfort with our investment in Red Lobster. The sites that we have were specifically picked at the time that we did those deals in 2015 and 2016. So these weren't sort of having to take a portfolio [indiscernible] we were able to go through and pick the ones that we thought were going to perform well over time.

As you heard during our prepared remarks, these were located in strong retail corridors. These are in the same strips that you are going to see in Olive Garden, Walmart, LongHorn Steakhouse, Outback Chipotle, you name it. Really good average five-mile population of about 150,000 plus. So we feel really good about the real estate itself. Understanding that Red Lobster is going through some difficulties right now, we are looking at it as how do we think about the investments overall from the time that we purchased these assets to today and through potentially exiting the position, as you heard.

We originally had 25 sites. We sold six of them over time, including three last year. The three we sold last year were high five or flat fixed cap rates in terms of dispositions. That compared against the high fixed weighted average acquisition cap rate for these back in 2015 and 2016. And if you take the rents that we have received over time from Red Lobster in addition to the disposition proceeds that we received, we have already received back more than 75% or roughly 75% of our initial investment lease assets with 19 of them still to go. So we have looked at how do we continue to recoup our investment and get to a spot where we feel very comfortable that we are going to have well more than our initial investment back in it.

Understanding the difficulties, we will look for opportunities to continue to reduce our exposure over time, but they continue to pay their rent, no indications otherwise. And so we feel that we could take a patient methodical approach to that exposure for us. And if you look at where it was at the beginning of 2022, today we dropped at 50 basis points in overall ABR exposure from 2.1% to 1.6%. So head in the right direction, but confident in our ability to manage that through the conclusion.

[Ki Bin Kim, Truist]

And sorry to belabor the point, but any near-term rent cuts in the cards?

[John Moragne, EVP & COO]

Not for us. It's something I know that is being discussed, but it is not something that we are currently interested.

[Operator]

[Operator Instructions] Our next question is from Eric Borden from BMO Capital Markets.

[Eric Borden, BMO Capital Markets]

I just may be following up on the guidance and the acquisition. Given the [indiscernible] curve and the typical seasonality, how should we think about acquisitions throughout the year and your assumptions for the expected move in cap rates?

[John Moragne, EVP & COO]

So we have looked at cap rates, as I said, sort of plateauing a little bit. I think that is [indiscernible] with the type of year-end activity that you usually see in the fourth quarter, where expectations sort of settle in as people are sort of just put their head down and trying to get through year-end activity, which is always heavier than others. Couple that with what happens in a slower start to the year, there has been this bit of a pause. Now the same time the information we are seeing from the market and from the transaction that we are looking at from our quarters and there has been an uptick again and the type of repricing discussions in that a place where the asset is in the [indiscernible] that we are seeing relative to the current macroeconomic backdrop.

So for us, that is part of the reason why you are seeing such a [indiscernible] first quarter and why we are sort of leaning more towards the belief that our acquisition pipeline will result in a heavier back-end weighted to the year. So our belief is that there is still some [indiscernible] to happen to the caps, but at the same time, we are going to the opportunity we find the right risk-adjusted returns and the right [indiscernible] against our in-hand grip powder or we are in a position relative to the opportunity set or our cost of capital where we can execute the way to provide the same thing, then we will absolutely look to increase our acquisition guidance if either of those things come to pass. So currently thinking on a conservative basis, more back-end weighted with a little bit of cap rate movement, but if opportunity set cost of capital just in place, we will adjust both of those forward in the year and look to increase it if we can.

[Eric Borden, BMO Capital Markets]

Great. And then just on Ki Bin's last question about rent cuts. Could you just elaborate a little bit more on that? What are the discussions you are having, the type of tenants, the potential impact to ABR? And any additional color there would be very helpful.

[John Moragne, EVP & COO]

Yes, we are not in active discussions or actively considering rent cuts for any of our tenants right now. I know those things get talked around a lot given where people sit, and I think it may be is a little bit more prevalent in the last couple of years as people think about the COVID environment or they are thinking about movie theaters in the way that those have been handled since then. But we are not actively considering giving rent cuts to any of the tenants. There is nothing in the watch list that we think about as particularly thematic that would lead us to a place where we think that those are coming. The ones that are on there right now are the things that we talked about during the prepared remarks, it is the Lobster, keep an eye on Carvana, keep an eye on Santa Cruz, which is now Green Valley Medical Center, and we feel confident in where all three of those are headed or our ability to manage those through what might be a difficult period.

[Eric Borden, BMO Capital Markets]

Okay. And then last for me on the development side. The $30 million pipeline currently in place, is that for the quarter? Is that your assumption for the year? And then what is the expected commencement period on those projects and the yields there?

[John Moragne, EVP & COO]

So it is not a full year projection. This is just currently a spot number that we have. We have taken a pretty proactive approach in the last couple of years to sort of enabling our property management and asset management teams to spend more time working with our tenants to find revenue generating capital expenditures that we can have to supplement our existing sourcing efforts. So this is just a spot number. It is comprised of a handful of different ones.

So there is different time lines on these different yields. But one of the reasons why we focused on it, which is probably an assumption that you are making the question, but one of the reasons we focused on it is that by working directly with our tenants and finding ways to partner with them for their success, we are going to get better yields with lower transaction costs than we do out on the open market. So this is an attractive area for us to be allocating capital, and we are going to be looking to do as much of it as we can this year and every year going forward for those reasons.

[Operator]

We currently have no further questions. I will now hand back to Chris Czarnecki for final remarks. Please go ahead.

[Chris Czarnecki, CEO]

Thank you. Just wanted to again thank all of the folks in the Broadstone universe for all the support you have shown me over the years. I am incredibly grateful. And more importantly, I am even more excited about the future of this team. I know they are locked and loaded and ready to continue to execute on your behalf and we look forward to seeing you soon at a number of industry events throughout the spring.

And so thank you, and have a great rest of your week. Bye.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.