Broadstone Net Lease Inc

NYSE:BNL

Earnings Call Analysis

Selective Capital Allocation Amid Market Dislocation

The company displayed financial discipline in a challenging market, executing strategic asset dispositions totaling $200 million, above guidance, at a 6% cap rate, and investing $64.1 million at a 7.5% cap rate. Despite a subdued transaction market due to interest rate volatility, the firm remains selective in acquiring investments. AFFO per share rose to $0.36, marking a 1.6% year-over-year growth. For 2024, they forecast an AFFO of $1.41 per share, investment volume of $350-$700 million, dispositions of $300-$500 million, and maintain cash G&A at $32-$34 million.

AFFO and Dividend Performance

The company marked a sturdy year with the generation of AFFO (Adjusted Funds From Operations) inching up by 1.6% year-over-year to $0.36 per share for the quarter and by 1.1% to $1.41 per share for the full year. This performance was buoyed by same-store portfolio growth and strategic asset recycling. Acknowledging this performance, the Board declared a dividend of $0.25 per share in OP unit for the quarter, a 3.6% boost from the previous year's first quarter.

Leverage and Interest Rate Outlook

The company ended the quarter with a leverage ratio of 5x net debt, a slight uptick from 4.9x, and remains comfortably positioned against potential interest rate volatility with the majority of its debt being fixed rate. Nonetheless, an elevated exposure to floating rates is anticipated as interest rate swaps begin to expire later in the year.

Dividend Payout Ratio Projections

Investors were informed of potential variability in the dividend payout ratio, which may climb into the low 90% range mid-year, due to timings between asset sales and reinvestment. Nevertheless, a return to the targeted mid- to high 70% range is expected shortly thereafter.

Guidance for Fiscal Year 2024

Setting expectations for the next fiscal year, the company anticipates maintaining AFFO at $1.41 per share, supported by significant asset dispositions and redeployment efforts. It also hints at a refined portfolio with the majority of dispositions focused on health care assets.

Capital Deployment Strategy

The firm holds a consistent strategy of exploring investment opportunities, especially in industrial, retail, and restaurant sectors where promising deals are identified. With a focus on cap rates solidly within the 7s, management has an eye on unique investment structures, particularly those that offer finance opportunities not readily available 18 months ago.

Interest Rate Swaps and Financial Planning

There is a strategic approach to expiring interest rate swaps, which will commence in October with the roll-off of $30 million by the year's end, followed by an additional $125 million the subsequent year. The executive team plans to reassess their options nearer the time, aligning their decisions with future maturity schedules, which do not commence until 2026.

Strategic Focus and Long-Term Vision

The long-term vision for shareholder value involves a three-year operational blueprint. Following a reflective year in 2023, the firm is entering 2024 with an execution focus, positioning itself to reap the benefits in 2025. This strategy is not reactive to short-term market moves but is driven by a firm-wide commitment to organic growth and value enhancement for shareholders.

Asset Sales and Future Outlook

While planning strategic dispositions throughout 2024, the team is not in a rush to liquidate all assets, especially those not contractually bound at present. By exercising patience, they aim to maximize value, signaling that some sales may extend into 2025, reaffirming the ideology of valuing long-term shareholder growth over immediate gains.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, everyone, and welcome to the Broadstone Net Lease Fourth Quarter 2023 Earnings Conference Call. My name is Bruno, and I'll be operating your call today. Please note that today's call is being recorded. [Operator Instructions]

I will now turn the call over to Brent Maedl, Director of Corporate Finance and Investor Relations at Broadstone. Please go ahead.

[Brent Maedl, executive]

Thank you, operator, and thank you, everyone, for joining us today for Broadstone Net Lease's Fourth 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 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, 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, 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. In conjunction with and included within our earnings release, we provided details on our ongoing efforts to simplify our health care portfolio through the disposition of clinically oriented assets. These materials have been furnished with the SEC and may be found on the Investor Relations section of our website at broadstone.com.

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

[John Moragne, executive]

Thank you, Brent. Good morning, everyone. I'm proud of what our team accomplished throughout 2023 in what was a uniquely challenging year on many fronts. But before jumping into perspectives on our fourth quarter and full year results and market conditions, I would like to take a few minutes to discuss our decision and ongoing efforts to simplify our portfolio composition through the sale of our clinically-oriented health care assets, specifically clinical, surgical and traditional medical office building properties, commencing with our announcement of an agreement to sell 37 of these assets for $253 million that we anticipate to close in the first quarter. The volatile macroeconomic conditions and suppress transaction environment we experienced in my first year as CEO, provided our team with a great opportunity for internal process and portfolio evaluation.

We completed a number of internal objectives and priorities. But perhaps the greatest was the clarity we obtained and our decision to simplify our portfolio, sell our clinical, surgical and traditional MOB assets focus more intently and proactively on the industrial space and our other core investment verticals of retail and restaurant assets and remove the complexity caused by holding health care assets not customarily included in the net lease wrapper.

Since going public in the fall of 2020, the composition and complexity of our health care portfolio has been a hurdle for many investors over the years and for good reason, clinical, surgical and traditional medical office building assets do not always fit well within the traditional net lease framework. While they can be high quality in nature, these types of assets generally have shorter lease durations, greater landlord responsibilities, longer potential downtime upon lease maturity and, in some cases, greater potential challenges with tenants, Green Valley being the starkest example.

While the characteristics of these assets can make them attractive for a dedicated health care property investor and manager, those same characteristics can make them onerous for a net lease REIT operator. At one time, our diversified health care portfolio may have served as a positive differentiator but it has since become a negative distraction as a publicly traded net lease REIT and a challenge to our growth and performance.

With this important strategic step, I believe we are positioning Broadstone Net Lease for long-term value creation and multiple expansion. After a detailed review, we identified 75 clinical, surgical and traditional medical office building assets for sale. On a pro forma basis, after completion of these sales, our health care exposure would be reduced by approximately 57% from approximately 17.6% of our ABR as of year-end to approximately 7.5%.

Following the sales, the remaining assets in our health care portfolio will primarily consist of consumer-centric medical properties that are customary for many publicly traded net lease REITs, examples of which include plasma, dialysis and veterinary services. Assets with the real estate fundamentals critical to the tenant's business and little to no regulatory risk. In addition to the 37 assets expected to close in March, we are in varying stages of negotiations on another 38 assets that we intend to provide an update on with first quarter earnings. We expect that some portion of the remaining assets may have a longer hold period as we determine best path forward for optimal disposition outcomes.

I am highly confident in our decision to sell these assets and focus on redeploying proceeds into industrial, retail and restaurant properties. Our pro forma portfolio statistics as measured by asset mix, occupancy, WALT, fixed rent increases and tenant diversification remain top of class. With prudent redeployment, we expect those key metrics will improve even further. We intend to regularly communicate progress on both the disposition and redeployment efforts as they take place and are excited for what is to come for BNL in 2024 and the years that follow.

Turning to our 2023 results. I'm happy to report a strong fourth quarter to close out the year. We consistently demonstrated our agility and prudence in a highly dynamic macro environment, characterized by significant fluctuations in interest rates and muted transaction activity across our investment sectors. As we navigated the challenging disconnect between interest rates and cap rates, we maintained our focus on long-term value creation and adaptability, demonstrated by a high degree of discipline and selectivity. As rates retreated from their highs at the end of the fourth quarter, we started to see sellers re-enter the market at the beginning of this year with a somewhat refreshed set of expectations as compared to what we had seen during much of 2023.

Despite the relative improvement in incremental optimism, we remained mostly on the sidelines, investing $64 million during the fourth quarter, of which $16 million was revenue-generating CapEx. As an example of our continued discipline as well as the challenging transaction market, late in the fourth quarter, we walked away from a roughly $70 million investment opportunity as the unfortunately increasing challenges in the insurance market improved insurmountable in distance, resulting in an investment that would have exceeded our risk tolerance.

Despite the lower-than-expected investment volume, we are pleased to report a full year AFFO of $1.41 per share, in line with our guidance as we realized operational efficiencies across G&A and bad debt. In our efforts to prudently redeploy disposition proceeds, we have secured $97.1 million of investments under control, which we expect to close during the first and second quarters. While our pipeline of opportunities has improved compared to 2023, we continue to believe a higher degree of selectivity is required as we navigate the macro backdrop.

We also continue to focus on sourcing off-market investments and unique capital allocation opportunities where we can partner with developers and tenants seeking capital solutions as the constraints on traditional commercial real estate lending persist. Our objectives for 2024 include redeploying substantially all of our anticipated disposition proceeds during the year, which is embedded within our 2024 guidance. Shifting to our overall portfolio, which remains predominantly leased to industrial and defensive retail and restaurant tenants, we continue to perform exceptionally well as evidenced by 99.2% rent collections during the fourth quarter and 99.4% occupancy as of December 31, 2023.

The Green Valley Medical Center was the only rent outstanding as of December 31, and we began marketing the asset for sale during the quarter. This decision resulted in us recognizing an approximately $26 million impairment. While early in the process, we have seen indications of interest from multiple parties for various uses, and we remain focused on putting this distraction behind us by the middle of the year.

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. We continue to execute on selective dispositions during the fourth quarter, selling 5 properties for gross proceeds of $16.5 million at an average cash cap rate of 6.7%, bringing our full year disposition proceeds to $200 million at an attractive weighted average cash cap rate of 6%. I am extremely pleased with the outcome of our full year disposition efforts, which exceeded our initial guidance for the year as we were able to capture opportunistic pricing for what I would consider a risk mitigation exercise. Given the environment, we were able to take advantage of market dislocation to sell assets with outsized credit and/or real estate risk at a weighted average cash cap rate of 6% for the year.

On the external growth front, we remain highly selective and disciplined during the fourth quarter, which aligns with our consistent messaging throughout 2023. Given an anaemic net lease transaction market in the back half of the year, we consciously chose to selectively allocate capital to investments that align with our growth strategy and mission to deliver long-term shareholder value rather than target short-term accretion. This resulted in fourth quarter investment volume of $64.1 million, inclusive of $47.9 million in development funding and $16.2 million in revenue-generating CapEx at a weighted average initial cap rate of 7.5%. Fourth quarter investment activity brought our full year investment volume to $166 million at a weighted average cash cap rate of 7.2%.

Looking forward into 2024, price discovery in the transaction market persists. Interest rate volatility continues to influence the capital allocation decisions of buyers at a more accelerated pace than the price expectations of sellers leading to a persistent gap in bid-ask spreads and an overall muted level of completed transactions in the broader market. As John highlighted, we remain focused in our efforts to source attractive investments and highly selective in the pursuit of opportunities as the market continues to 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 trend in the third quarter of 2024, with rent commencing a little later than October, and we have funded approximately $93.9 million through December 31.

We will continue to look at creative opportunities to partner with developers in this capital-constrained environment, while remaining selective and cautious as the macro environment evolves. Moving to our existing portfolio, 2023 credit performance was in line with prior years, which exceeded expectations given the interest rate and macroeconomic backdrop. Heading into 2024, we remain cautious on and continue to pay extra attention to industries that are sensitive to discretionary consumer spending. Of note, we have seen some operational performance decline in the furniture sector, and as recently as this month, had one tenant within the industry, representing 1 asset or 0.2% of ABR filed for Chapter 11 bankruptcy. As part of the company's reorganization efforts, we anticipate that the tenant will vacate the site, which is predominantly a distribution center that also has a small retail showroom.

We will begin working to backfill the space upon receipt of the property and expect to receive rent in the interim. Red Lobster site level performance remains healthy, and we will continue to look to opportunistically sell these assets as we did during the fourth quarter for a single site at a 6.45% cash cap rate. Thai Union recently announced its intention to sell its stake in Red Lobster, and we are working with them as they navigate that process.

Given the strength of our site level performance, the quality of our real estate, the strength of the brand and early interest in Thai Union stake, we remain cautiously optimistic about Red Lobster future. As John noted earlier, we will finalize the resolution for Green Valley Medical Center through a near-term sale of the asset. The tenant has been unable to pay rent since October of 2023 and still has not commenced operations given the ongoing challenges in the financing markets.

Lastly, re-leasing efforts for our previously tenanted Shutterfly location has increasingly improved as we have received significant interest in the property. We are in late stages of negotiations with multiple parties and now expect a net Senan to take possession in the fourth quarter of 2024. We Shutterfly will continue to pay rent and operate at the site through the second quarter of 2024, so we are expecting minimal downtime at the property.

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. During the quarter, we generated AFFO of $71 million or $0.36 per share, an increase of 1.6% in per share results year-over-year. For the full year, we generated AFFO of $278 million or $1.41 per share, an increase of 1.1% year-over-year and in line with the midpoint of our guidance. Quarterly and full year results were largely driven by same-store portfolio growth and incremental asset recycling throughout the year. We incurred $8 million of cash G&A during the quarter and $32.1 million for the full year or a 1% increase year-over-year. We once again ended the quarter in a strong and flexible financial position despite no capital markets activity. From a leverage perspective, we ended the quarter in a position of strength at 5x net debt, up slightly from 4.9x at the end of last quarter.

Our mostly fixed rate debt capital structure keeps us insulated from interest rate volatility with no material near-term maturities. Though our exposure to floating rates will start increasing later this year as our existing swaps start to roll in the fourth quarter. At our quarterly meeting, our Board of Directors maintained our $0.25 dividend per common share in OP unit, payable to holders of record as of March 29, 2024, on or before April 15, 2024. This represents an increase of 3.6% over the dividend declared in the first quarter of 2023.

Our dividend remains well covered and represents an attractive dividend yield relative to many of our peers. Given likely timing differences between asset sales and capital redeployment throughout 2024, our payout ratio could increase into the low 90% range in the middle of the year. However, we anticipate returning to our targeted payout ratio of mid- to high 70% range in the relative near term as we redeploy the sale proceeds.

Finally, details of our 2024 guidance and key assumptions were included in our earnings release last night. They include AFFO of $1.41 per share, reflecting the timing of our ongoing dispositions and redeployment efforts. Investment volume between $350 million and $700 million, disposition volume between $300 million and $500 million with ongoing health care sales accounting for the substantial majority. And finally, cash G&A between $32 million and $34 million, which is the same cash G&A guidance last year.

I will now turn the call back over to John before we open up the line for questions.

[John Moragne, executive]

Thanks, Kevin. As you can hear from our remarks, we are quite proud of the way we navigated 2023 and are excited for what to come in 2024. Reflecting on 2023 and my first year as CEO, I'm proud of the decisions we have made, the discipline we have shown in our commitment to long-term value creation and the results are actions produced in a volatile year. I believe the combination of these efforts will be demonstrated through the growth opportunities they will present us with as we navigate 2024 with an eye for what that means in 2025 and beyond. The last year has been challenging for real estate generally, but I believe the future is bright for BNL.

We can now open up the line for questions.

[Operator]

[Operator Instructions] We do have our first question comes from Spenser Allaway from Green Street.

[Spenser Allaway, analyst]

Are you going to be able to share any color on the buyer pool for the assets currently under contract? And do you have a sense of whether any of these assets will be repurposed or if they are intended to remain lease to clinically focused tenants?

[John Moragne, executive]

Thanks, Spenser. Buyer pool, we had a pretty robust list that we went out to. It was an active marketed process. So we were very pleased with the ability of the brokers that we work with and our team to drive this down to the best optimal disposition outcome for us. So robust process. These are a variety of dedicated health care operators in the real estate space. There's some private players in there as well as some public.

And our understanding is that all these assets are going to continue to be operated sort of as they are structured. So they're not being repurposed into something different, whether there's a view towards re-tenanting some of these in the future, given that that's something that is more prevalent as we talked about sort of in the prepared remarks in the dedicated health care space. I can't speak to that and what their plans are, but there's not a view that these are going to be turned down and turn to something totally different from the health care purposes they serve today.

[Spenser Allaway, analyst]

Okay. And then just turning to your investment guidance for '24, it suggests you would plan to be a net acquirer this year in the event that you continue to trade at a discount to NAV, would this still be the case? Or should we expect dispositions to outpace acquisitions again for this year?

[John Moragne, executive]

Yes, I think it depends on what we see. As you've heard in our remarks, there's a little bit of price discovery still going on. We're cautiously optimistic that this will start to sort of clarify itself over the coming quarters, and you'll start to see volumes pick up. There's a lot of good indicators suggest it should. We're about 18 months into this tightening on net lease volumes as we start to see, hopefully, some of that bid-ask spread come in a little bit more from where it was, particularly during 2023.

As we start to see some cost of capital improve, there might be some more buyers and get sellers more excited. That's part of the issue that people have experienced that sellers haven't necessarily been willing to go out and market their properties or to look for transactions because we're not sure what the buyer pool looks like. But what we have seen is even though there's been an increase in some places and a number of offers, you're not seeing it everywhere.

Buyers that are well capitalized, all cash buyers are in a much better position than those that are coming in with financing contingencies, which you continue to see on both deals that we're bidding on and deals that we are actively selling ourselves. So that positions us really well. We also, as you heard in the remarks, are really keenly focused on looking at off-market opportunities that might come through our network as well as unique investment structures, the $97.1 million that we've got under control is a fairly large transaction.

That's a repeat deal with the developer from UNFI. So we're very excited about that, repeat relationships, being able to find those off-market direct opportunities to invest capital and things that we get really excited about are the places where we hope to see some more. So it just depends on what's going to happen for the year. And as we said, we will regularly update folks on both the sales efforts relative to the health care portfolio simplification strategy as well as our redeployment.

[Kevin Fennell, executive]

Spenser, it's Kevin. I would just add on the other part of your question is from a need for capital, we're in the same spot we were last year, and we're lowly levered. So we've got some leverage capacity as we think about net acquiring.

[Operator]

Our next question comes from Anthony Paolone from JPMorgan.

[Anthony Paolone, analyst]

Great. I guess, first, just some clarifying items on the health care portfolio that you intend to sell. 11% of ABR is about $43 million, but there's some MOBs in there and such, and it sounds like some landlord responsibilities. Is the NOI a different number or is it the $43 million?

[John Moragne, executive]

The way we're thinking about it is the $43 million there's certainly some savings in there from property edition CapEx resulting from additional landlord responsibilities, but the way we've been thinking about it from a sales and a redeployment standpoint is focused on the $43 million.

[Anthony Paolone, analyst]

Okay. And then how should we think about cap rates on the stuff to be sold still outside of, say, green, there's no NOI there, but is this a higher cap rate stuff do you see it as? Or is this 7.9% reflective on the first tranche? Like how should we think about that?

[John Moragne, executive]

Yes. I think the 7.9% is reflective. The way we've been focusing on this is sort of that mid- to high 7s for where we're looking to sell these assets. We're not straight price takers in this exercise. This is not something where we're looking to fire sale these. We took a long time to think through this process and what we thought was going to provide the best long-term shareholder value, and we believe this is it.

We're really excited about executing on this in '24 and what that's going to mean for 2025 and the years beyond in terms of our ability to grow and drive value for shareholders, including AFFO accretion and multiple expansion. So we're not looking to sell these at really high cap rates just to move them along. If we need to hold these for a little bit longer, that's okay. These are assets that we have a lot of conviction in before we went public when we acquired majority of them and so we can hold these and look to execute in the mid- to high 7s. This is not something, like I said, that's going to be a fire sale at higher cap rates.

[Anthony Paolone, analyst]

Okay. And then with that being said then, if we're all kind of sitting here looking at you taking on this divestiture initiative, like how do we get comfortable looking out to 2025 and that being a return to growth? Or it may not be, like, I mean, how should we think about that? Like when does this process kind of end and you get back to driving accretive acquisitions?

[John Moragne, executive]

Yes. I mean 2025 is where we expect that to happen, although there's a chance you can see it in '24. The reason we came out at $1.41 rather than providing a range is that the timing on the sales and the redeployment is, as you can imagine, the single greatest variable. The range and the focus there is entirely on the health care simplification strategy. There's not anything that we were thinking about from broad credit issues.

There's no credit bad debt stuff that worried about. You heard us during our remarks from a bad debt and from a tenant credit standpoint, there's only a handful of relatively immaterial issues that we're focused on right now. So this is entirely based off of the strategic work that we're doing in the clinical health care sales and then redeploying those proceeds. And the goal here is that at worst, we wanted this to be a neutral exercise.

So $141 million to $141 million. But if things go our way a little bit on the timing standpoint, both in terms of are there ways that we can lengthen out some of the sales but still execute? Or are there ways that we can accelerate some of the investment activity depending on the opportunities we see, we might be able to push it. But we started the year at $141 million. We're going to regularly update this. We believe as we get closer to sort of the end of Q3, beginning of Q4, we'll have a very clear view as to what our growth path looks like in 2025, and that's what we're gearing ourselves to.

A big piece of this that I don't want to get lost either is, and we talked a little bit about this last year is the huge benefit that we're going to get from UNFI coming online. But not only are we going to be going into 2025, hopefully, with the majority of this health care portfolio simplification strategy sort of put to bed, but also we're going to have UNFI coming online. And both of those things, plus whatever other incremental redeployment we can do this year are going to give us one heck for 2025, we think. So we're excited for what that is.

[Anthony Paolone, analyst]

So the intention is to manage this process to have growth in AFFO in 2025?

[John Moragne, executive]

Correct.

[Operator]

Our next question comes from Michael Gorman from BTIG.

[Vishal Ross, analyst]

This is Vishal Ross on for Mike. With the UNFI facility coming on later this year and starting to impact cash flow, can you remind us how those economics impact the back half of 2024. And as you near the end of the project, are you seeing other similar opportunities in the market right now? And where can we see you execute?

[Ryan Albano, executive]

So in terms of UNFI, we expect it to come online and start paying rent in the last quarter of the year, the fourth quarter. So we pick up one quarter of that this year and then obviously a full year next year, so most impactful for 2025. In terms of additional opportunities like that, we have been spending a lot of time with a host of relationships that we've built over the years from a developer perspective. I'd call the depth of that somewhere just north of 10 relationships that we've been working with and seeing opportunities from. There certainly, as John had mentioned, some dislocation in the capital markets, and we do see future opportunities on a build-to-suit basis. But to be determined as we continue forward here in terms of how meaningful that will be.

Perfect. Makes sense. And then how does the deal flow look on the reinvestment side, basically, how quickly do you think you can redeploy these proceeds? And as you think about redeploying assets, where are you seeing the most interesting opportunities?

[John Moragne, executive]

We feel pretty confident right now on the redeployment there. As we mentioned, we've got that $97.1 million that's already under contract. We're seeing more and more come along. Whether those transact or not is still an open question. As you heard in Ryan's prepared remarks, there continues to be a lot of opportunity out on the market. Whether those transact or not has really been the key thing in 2023 and what we've seen so far in 2024. But we've sharpened our pencils. There's a number of things that we're looking at in our core verticals, industrial and defensive retail and restaurant sectors that we think are actionable. So we're working hard on them.

We expect to see some of that come in for Q2, Q3. The timing, as I mentioned before, on the redeployment of the health care sales proceeds is going to be critical. So we're hopeful that we're going to see what we can, but we're going to maintain that discipline. This is still not the market of 2022 or 2021. This is an area where we still need to be disciplined and focused on finding the right opportunities, shifting ourselves to find a way to get to a yes, but still being very comfortable to say no, if it isn't going to work. But there's good opportunities right now in all 3 of those industrial retail and restaurants.

[Operator]

Our next question comes from Mitch Germain from Citizens JPMorgan.

[Mitch Germain, analyst]

Are there any other dispositions planned other than health care? How should they think about that?

[Kevin Fennell, executive]

They'd be pretty minimal, Mitch. There's the usual risk mitigation stuff that we'd be focused on, depending on how we're looking at the individual asset from an underwriting standpoint. But with the pressure that the health care sales put on earnings growth for the year, that's clearly the area that we'll be focused on, and it will only be a handful of things that we might do separately.

[Mitch Germain, analyst]

Got you. And then John, you said, call it, around a high 7% cap rate on the sales. You were able to do some deals recently. I think it was like an average low 7s for deployment. How should we think about yields that you're seeing in the market today. Can you replicate something close to the 7s? Or is there likely to be a little bit of dilution as you go through that process?

[John Moragne, executive]

It depends on the asset, obviously, but we're focused in the 7s. With selling off, I mean if you think about this first tranche of things that we're selling in the health care portfolio, you're talking about sub 5-year WALT, the individual landlord responsibilities and some of the other things that, again, don't work well for us as a publicly traded net lease company, but we're great for dedicated health care investors. That's a lot of the stuff that they look for in terms of where they have the ability to leverage their operational expertise as opposed to more of a passive net lease environment.

So that's why we believe that there's a good opportunity to sell these and move them along. I've been on that redeployment side, we're solidly in the 7s. There's still good opportunity out there, particularly in places where we're able to find off-market opportunities and unique investment structures with developers or others that aren't able to find the type of finance than they used to 18 months ago. So that's where our focus is on an individual deal, you might be talking low to mid-7s on a blended basis, maybe we're talking mid-7s, but that remains to be seen as we go.

[Mitch Germain, analyst]

Got you. You talked about a repeat deal with the UNFI relationship that brought you that transaction. That's not a development deal, right? That's the traditional acquisition. Is that the way to think about it?

[John Moragne, executive]

It's actually not, there's an existing property that they're working through solution on in terms of potentially selling some of the assets and looking for a financing solution on the other pieces. So we're working on that now. It's not a straight up development and the entirety of it does not include sort of a straight fee simple sale. So working on, as I said, unique transaction structures to help the developers out there that aren't finding what they need any more from commercial real estate lending.

[Mitch Germain, analyst]

Got you. And last one, Kevin, obviously, you mentioned the swaps are expiring. And I think that's kind of going to start to bleed into earnings over the course of the next couple of quarters or years. Is there any desire to pursue something to replace what's expiring right now? What are your thoughts there?

[Kevin Fennell, executive]

Yes. I think the first part of the answer is we've got time, right? October of this year is when they'll start to roll to the tune of $30 million by the end of this year, another $125 million into next year. So the order of magnitude is not particularly significant. I think the decision on what you do is easier to make and clearer to make as you get closer. And if we're potentially sitting on cash or whatever considerations we have, we'll certainly evaluate best option and look at that alongside our maturities, which don't start until 2026.

[Operator]

Our next question comes from John Kim from BMO Capital Markets.

[John Kim, analyst]

On the health care sales, John, you mentioned the rationale of selling that would certainly make sense lower weighted average lease term, potentially higher risk to the landlord. But I just wanted to clarify the timing of this decision now and whether or not there was any tenant issues that we're drilling or something that you were seeing in the rise.

[John Moragne, executive]

No. Obviously, we've got Green Valley from the tenant issues that we've spent a lot of time talking about. But from the rest of this portfolio, this is a strategic structural issue, call it. This is not looking at any individual tenant concerns. This is not something that we're thinking about from a tenant credit at that standpoint. As I mentioned during my remarks, 2023 was a great year in many ways for us to be able to sit back and think about what do we want to be?

What is the thing that's going to help us drive long-term shareholder value, get into some multiple expansion, get back to that virtuous cycle. And we're now thinking of this sort of 3-year period as being critical to that. 2023 was sort of a pause in the net lease market. It gave us time to sit and think about where we are, particularly relative to where we came from 4 years prior with going public.

2024 is now going to be this execution period, and then 2025 was when we get to harvest the fruits of these labors, we're going to be spending a lot of time in '24, executing really well, setting ourselves up. The core mission of this business as any public traded at the Street would be is to grow long-term shareholder value to grow ourself.

We're not focused on sort of the vagaries and the pestitudes of quarterly earnings. We're looking at what is going to drive long-term shareholder value. And that's what we're doing this year, and that was what drove this decision and we're excited, as I said, to sort of harvest the fruits of these labors in '25 and beyond.

[John Kim, analyst]

Okay. And then in your answer to prior questions on the cap rates that you expect on the remaining 75 assets that are in for sale. If it's at 7.9% or lower, that would imply roughly $295 million on the remaining assets. And the total for that healthcare is positioned to be 50% or higher and your guidance for this year on dispositions in $300 million to $500 million. So I was just wondering if you were being conservative on that decision guidelines? Or was there some kind of leakage stuff into we're not accounting for?

[John Moragne, executive]

No, I don't think it's either of them. I think that was sort of our best view as to what we've got in the pipeline for right now. I think another key component of this and I think I touched on this earlier, but we're not wedded to selling every single last one of those 75 assets or the 38 that aren't under contract right now in 2024. We're not going to be price takers on this. We could be patient with these. So there may be a handful of those or more that slip into 2025, and that's okay. This is, again, with a long-term view towards driving shareholder growth and value. So we're not going to try to push them all through 2024. So that's for the range. I think if you're seeing any disconnect there, it's probably our view that some of these are probably going to push into 2025 as opposed to just taking whatever we can in '24.

[John Kim, analyst]

Okay. My final question is on your G&A guidance. You expect it to be down $6 million or 15% this year versus last year. I realized last year, you had $1.6 million of severance costs are not expected to happen again. But what is the remaining cost savings going to come from on the G&A side.

[Kevin Fennell, executive]

John, it's Kevin. I think the numbers you might be combining. We guide to cash G&A and the delta that explains most of that's probably the stock-based comp.

[Operator]

Our next question comes from Ki Bin Kim from Truist.

[Ki Bin Kim, analyst]

Just want to go back to the AFFO cadence that we should expect in 2024. I think you mentioned at one point, you'll hit a 90% payout ratio, implying AFFO of low 30 funds. I just want to confirm that. And if you can comment on the cadence, please?

[John Moragne, executive]

Yes. I think a point of clarification on that is that in terms of trying to quantify where the dividend could theoretically go to, we basically said this all happened today, what would the payout ratio look like? Obviously, the timing impact will mitigate a lot of that. And so once again, we're back to the, I think, point of clear to hear that the timing, both on the disposition and the redeployment will be the driving factor in a lot of the quantitative outcome each quarter here.

[Ki Bin Kim, analyst]

Okay. And I just want to go back to the Red Loser and Shutterfly comments. Should we expect some type of rent or asset value dilution as these assets transition to different owners, possibly?

[John Moragne, executive]

So the Red Lobster, we're working with them as they try to find a new home for their stake, Thai Union being then. That has not come up yet. That's not something that we're interested in. There's good value in the real estate that we own there. And we're not interested in taking a step back. It has not been a conversation that we've had as they have explored potential opportunities. And then on Shutterfly, it's in a great market. We've already had a handful of tourists coming through. We feel pretty good about our prospects there. So we're not looking to take a step back, although as we mentioned in our remarks, we're thinking that re-leasing that is probably scheduled for the fourth quarter, and then Shutterfly would be vacating at the end of the second quarter. So there's a little bit of downtime there, but immaterial overall.

[Operator]

Our next question comes from Ronald Kamdem from Morgan Stanley.

[Ronald Kamdem, analyst]

Just a couple of quick ones. So just looking at the presentation about sort of the pro forma portfolio. As you were sort of going through this process, was it solely focused on sort of the health care vertical? Or did you sort of kick the tower to some of the other verticals? And I'm thinking office here as well, right, why not sort of do everything at once and so forth. So how do you guys think through that?

[John Moragne, executive]

Yes. We looked at everything, honestly. As I mentioned, '23 was a great year for sort of stepping back, and we didn't want to go into it with preconceived notions. So we were very keen on evaluating everything that was in the portfolio. As Ryan, as you know, and as everyone else knows, we have been very industrial focused in the last 5 years, north of $2 billion in total acquisitions, 70% of that being industrial, part of our hypothesis around the clinical health care assets was looking at where do we transact and that had fallen off the cliff, less than 10% of total investment volume in the last 5 years and then all the other things that we had talked about.

So not only was it a place that doesn't really fit well in our wrapper, but it's also a place that we hadn't been able to scale in a meaningful way for a long period of time. The other assets, so in terms of our core verticals, industrial and the intensive retail and restaurant sectors, we feel really, really good about, particularly after doing a deep dive and going through it mass by asset and sector by sector in terms of what works for us and what we think will drive that long-term shareholder value and multiple expansion.

But office, what you just touched on, starting with -- I think it was about this time last year, we took a very clear stance that office is not going to be a part of our future on a stand-alone basis. We will be looking to slowly wind that portfolio down. We're very happy to hold on to those master leased office assets just because we think of them more as being a part of the industrial or retailer restaurant grouping that they're with. But those stand-alone office assets are better held somewhere else, but we're not going to fire sell them. There's good credits on those. They consistently pay rent. We don't have any landlord obligations. It's not something that is causing any real issues for us. So we will happily hold those until we can find an optimal disposition outcome, but we will be looking for an optimal disposition outcome at some point.

[Ronald Kamdem, analyst]

Got it. And then just in terms of people and staffing, does anything change there? Like are there people that were working on the health care that are either getting like go or refocusing? Or is it like how does the team actually change from these sort of events?

[John Moragne, executive]

So we're fairly lean staff to begin with, and we haven't had a lot of growth. We've been pretty much flat in the last 2 years to 3 years here. On the health care, in particular, there was already some attrition that we had experienced during the year. And then we have one retirement that's coming up that's planned separate in the park from our health care reorganization. And then keep in mind, even at the end of this, we're going to have 7.5% sitting in the consumer-centric health care space. And so the folks that we have that work on that would continue to be dedicated to that space. So as I said, we're kind of flat from a person over person basis for the last couple of years here, and we anticipate that's probably going to hold true for this year as well.

[Operator]

We currently have no further questions. So I would like to hand the call back to John Moragne for our closing remarks. Over to you.

[John Moragne, executive]

Thanks, Bruno. Thanks all for joining us today. I hope you can hear the excitement that we have about this strategy and what we're going to be doing in 2024, particularly with that long-term view of growing shareholder value and multiple expansion in 2025 and beyond. Looking forward to seeing many or all of you in the upcoming weeks at various conferences. And hope you all enjoy the rest of your day. Thank you.

[Operator]

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