National Retail Properties Inc

NYSE:NNN

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen and welcome to the National Retail Properties Third Quarter 2022 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mr. Steve Horn, Chief Executive Officer. Sir, the floor is yours.

[Steve Horn, Chief Executive Officer]

Thank you, Al. Good morning and welcome to National Retail Properties’ third quarter 2022 earnings call. Joining me on the call is Chief Financial Officer, Kevin Habicht.

As this morning’s press release reflects National Retail Properties performance in 2022 continues to produce strong results, including continued high occupancy, impressive rent collections and a solid acquisition driven by our tenants’ relationships. We are in position to continue the performance through the fourth quarter. Based on our year-to-date performance, we announced a further increase in our 2022 guidance of core FFO to a range of $3.11 to $3.15 per share.

Also during the quarter, we announced and pleased to announce Elizabeth Castro Gulacsy has joined the Board. Her experience with SeaWorld Entertainment, Cross Country Healthcare and Ernst & Young will bring a fresh perspective and valuable insight as we continue to grow the company.

NNN’s longstanding strategy of being selective while deploying capital and opportunistic raising capital over the years/decades has NNN in great shape heading into 2023. In a time of uncertainty like today’s macroeconomic conditions, NNN’s discipline of maintaining a solid balance sheet and reasonable acquisition volume does put NNN in good place to handle the price discovery phase, the triple net market is currently working through. At the end of the quarter, we had under $50 million drawn on our $1.1 billion line of credit after completing over $585 million of volume through the first 9 months of the year.

Shifting to the highlights of National Retail Properties third quarter results, our portfolio of 3,349 freestanding single-tenant properties continue to perform exceedingly well. We maintained high occupancy levels of 99.4%, which remains above our long-term average of 98% plus or minus. We also collected 99.7% of rent due for the third quarter. On the COVID rent deferral front, the repayment continues to track as expected. At the end of the third quarter, 82.1% or $46.6 million of the original $56.7 million deferred rents being paid back, which is 100% that is due at the time.

Based on the current dialogue with our tenants across multiple industries, current rent collection levels and current occupancy levels, our portfolio is performing at high levels and we expect that trend to continue. This is a portfolio that has stood the test of time through GFC and COVID. It’s been built or formed by NNN’s multiyear strategy focus, the luxury of selectivity and the conservative underwriting over decades by our professionals.

Turning to acquisitions. During the quarter, we invested just north of $220 million and 52 new properties at an initial cap rate of 6.25%, with an average lease duration of 16.5 years. 19 of the 23 deals were from relationship tenants, which we do repeat programmatic business. Through the first 9 months, we have invested $585 million in 154 properties, which tops our 2021 volume of roughly 550. Currently, our market is in a price discovery period, but we do see the bid/ask spread showing signs of adjusting and we will continue our thoughtful and disciplined underwriting approach. NNN continues to emphasize acquisition volume through sale-leaseback transactions with our stable relationship tenants. With our company’s long-duration triple net lease form which is more landlord-friendly than the 1031 market deals.

During the quarter, we sold 8 properties raising $21 million of proceeds to be reinvested in the new acquisitions. Year-to-date, we have now raised approximately $50 million of proceeds from the sale of 26 properties, including 14 vacant. Job one is always to re-lease the vacancies, but we will continue to sell non-performing assets if we do not see a clear path of generating rental income within a reasonable timeframe.

Our balance sheet remains one of the strongest in our sector. Our credit facility has plenty of capacity, as I mentioned earlier, with only a balance of under $50 million. We also have no material debt maturities until mid 2024. NNN is well positioned to fund the remaining 2022 acquisition guidance.

With that, let me turn the call over to Kevin for more color and detail on our quarterly numbers and updated guidance.

[Kevin Habicht, Chief Financial Officer]

Alright. Thanks, Steve. And as usual, I will start with the cautionary statement that we will make certain statements that maybe considered to be forward-looking statements under federal securities law. The company’s actual future results may differ significantly from the matters discussed in these forward-looking statements and we may not release revisions to these forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time-to-time in greater detail in the company’s filings with the SEC and in this morning’s press release.

Okay. With that, headlines from this morning’s press release report quarterly core FFO results of $0.79 per share for the third quarter of 2022, that’s up $0.08 or 11.3% over year ago results of $0.71 per share. The year-to-date 9-month core FFO results were $2.35 per share and that’s an 11.4% increase over year ago results. Today, we also reported that AFFO per share was $0.81 per share for the third quarter and that’s up $0.06 per share or 8% over prior year results.

We did footnote third quarter AFFO included $1.7 million of deferred rent prepayment and our accrued rental income adjustment for the third quarter without which would have produced AFFO of $0.80 per share for the quarter. Likewise, in the first 9 months of 2022, AFFO included $4.7 million of deferred rent repayments in our accrued rental income adjustment, without which would have produced AFFO of $2.38 per share for the 9 months of 2022 and that represents a 10.2% increase over the similarly adjusted $2.16 results for 2021.

So as these scheduled deferred rent repayments continue to taper off from peak levels in 2021, we are starting to see the improved results kicking in from our recent acquisitions over recent quarters and years. Excluding the deferred rent repayments, our AFFO dividend payout ratio for the first 9 months of 2022 was approximately 65% and that suggests we will create approximately $190 million of free cash flow after the payment of all expenses and dividends for the full year 2022.

As Steve mentioned, occupancy was 99.4% at quarter end, that’s up 40 basis points for the year. G&A expense we reported today was $10.1 million for the third quarter and that’s down from $11.1 million year ago levels. We ended the quarter with $752.8 million of annual base rent in place for all leases as of September 30, 2022 and that’s our first time over $750 million.

Today, we did increase our 2022 core FFO per share guidance from a range of $3.07 to $3.12 per share to a new range of $3.11 to $3.15 per share. And similarly, we increased the AFFO guidance to a range of $3.18 to $3.22 per share. The guidance midpoints for both the core FFO and AFFO were increased by $0.035 or 1.1% compared to the prior quarter guidance.

The supporting assumptions for our 2022 guidance are on Page 7 of today’s press release and are modestly fine-tuned from our last quarter guidance, including $25 million increase and the acquisition volume midpoint. As usual, we do not give guidance on any of our assumptions for capital markets activities, except for the general assumption that over the long-term, we are going to behave in a fairly leverage-neutral manner. But really, the most important takeaway from all this is that we expect to grow core FFO per share results in 2022 by about 9% to the new guidance midpoint. This is a very good year for us, what I would call above our target trend line of mid single-digits per share growth over the long-term.

Admittedly, 2022 was aided by some tailwinds, including some of the refinancing we did in 2021 most notably, redeeming our 5.2% preferred stock, which saved us approximately $0.03 per share as well as $3.3 million increase or about $0.02 a share increase in our cash basis deferred rent repayments in 2022 compared to the prior year. And additionally, we did have one less executive position, which generated some G&A savings in 2022. So, that all helped 2022 results, those tailwinds.

Like seemingly the vast majority of REITs, we will publish our 2023 guidance in early February when we report our year end results. It’s always somewhat of a challenge to project acquisition volume and cap rates. But in this transition period of rising capital cost, pushing up cap rates, it’s more difficult to make that projection today than it has been in the past. So, the shifting price discovery sans of acquisition cap rates and capital costs has compelled us to wait until early February to publish our ‘23 guidance.

Having said that, we are still optimistic that we will be able to continue to grow per share results next year despite the high bar created by the 9% plus growth in our 2022 results as well as the continuing headwind from the reduction in our cash basis tenant deferred rent repayments, which are scheduled to decline from $9.1 million in 2022 to $3.3 million in 2023 as can be seen on the schedule on Page 13 of today’s press release.

One important element to support our expectation for continued growth in 2023 results is the position of our balance sheet and liquidity. The third quarter was fairly quiet in terms of capital markets activity. We were fairly active and very active in the debt markets in 2021 and not unhappy with that decision. We did issue $97 million of equity in the third quarter of ATM executing trades around the $47 per share level. But despite acquiring $223 million of properties in the quarter and $588 million in the first 9 months of the year, we ended the third quarter with only $47.5 million outstanding on our $1.1 billion unsecured bank line and that’s just a small increase over the prior quarter’s $40 million outstanding.

So our liquidity is in excellent shape. Our weighted average debt maturity is now approximately 14 years. Our next debt maturity is $350 million, with a 3.9% coupon in mid-2024. And with the exception of our small balance outstanding on our bank line, all of our debt outstanding is fixed rate debt.

A couple of stats, our net book to gross book assets was 40.3% and that’s been relatively flat for the year. Net debt-to-EBITDA was 5.3x at September 30 and that’s down 10 basis points from the prior quarter. Interest leverage and fixed charge coverage of 4.7x for the third quarter. And again, that’s relatively flat with recent quarters.

So we are in very good shape to produce strong core FFO per share growth. Current 2022 core FFO guidance is suggesting about 9% growth to the midpoint with some tailwinds that put us above our typical growth rate, 2023 should continue that growth despite the absence of some of those tailwinds that we had in 2022. Our focus remains on growing per share results over the long-term. We think the asset growth focus acquisition volume content in many sectors over recent past quarters and years has downshifted materially as the market the marketplace seeks to adjust to the new environment and appears to be getting a little more disciplined on price. If so, we think renewed investor focus on per share results and managing balance sheets will accrue to our benefit. But time will tell.

While there is currently an increased level of increased economic and capital market uncertainty, we think we’re reasonably well positioned for such. So only with that, we will open it up to any questions.

[Operator]

Thank you. [Operator Instructions] Our first question is coming from Nick Joseph with Citi. Please go ahead.

[Nick Joseph, Citi]

Thanks. What are you seeing in terms of the movement of cap rates of sale leasebacks versus just flow acquisition trying to get a sense of kind of the expansion for each of those categories?

[Steve Horn, Chief Executive Officer]

Nick, congrats on the new role.

[Nick Joseph, Citi]

Thank you.

[Steve Horn, Chief Executive Officer]

So the cap rates, we’ve noticed really the last Fed hike. I’ve noticed kind of a little bit of a velocity of the cap rates increasing where our pricing early, late second quarter, early third quarter, they were still fairly low to kind of the first and second quarter cap rates. Late in the third quarter pricing, we’ve seen a 30, 40 basis point move in cap rates. So what I have in the pipeline going to fourth quarter, first quarter, there is definitely a move for our acquisition kind of on a risk-adjusted basis, albeit equal. On the sale leaseback side and the 1031 market side, I kind of feel they have moved up and step. But what we find is the sophisticated owners of the real estate understand that interest rates have moved and they are willing to sell at the higher cap rate currently. It’s still not – the bid ask isn’t as tight as you like it to be, but we’re definitely seeing a movement. I feel better today than I did 45 days ago on the cap rate spread.

[Nick Joseph, Citi]

That’s helpful. And then I recognize guidance doesn’t assume capital markets activity. You were able to issue some equity accretively in the third quarter. So as you look to these acquisitions, today, how are you thinking about those investment spreads, just given cost of equity and cost of debt currently?

[Kevin Habicht, Chief Financial Officer]

Yes. As you know, Nick, we think about it a little differently than kind of the typical, I think, spread discussion that goes on. We want to burden our equity for purposes of deploying capital, we wouldn’t have burdened it at a return that we think adequately compensates common shareholders. And that includes our free cash flow. Like I said, we have about $190 million of free cash flow annually at the moment. And so we burdened that as well. It’s not free. It carries a cost. And so that is – that creates some opportunity for us to alleviate some heavy lifting in terms of meeting the issue equity. So if you have $190 million of free cash flow and call it, $100 million in a given year of disposition proceeds, that goes a long way to solving the equity need, if you will, for a typical acquisition volume year for us. And so we don’t get to that. And we have – on the debt front, we’ve communicated, we’ve really not used our bank credit facility in any meaningful way for several years. I think the pointed average outstanding balance for the last 5 or 6 years has been like $55 million, $55 million. And so going into 2023, we will lean more on to that facility and use it more than we had in the past, likely. And so that’s the plan in the short-term, meaning the next five quarters for – on the debt front. Now that I’ve said all of that the world will change and we will do something totally different. We do try to be opportunistic in raising capital, get it when it’s available in what we think is a well-priced or reasonably priced. And we will respond to the market as it unfolds. But our current thinking is what I’ve just outlined.

[Nick Joseph, Citi]

Thant’s very helpful. Thank you very much.

[Operator]

Thank you. Our next question is coming from Spenser Allaway with Green Street. Please go ahead.

[Spenser Allaway, Green Street]

Thank you. Just one on the revised external growth that in – so even the high end of your provided range would imply about $110 million growth for the last quarter, so that contract with about a $200 million run rate in recent quarters. Can you just walk us through your thinking on this? Obviously, you’re being conservative, but just wondering if it’s driven more by compressing spreads, a lack of sellers in particular segments that you like. Just curious what your thoughts are?

[Steve Horn, Chief Executive Officer]

No. If you recall, in the second quarter earnings, we updated our acquisition volume slightly, albeit – the fourth quarter, as you know, we’re a lumpy – I mean I wouldn’t get caught up quarter-to-quarter acquisition value – we’ve had a fairly past few quarters, a robust acquisition activity. Our pipeline feels really good right now. But as you know, in the transaction market, don’t count your chickens until they are closed, especially given the capital markets and just the equity market volatility in the debt market. But yes, we feel good about our acquisition guidance through the remaining of 2022. And it could just be timing. But until they are closed, we weren’t willing to update or expand our guidance.

[Spenser Allaway, Green Street]

Okay. And then I really you mentioned in your prepared remarks that if necessary, you would sell some properties. So I’m just wondering if you currently have any assets that are earmarked for divestment or – like what are the criteria that you’re looking for when identifying disposition assets?

[Steve Horn, Chief Executive Officer]

Yes. I mean I don’t remember though that Spenser saying we would sell properties. But the question is we are always looking to sell assets and strengthen the portfolio. And when we sell assets, it could be offensively because we’ve had discussions with the tenant or just the property level analysis that it’s a high-risk asset upon renewal. So we will sell it. Don’t tell anybody that because otherwise, we can’t sell too many assets in the 1031 market. We sell vacant assets after we try to re-lease them, and we’re just not finding it’s taking too long. And then we also have third of our portfolio that we sell because somebody finds the asset a lot much of a value than we do. At the end of the day, year-to-date, the assets that – the income-producing assets that we sold, we’ve sold at I think a 5.9% cap for the quarter, it was a 5.8% cap. So we are recycling some capital with our dispositions and strengthening the portfolio at the same time.

[Spenser Allaway, Green Street]

Thank you. It’s very helpful.

[Operator]

Thank you. Our next question is coming from Wes Golladay with Baird. Please go ahead.

[Wes Golladay, Baird]

Hey, good morning, everyone. I just wanted to get an update on your relationships that you’ve established this year. Are you exceeding expectations? And then also are you seeing some of your older relationships come back, people that may have left you when pricing got aggressive, and now they are finding out those new partners are no longer available?

[Steve Horn, Chief Executive Officer]

That’s a good question. The new relationships, they are right on track where we kind of task our acquisition group to develop new relationships over the year. So it’s no different in 2022 than 2021, but a lot better than 2020. So going forward, I expect the same cadence. And the same cadence of what we’d call relationships falling off, meaning they outgrew us their cost of capital dropped lower than we’re willing to provide it. And we cheer that. We like them to find cheaper cost than us because it strengthens their balance sheet. We’re not finding a material amount of our relationships coming back because we’re still in that price discovery mode. I think we may find one or two will work their way back to us because we weren’t – they were kind of lick in the plate, I would say, looking for 10 or 15 basis points cheaper than we would. But because of our certainty and reliability of a landlord, they’ll come back to us a little bit.

[Wes Golladay, Baird]

Got it. And then when we look out to maybe 2023 and 2024, it looks like a lot of your major relationships have plans in motion. You really can’t call at this point. Is there a natural lag between when an economy slows, cap rates expand and when sale-leaseback transactions may moderate, would this be more of a 2024 thing if that yield stay elevated like they are?

[Steve Horn, Chief Executive Officer]

Yes. Our development pipeline is as robust today as it was last year, we’re not seeing a slowdown just because it’s a real estate transaction, and it does take a fair amount of time to get permitting and the process starting. And we’re not hearing any external growth slowdown as far as new property development. One thing I am noticing in the market is the M&A market is definitely slowing down, if it’s the QSRs. There is still appetite out there. But we’re not fielding as many calls on M&A activity as we were 6 months ago. But we also don’t rely on the M&A activity alone to hit our volume numbers.

[Wes Golladay, Baird]

Got it. If I get just one last one for Kevin, going back to that $190 million of free cash flow, do you give that one to 8% cost of equity charge, is that what we’re looking at?

[Kevin Habicht, Chief Financial Officer]

Yes, yes. So that’s what I was suggesting is that, yes, I think sometimes company thinks that’s free equity if you will. And so anything you earn that is accretive. And I understand why they might go down that path, but we really try to – for purposes of deploying all capital, no matter how we source it, including that free cash flow, we really want to put a charge or a return on equity hurdle on that to make sure we’re taking care of shareholders that were what we think are adequately compensating shareholders for deploying new capital.

[Wes Golladay, Baird]

Great. Thanks, everyone.

[Steve Horn, Chief Executive Officer]

Thanks, Wes.

[Operator]

Thank you. Our next question is coming from Joshua Dennerlein with Bank of America. Please go ahead.

[Joshua Dennerlein, Bank of America]

Hi, guys. Just a quick question on G&A, you obviously, have one position filled right now. How are you thinking about kind of G&A as you head into next year? Is that something do you want to fill another set of role or kind of – is this kind of the run rate we should be thinking about?

[Steve Horn, Chief Executive Officer]

I can talk about in another executive. Yes. Currently, we have four executives and I probably – not in the immediate future of filling an executive role. But kind of second half of the year, I could foresee filling the executive role. And the rest is G&A, I can let Kevin handle.

[Kevin Habicht, Chief Financial Officer]

Yes. I mean, yes, G&A, there is nothing notable happening within that. Obviously, there is a little bit more price pressure going on just given the inflation environment, but nothing else notable going on in our G&A line item.

[Joshua Dennerlein, Bank of America]

Okay. Awesome. That’s it for me, guys. Thank you.

[Steve Horn, Chief Executive Officer]

Thanks, Kevin.

[Operator]

Thank you. Our next question is coming from Ronald Kamdem with Morgan Stanley. Please go ahead.

[Ronald Kamdem, Morgan Stanley]

Hey, a couple of quick ones for me. Just starting with tenant risk, maybe could you just give us an update on what bad debt is looking like, what sort of – what you are making into the guidance now and then maybe in some of the more topical or theaters or anybody else that you are looking at, just where do we stand there? Thanks.

[Kevin Habicht, Chief Financial Officer]

Yes. It doesn’t feel like it’s changed a lot from our mind in terms of the kind of credit profile, if you are, the credit watch list, if you will. We have typically assumed 100 basis points of rent loss for any given year, and we did that in normal times, and that’s really still where we think pencil in our mind as we think about the future is that kind of a potential rent loss. We frequently don’t experience 100 basis points of rent loss. It’s usually much less than that. And – but we tend to be a little conservative, and so that’s what we pencil in. But at the moment, we – the names that are most prevalent in kind of the credit discussions, if you will, the Regal Theaters, we only have one. And I know everybody says this, but we really do like that property. And so it’s in a good location and the rents are low. And so we kind of like our odds on that one. Bed, Bath & Beyond is an increasingly struggling. It appears, again, we only have three stores, 0.2% of our rent. So, again, it’s not a big number and our rents per square foot are good. And so we are not worried about that. So, I would say, generally, our feeling about the portfolio and our tenant profile has not changed and we are not changing our kind of rent loss assumption around any concerns there.

[Ronald Kamdem, Morgan Stanley]

Great. And then I think the second question is if I just think about this environment of higher debt costs, higher financing costs, I mean I think NNN relative to the rest of the peer set, great balance sheet, a lot of the debt or a lot of the acquisitions internally funded with free cash flow. In some ways, you guys should be positioned better than everybody else, right, as you are thinking about sort of next year and 2024. I guess the question really is, like as you are thinking forward, do you sort of see this as a time to sort of show why your strategy is differentiated and out signing and putting up good numbers, or how are you guys sort of thinking about the messaging versus the peer set?

[Kevin Habicht, Chief Financial Officer]

Yes, fair question. I mean we don’t focus too much on exactly what everybody else is doing. But yes, no, we think that without us changing our strategy much that we may shine brighter, if you will, relatively than what I – sometimes referred to as the huge acquisition contest that we have had for the last seemingly 2 years, where I don’t think we shined it bright. I think we are entering an environment where doing executing the way we typically executed and driving per share results and having some dry powder and just trying to post per share growth, that focus I think will look relatively better potentially in the coming quarters. I mean – but time will tell, like I said, but this, in some sense, is a better environment, if you will. And I think that’s kind of to your question, relate for us relative to others. And so we would probably agree with that. We will see how it plays out. I mean I am assuming the Fed is going to maintain its new found religion. But who knows, tomorrow, they may decide to – or maybe not tomorrow, later this afternoon, they may decide to totally change and go down a different track. I don’t think they are. But we think we are really well positioned, I guess, is what we are saying.

[Ronald Kamdem, Morgan Stanley]

Great. And then if I could sneak a quick one in. You guys raised the acquisition guidance. You talked about cap rates going up. Is there a way to sort of put some numbers around that? Like could we see 25 basis points, 50 basis points over the next 12 months to 18 months of cap rate rising? And given the programmatic relationships, is it sort of a fair assumption that volumes continue to be healthy for you guys over the next 12 months to 18 months?

[Steve Horn, Chief Executive Officer]

Yes. I mean our line of sight, as you know, on acquisitions is always 60 days, 90 days out. And we feel comfortable of where we are sitting with our pipeline and relationships. As I mentioned earlier, 25 basis points, 40 basis points, I have seen that jump in the last month or so. So, I feel comfortable that our cap rate has increased by that amount going into the fourth quarter. And I see it continuing at least at that level for the first quarter, maybe the second quarter. And if rates sustain, which it feels like they are going to, I think you can start seeing 50 basis points, 75 basis points in the second half of next year. But as far as acquisition volume, it settled as Kevin kind of touched on it with our focus of FFO growth, we don’t focus so much on volume. We focus where we can grow our per share results. Volume is never an issue. Cap rate is the problem. If I wanted to go buy 5.75, I could and do as much as we can. But yes, overall, I feel comfortable where we are sitting as far as relationships and potential deals going into 2023.

[Ronald Kamdem, Morgan Stanley]

Great. Thanks so much.

[Steve Horn, Chief Executive Officer]

Thanks.

[Operator]

Thank you. Our next question is coming from John Massocca with Ladenburg. Please go ahead.

[John Massocca, Ladenburg]

Good morning.

[Steve Horn, Chief Executive Officer]

Good morning John.

[John Massocca, Ladenburg]

I am sorry, if I missed this in your response to Spenser’s question, but it looked like disposition guidance came down quarter-over-quarter? Is there anything specific driving that, or is it just kind of the price discovery environment we are in today?

[Steve Horn, Chief Executive Officer]

Yes. I mean we don’t need to sell anything currently. And we had a couple of deals that got a little rocky and they wanted to re-trade the price. So, we weren’t willing to do that. So, they are not going to close here in the fourth quarter. And then we have another large transaction out there for timing reasons. I don’t know if it’s going to hit the fourth quarter or first quarter. Not really, really small numbers, John, as you know. So, I am not really too focused on it.

[John Massocca, Ladenburg]

Okay. That makes sense. And then on the balance sheet side, as you think about maybe your debt funding needs going forward, how should we think about term loan debt versus kind of unsecured debt? I know historically, you have been an unsecured issuer, but it seems like the pricing differential you can get on those different types of debt has widened a lot in kind of recent months, so just any thoughts there?

[Kevin Habicht, Chief Financial Officer]

Yes. I mean we are not – we don’t foreclose ourselves to doing a term loan that would in many respects, not materially different than unsecured bond deal. But we – so if that would just be a game time decision for us as to what is appropriate when we need it. At the moment, it doesn’t feel like we need to tap either of those markets in the coming quarters. So, we will wait and see how things shake out over the next 6 months, 9 months, 12 months and then make a game time decisions. But both are very viable alternatives for us. We enjoy good support in the banking community. But a lot will depend on just investor appetite at the time we want to go to market, bond market investor appetite versus bank lending appetite, and we will make a game time decision then.

[John Massocca, Ladenburg]

I know – is there a specific maybe spread you have in mind between the two that would make one, more attractive than the other, just given I think the historical preference for unsecured issuance?

[Kevin Habicht, Chief Financial Officer]

No. We are kind of absolute rate people, what’s the all-in cost of the debt, and that’s what we will evaluate one against the other. And so as it relates to a term loan, anything that we are sensitive to variable rate debt versus fixed rate debt. So, I think if we went down something with more of a variable rate and we want to kind of lock that and get some protection there. But no, there is no magic to the – I don’t have the spread in mind.

[John Massocca, Ladenburg]

Okay. That’s it for me. Thank you very much.

[Steve Horn, Chief Executive Officer]

Thanks John.

[Operator]

[Operator Instructions] Our next question is coming from Linda Tsai with Jefferies. Please go ahead.

[Linda Tsai, Jefferies]

Hi. Good morning. If there were a slowdown in the economy, how much would you expect occupancy to fall? I know it’s never gone below 96.5%. But just wondering if a more durable tenant base would help support that higher?

[Steve Horn, Chief Executive Officer]

Yes. I mean our tenant base is large regional operators. They are not the mom and pops. They have been to have the per investment grade rated, but they operate thousands of retail locations. And geographically, we are highly diverse. Industry-wise, we are highly diverse. But we are in retail, so things happen within retail. But if the economy slows down, I don’t see a drastic change in our occupancy level given the credit quality, creditworthiness of our tenant base. There would have to be a pretty substantial macro event.

[Kevin Habicht, Chief Financial Officer]

Yes. And Linda, this is Kevin, and it’s not really directly answering your question, and I am not implying this. But it’s funny over the long-term, meaning over a couple of decades, which I know nobody really thinks about. We have always kind of said our occupancy is 98%, plus or minus 1%, and that’s just kind of the ZIP code that we have lived in for many years. And we are at the top end of that range right now. We have spent some time resolving some vacancies in the last couple of years, and so that’s reduced the number of vacancies in the portfolio. But no, we don’t see anything that’s pressing us. And like I said, it goes to my comment earlier about our rent loss assumption has not changed at all, even from recent years. And so we don’t feel like we are particularly exposed and have a material occupancy issue ahead of us.

[Linda Tsai, Jefferies]

Great. Thank you.

[Operator]

Thank you. As there appear to be no further questions on the queue, I will hand it back to Mr. Steve Horn for any closing comments.

[Steve Horn, Chief Executive Officer]

I appreciate your time and energy you are spending on National Retail. We look forward to seeing many of you, I guess in person in the upcoming NAREIT conference on the West Coast. Any questions, feel free to give Kevin or myself a call. Thank you.

[Operator]

Thank you, ladies and gentlemen. And this does conclude today’s conference call. You may disconnect your lines at this time, and have a wonderful day. And thank you for your participation.